Score One for Dissent

By Tomoeh Murakami Tse
Washington Post Staff Writer
Thursday, February 15, 2007; Page D01

Aflac said yesterday that it would become the first major U.S. company to give shareholders an advisory vote on executive compensation packages, bolstering investor groups that have vowed to push companies to change their governance practices at annual shareholder meetings this spring.

Aflac, the world's largest seller of supplemental health insurance, said it would allow shareholders a nonbinding vote on its corporate pay practices beginning in 2009 -- the first year that the company's proxy statement will contain the three years of compensation data required by the Securities and Exchange Commission's new disclosure rules. Aflac made its announcement after a proposal last year by one shareholder, Boston Common Asset Management.

"They're an early adopter," said Richard Ferlauto, director of investment policy at the American Federation of State, County and Municipal Employees, which supports the so-called say-on-pay resolutions. "We expect others will follow."

Such proposals are among the most controversial of the hundreds this year by major shareholders, who are emboldened by public furor over outsized executive compensation. Proponents say that even though the votes would be nonbinding, they would pressure companies to change compensation policy.

At least 50 companies will have votes on say-on-pay at shareholder meetings, up from seven last year, according to Institutional Shareholder Services, a proxy advisory firm in Rockville.

Other closely watched resolutions include a proposal to allow shareholders to run opposing board candidates and another to tie executive pay more directly to corporate performance. Many of the companies targeted are in the hot seat over executives' salaries or the practice of back-dating options.

Home Depot, still smarting from controversy surrounding the lucrative exit package given to its former chief executive, last week invited an activist shareholder to join its board, helping to avert a potentially nasty proxy fight. And dozens of prominent companies, including Lehman Brothers, Honeywell and Wells Fargo, have agreed to change how directors are elected.

ISS said that since 2003, when investors began pushing for election by a majority of shareholder votes, about 200 companies have adopted some form of majority voting.

"I think 2007 represents something of a tipping point," said Stephen M. Davis, a fellow at the Yale University's center for corporate governance. "Smart companies see the writing on the wall."

Still, some corporations remain unyielding. So far this year, companies have successfully sought the SEC's approval to keep at least 40 of the 630 corporate governance-related proposals submitted by shareholders from coming to votes, according to ISS. Dozens more are trying.

Companies say though they have worked with investor groups to ensure best corporate governance practices, some proposals focus on narrow agendas that are costly and distracting to board members.

"It goes counter to what should be the fundamental question: What are the systems of governance in place that assure companies can grow and create more jobs and create greater shareholder value?" said John J. Castellani, president of Business Roundtable, an association in the District of chief executives of major U.S. companies. "We would rather have shareholders focus on shareholder value."

Hewlett-Packard, the computer maker under investigation for using private investigators to obtain personal phone records, has satisfied shareholder concerns about disclosure of political contributions but tried to exclude a proposal that would allow dissident shareholders to run board candidates. The SEC recently declined to act on HP's request to keep the measure off the ballot, and shareholders are scheduled to vote on it at a March 14 meeting.

An HP spokesman declined to comment. In the company's proxy statement, the board of directors recommends a vote against the proposal, in part because its approval could lead to "the election of 'special interest directors' who represent the interests of the stockholders who nominated them, not the interests of all HP stockholders."

AT&T has sought guidance from the SEC about omitting from its proxy ballot a proposal to allow an advisory vote on corporate compensation practices. The SEC has not yet responded, said spokeswoman McCall Butler, who said that the company planned to keep the resolution off the ballot. Butler said the company is having dialogue with shareholders, and that a "blanket 'yes' or 'no' " vote on compensation would not provide useful feedback for the board.

Nonetheless, as the negotiations reach their peak before the annual shareholder meetings, compensation consultants and investor groups say the shift in the climate has altered the dynamic between boardrooms and shareholders.

One reason activist shareholder groups -- mainly pension funds and labor groups -- will walk into the meetings with a bit more swagger this year is that new SEC rules require companies to offer more information about pay. Such disclosures would give shareholders a better idea of the total compensation granted to senior management, and could show that $200 million packages such as the one former Home Depot chairman and chief executive Robert L. Nardelli got last month are in place at dozens of companies, some corporate governance experts said.

"Boards are realizing that they need to step up and change their standards," said Ed Durkin, director of corporate affairs for the United Brotherhood of Carpenters and Joiners. "The way people may express their anger at some of those numbers is to vote on resolutions that relate to compensation."

Rep. Barney Frank (D-Mass.), chairman of the House Committee on Financial Services, said yesterday that he will hold a hearing March 8 on strengthening the role of shareholders in setting executive compensation.

Maryland state Sens. Paul Pinsky and Richard S. Madaleno Jr. last week introduced a bill that would prohibit a company from deducting executive compensation as a business expense if it was more than 30 times the pay of its lowest-paid employee. President Bush told a group of business executives on Wall Street recently that they "need to pay attention to the executive compensation packages that you approve."

All this, investor groups say, could motivate companies to avoid public votes on controversial proposals by cutting deals with investors before the meetings.

Durkin's group has made more than 120 proposals, 72 of them on majority voting. He expects to have settled more than half by the start of proxy season, up from the 25 percent settlement rate on the issue last year.

"There's significant engagement with companies now," said Ferlauto, the AFSCME official. "Companies are realizing the disclosures that they'll be making and are meeting with shareholders early on to try to explain away the outsize compensation payments of CEOs."