Fair Game
Inciting a Revolution: The Investor Spring

By GRETCHEN MORGENSON

Published: June 4, 2011

THE Arab Spring gave Joseph W. O’Donnell an idea about, of all things, his investments.

Mr. O’Donnell, a retired chief executive of the J. Walter Thompson Company, and a man who picks his own stocks, figured that if Twitter, Facebook and other social media could help oppressed citizens in Tunisia and Egypt rally for change, they could help disenfranchised individual investors too. You know, the folks who own shares in publicly traded companies but rarely get a say in how those companies are run.

Mr. O’Donnell found a group of like-minded people at the InvestorVillage Web site. All of them own shares in the Celgene Corporation, a bio-pharmaceutical company based in Summit, N.J., and all of them have been dismayed by what they see as outsize executive pay at the company, whose stock price has returned little over the last five years.

Celgene shares were trading at about $59 on Friday — roughly where they were at the end of 2006. Given that this is a drug stock, there have been many ups and downs over that time, of course. But returns have been slim for shareholders who held on throughout that period.

Mr. O’Donnell has owned Celgene’s shares for almost six years. He hastens to note that this is a well-managed company, with fine operational performance and plenty of promise. Nevertheless, he says: “A lot of frustration has emerged regarding shareholders’ lack of returns relative to management’s pay packages. The stock has been roughly flat, in spite of executional excellence. In the meantime, the C-suite has been richly rewarded.”

While Celgene’s executive pay was relatively stable from 2007 to 2009, last year it ramped up considerably, according to company filings. The top four executives received a total of $24.6 million in 2010, up 30 percent from the amount paid to the four highest-paid executives during the previous year.

The company’s stock price, by comparison, rose a mere 5 percent last year.

MR. O’DONNELL has tapped into an issue that concerns many individual investors but which many feel powerless to change. Yes, individuals get to cast their votes at annual stockholder meetings. But such votes can seem like exercises in futility for investors, because companies need not bow to investors’ wishes.

With last year’s Dodd-Frank legislation and regulatory rules requiring that companies put their pay practices to an advisory vote of shareholders at least once every three years, Mr. O’Donnell thought 2011 could be the moment to rally investors on the issue. An Investor Spring, as it were, just in time for Celgene’s annual meeting on June 15.

Reaching out to fellow holders, Mr. O’Donnell quickly hit pay dirt. David Sobek, an associate professor of political science at Louisiana State University, agreed to develop a Web site, www.sobekanalytics.com/celgshareholders, to attract other dissatisfied Celgene investors.

“I saw this as a collective action problem,” Mr. Sobek says. “How do you get a bunch of people with similar interests organized? Before the Internet, just tracking down fellow shareholders was almost impossible. But we have been able to organize people in a way that we didn’t think would be possible, and that in itself is a victory.”

To keep the group from being hijacked by gadflies, the organizers specifically asked those interested in joining to refrain from “personally directed or emotional attacks” because they would “detract from the possibility that our concerns will be seriously considered by existing directors and/or institutions.”

After several months of outreach, Mr. O’Donnell and Mr. Sobek say that they received commitments from investors holding 2.7 million shares. These investors have promised to vote against Celgene’s pay practices and all directors up for re-election who have sat on the board’s compensation committee.

They also said they would vote to require the company to put its compensation practices to a shareholder vote once a year, rather than once every three years as management recommends. With approximately 461 million shares outstanding, 2.7 million shares voted against management’s proposals and board members will by no means be enough to prevail. Institutional shareholders control roughly 90 percent of Celgene’s shares, and these investors typically vote with management.

Still, voting as a bloc might get the group of disgruntled investors more attention from Celgene’s board and management. Representatives of the group say they want Celgene’s board to re-examine its pay practices and align them more with shareholder returns. One concern: the company’s increased use of restricted stock in the last two years, rather than equity grants that are more closely aligned with a rising share price. Also disturbing to some investors is the fact that Celgene has a poison pill in place, an antitakeover device that shareholders view as entrenching management.

In its filings, Celgene describes the financial measures its board uses to assess its executives’ performance. These measures include growth in earnings per share and revenues — though they are not calculated using generally accepted accounting principles. The company also says it emphasizes long-term growth in shareholder returns.

Asked about the investor group and its rumblings, Brian Gill, a Celgene spokesman, responded that the company’s shares have been a top performer in the sector over the last 10 years. The company’s pay practices, he says, receive good grades from institutional proxy advisory services.

“We all feel the frustration of a company that continues to deliver these industry-leading operational financial results but at the same time exists in an environment where health care reform and austerity issues also impact the valuation,” Mr. Gill says. “We take every investor’s comments and recommendations seriously.”

THE outcome of the investor vote won’t be known until June 15, of course. Many of the investors who have joined to vote their shares expect to attend Celgene’s annual meeting.

“This is a test case to see how far one can go with this,” Mr. O’Donnell says. “It seems like it’s worth a shot. Maybe the individuals in the C-suite will have a greater sense of empathy for the collective individual investor. It will be interesting to see how it pans out.”