Activism
Shirley Westcott, managing director of policy at Proxy Governance, outlines this year's US shareholder
campaigns
While many of the past years’ themes will carry over to 2007, the focus and
intensity of this year’s shareholder campaigns in the US have sharpened around
two central issues: greater shareholder influence over director elections and greater
shareholder say in executive compensation.
Beyond individual resolutions at individual companies, institutional
shareholders are also finding strength in numbers by forming broad coalitions
and extending their appeals for governance reforms to Congress, the
US
Securities and Exchange Commission, the stock exchanges and states.
This year’s lineup of shareholder initiatives include:
Majority voting in director elections: In its fourth year, the
United
Brotherhood of Carpenters, joined by other trade union groups such as
American Federation of State County and
Municipal Employees (AFSCME), the AFL-CIO,
and Sheet Metal Workers International Association, is pressing forward company
by company in resetting director election standards from plurality to majority
voting. Under the plurality system--the long-time norm in the U.S.--the board’s
nominees are invariably elected, no matter how low their support levels, unless
a dissident shareholder resorts to the expense of soliciting a challenger slate.
This year’s majority voting targets—some 100 firms--include companies that
failed to address high support levels on last year’s resolutions or have only
adopted a director resignation policy, whereby a director would tender his
resignation if he received more “withhold” votes than “for” votes. Such policies
were generally found acceptable last year—by both shareholders and
PROXY
Governance—as an alternative to an outright majority voting standard.
Broad study of majority voting’s implications, and resulting changes in the
legal landscape, have brought new momentum to the issue. Revisions last year to
the Delaware General Corporation Law and the
Model Business Corporation Act,
which many states follow, have made it easier for shareholders to specify the
election standard through bylaw amendments and for boards to enforce a director
resignation if he fails to obtain a specified number of votes. Because only
shareholders may change or repeal election standards they themselves set, scores
of companies have become voluntary adopters to pre-empt shareholder action. To
date, PROXY Governance has tracked nearly 200 companies that have either adopted
majority voting or will do so this proxy season through management resolutions.
Majority voting reincorporation: An ancillary proposal by the Carpenters asks
companies incorporated in Ohio to reincorporate in Delaware. Ohio is one of
several states that does not permit majority voting, though the legislature is
expected to take up the issue this spring. Convergys
faces the reincorporation resolution on 17 April, while another target,
DPL (27 April
), has devised an alternative: a management-sponsored proposal amending the code
of regulations to include a director resignation requirement if “withhold” votes
exceed “for” votes.
Takeover defences: As in the past two years, management
resolutions to declassify boards are likely to outnumber shareholder
resolutions, with over 30 tracked so far by PROXY Governance. Though companies
have largely conceded on this issue, in some cases trade-offs are being made.
Fortune Brands (24
April), for example, chose to adopt majority voting rather than implementing
last year’s shareholder resolution to declassify the board, citing the risk that
the two combined could result in a large number or even all directors failing an
election at a single annual meeting.
Companies are similarly eliminating supermajority voting requirements, which are
typically applied to specific corporate actions such as shareholder removal of
directors, approval of business combinations, or amendments to the charter and
bylaws. Lofty voting thresholds, sometimes as high as 80% of the outstanding
shares, can equally thwart management-endorsed initiatives (such as a
reincorporation) as shareholder initiatives (amending the bylaws). As in 2006,
management-sponsored resolutions to revert to a simple majority vote are thus
far outpacing shareholder requests.
Last year’s low volume of poison pill proposals is expected to continue in 2007,
as companies forego instituting rights plans until faced with a hostile
acquirer. A longstanding gadfly favourite, the resolutions generally ask that any
current or future pill be put to a shareholder vote or redeemed. Because poison
pills are the single takeover defence that boards can enact unilaterally,
shareholders have often sought pledges from companies to seek shareholder
approval of a pill within a reasonable time after adoption to prevent potential
abuses. But as witnessed at News Corporation in 2005, such a policy may have no legal
standing if the board chooses to ignore it.
A new shareholder tack, introduced by Harvard law
professor Lucian Bebchuk in 2006, takes the form of a bylaw amendment requiring
either shareholder or overwhelming board approval (unanimous or 75%) of a poison
pill. So far the proposal hasn’t met with success—which would test its legal
validity- either at
Walt Disney’s 8 March meeting or at
CA last year. Bebchuk is offering a variation of the bylaw at
Chevron (25 April) that
would preclude any News Corp.-style dereliction: the company’s pill policy
could not be altered or revoked without shareholder or unanimous board approval.
Shareholder “say on pay”
: As with ballot access, a broad coalition of international
investors is spearheading efforts to give U.S. shareholders greater say in
executive compensation through an annual advisory vote.
Following last year’s successful showing at seven
companies (40% average support), AFSCME and other filers—including the AFL-CIO,
CalPERS, Service Employees International Union,
New York City Pension Funds,
Amalgamated Bank LongView Funds, and
International Brotherhood of Electrical
Workers- are bringing back “say on pay” proposals en masse in 2007.
Between 70 and 100 are anticipated, beginning with
Morgan Stanley (10 April),
United Technologies (11 April ),
Wachovia (17
April) and, for a second year, US Bancorp (17 April). Expectations are high
that many resolutions will receive majority support, notwithstanding that last
year a number of mutual funds, including
Vanguard,
Fidelity Investments, and
Putnam Investments, voted against these proposals.
Meanwhile, resolutions are being withdrawn at companies
that have joined an AFSCME/Walden Asset Management-sponsored working group to
study the issue further. The proposal was similarly withdrawn at
AFLAC,
which became the corporate front-runner in agreeing to implement an advisory
vote on compensation starting in 2009.
Pay for superior performance:
For a second year, the Carpenters, along with the Electrical Workers, Sheet
Metal Workers, International Brotherhood of Teamsters and New York City Pension
Funds, will advocate not mere pay for performance, but pay for
superior
performance.
Their some 50 resolutions will ask companies to base
executive incentive pay on performance
relative to
peers--an approach also promoted by PROXY
Governance--and
to only give payouts when performance exceeds the peer median or average. Other
proposals sponsored by the AFL-CIO, as well as gadfly investors, ask that a
significant portion of executive equity pay be performance-based, such as
indexed, premium-priced or performance-vested options or performance-vested
restricted shares.
Compensation consultant independence: Board compensation consultants are
often blamed for upward spiralling chief executive (CEO) pay due to their practice of peer
benchmarking—sometimes dubbed the “Lake Wobegon” effect where everyone is
considered above average. A new shareholder resolution this year from
organized labour probes the objectivity of compensation consultants by asking
boards to disclose any relationships their consultant has with management,
including other services provided to the company, which could pose a conflict of
interests. Having already made an appearance at
WGL Holdings (1 March), many
subsequent resolutions are likely to get withdrawn as companies agree to the
disclosure or adopt policies that prohibit using the board compensation
consultant for other services.
Option backdating:
In reaction to the widespread stock option backdating, the Teamsters and
Amalgamated Bank are asking companies that are under federal investigation to
adopt a best practice of using fixed option grant dates and disclosing them in
advance. Grants to new hires would be exempt from the pre-determined schedule.
At least three targeted companies have agreed to adopt the practice, while
proposals remain outstanding at Apple Computer,
Broadcom,
Macrovision, and
Progress Software.
Other compensation proposals: Mainstay resolutions dealing with
severance and pensions—components of compensation that can yield big
paydays--will return in 2007 though in some cases with new twists. A new
proposal from the Carpenters asks companies to base pension benefits solely on
an executive’s salary and to exclude bonuses and incentive pay from the
calculation. Last year, Pfizer faced shareholder fallout for
CEO Hank
McKinnell’s pension package, which, until 2001, had included equity awards in
the benefit formula. Upcoming resolutions include U.S. Bancorp (17 April),
Johnson & Johnson (26 April) and
Sempra Energy (26 April). Other
pension-related proposals seek a shareholder vote on extraordinary benefits,
such as extra years of service credit, preferential benefit formulas and
accelerated vesting of benefits.
Pay-for-failure embarrassments at the likes of
Home Depot and KB Home have kept severance pay on the shareholder radar screen. About
a dozen resolutions this season, primarily from organised labour, will request a
shareholder vote on severance benefits that exceed three times salary and
bonus. Benefit add-ons, such as the accelerated vesting of stock options, can
greatly magnify the total payout beyond just the cash severance formula.
Already one severance proposal—put forward by CalPERS at
Shaw Group (31 January)-has received majority support, though it failed
to get the requisite 75% to pass as a bylaw amendment. At issue was CEO Jim
Bernhard’s ten-year employment contract (since reduced to three years) that
auto-renewed daily, thereby yielding a potential severance payout covering his
perpetual 10 remaining years.
Links
PROXY
Governance
US
Securities and Exchange Commission
United
Brotherhood of Carpenters
American Federation of State County and
Municipal Employees
AFL-CIO
Sheet Metal Workers International Association
Delaware General Corporation Law
Convergys
DPL
Fortune Brands
News Corporation
Walt Disney
CA
Chevron
CalPERS
Service Employees International Union
New York City Pension Funds
Amalgamated Bank
International Brotherhood of Electrical
Workers
Morgan Stanley
United Technologies
Wachovia
US Bancorp
Vanguard
Fidelity Investments
Putnam Investments
Walden Asset Management
AFLAC
International Brotherhood of Teamsters
WGL Holdings
Apple Computer
Broadcom
Macrovision
Progress Software
Pfizer
Johnson & Johnson
Sempra Energy
Home Depot
KB Home
Shaw Group
April, 2007 |
