JUNE 11, 2007
NEWS & INSIGHTS
Activist Investors Get More
Respect
Boards are listening, and shareholder proposals
are making headway
When Harvard Law School
professor Lucian A. Bebchuk filed a shareholder proposal with Home Depot
Inc. (HD ) on Dec. 12, his
expectations were low. It asked the company to require that two-thirds of
its board approve executive compensation plans--a novel concept that hadn't
been tested in prior proxy seasons. Bebchuk also sought to have the change
written into Home Depot's corporate bylaws, something most companies are
loath to do. "I did not expect [they] would be willing to make changes in
the bylaws in response to a proposal by someone who really is an individual
shareholder," says Bebchuk, who owns just 90 shares.
But Home Depot surprised him. The company, smarting from the thrashing it
took for its controversial annual meeting last year and fresh from the
ouster of excessive executive-pay poster-boy Robert L. Nardelli, held its
first discussions with Bebchuk the same day new Chief Executive Officer
Francis S. Blake took over in January. After a couple of conversations and
e-mails with Bebchuk and a discussion with outside counsel, the
home-improvement retailer adopted the proposal outright. In exchange,
Bebchuk agreed to withdraw the resolution.
It may come as little surprise that Home Depot is offering up a few olive
branches. Its 2006 annual meeting, a 37-minute session that was attended by
none of the company's directors and where shareholders were not allowed to
ask Nardelli questions, was one of the low points in the history of
corporate governance. But Home Depot's agreement with Bebchuk also
demonstrates the new mood of this year's proxy season. While plenty of
investor resolutions are still prompting heated contention, shareholders and
boards are negotiating away a near-record number of proposals ahead of
meetings. So far this year, 22% of corporate governance proposals have been
withdrawn by investors, up from 15% at this point last year. New resolutions
that make it to the ballot are winning soaring vote tallies. And activists
and directors are having more dialogue than ever.
Such trends have led some proxy watchers to call this season a breakthrough
year. "I think there's no doubt this will be the most successful proxy
season ever," says Patrick McGurn, executive vice-president and special
counsel of proxy adviser Institutional Shareholder Services. "The wave of
constructive engagements between boards, management, and the proponents of
these proposals has led to a boatload of reforms being adopted."
'MERCY'
While CEOs used to be able to shrug off shareholder activists, now they do
so at their own risk. It is yet another sign that in the battle between
owners and managers--the most fundamental governance struggle in
business--investors are gaining power. "Shareholders have a right to say we
don't think this is working," says Harvey J. Goldschmid, a professor at
Columbia University School of Law and a former commissioner at the
Securities & Exchange Commission, "and [corporations] just haven't been able
to hold back the pressures."
The most widely adopted reform this year has been majority voting. First
introduced three years ago, the new rule means directors must be elected by
more than 50% of shareholder votes rather than just by a plurality. For
meetings so far this year, 57% of the proposals on this topic have been
withdrawn after shareholders either negotiated deals or companies agreed to
adopt the new rule--up from 25% this time last year. "On the issue of
majority voting, boards are just rolling over and saying, 'Mercy,'" says
Jennifer O'Dell, assistant director for corporate affairs at the Laborer's
International Union of North America.
But majority voting isn't the only issue that has quickly gained steam. "Say
on pay" proposals, which would give shareholders the right to make a
nonbinding vote on executive compensation packages, were filed at 66
companies this year after first finding their way to the ballot in 2006.
Although only three companies, Blockbuster Inc. (BBI
), Verizon Communications Inc. (VZ
), and Motorola Inc. (MOT )
have seen the idea win more than 50% of votes, many votes came flirted with
a majority. The average vote on the issue so far this year is 43%, up from
40% last year. Stephen M. Davis, president of independent governance
consulting firm Davis Global Advisors Inc., says he has never seen a new
issue be embraced so quickly. "It's taken off like a rocket," he says. "To
have the first year of a widespread campaign producing votes with 30% to 50%
outcomes is unheard of."
In one sign of how willing companies are to engage with investors on this
new issue, insurer Aflac Inc. (AFL
) became the first company to commit to giving shareholders a nonbinding
vote on executive pay after social investor Boston Common Asset Management
filed a proposal in November. Aflac Chairman and CEO Daniel P. Amos placed
calls to his largest institutional investors and longtime individual
shareholders before adopting the idea.
Some shareholder activists have bargained for other outcomes. The American
Federation of State, County & Municipal Employees (AFSCME) filed a
say-on-pay proposal at drugmaker Bristol-Myers Squibb Co. (BMY
), but withdrew it following the company's agreement to join AFSCME's new
working group on the topic. The latest sign of an armistice: The working
group is bringing together more than 20 other corporations, unions, and
investors to explore how giving shareholders the chance to vote on pay might
be adopted by U.S. companies. (The vote is standard practice in Britain,
Australia, and the Netherlands.)
Such hand-holding would have been unthinkable not long ago. Until Enron and
Sarbanes-Oxley forced boards to tighten their grip on management, even
shareholder proposals that won respectable votes were often ignored by
companies. A 30% vote for a resolution would have been enormous. Labor
unions didn't have the sophisticated relationships they now have with
boards. "A lot of people who made proposals were kind of fringe players,"
says Goldschmid.
Until recently, says Richard Ferlauto, the director of pension and benefits
policy for AFSCME, discussing proposals with the board rather than senior
staffers would have been unimaginable. "Five years ago we would have never
gotten in a corporate boardroom," Ferlauto says. "Now we're regularly
meeting with corporate directors about substantive issues."
SWING VOTES
Activists such as Ferlauto could have even more leverage next year on
director elections. That's because the SEC is expected to vote on a New York
Stock Exchange (NYX )
proposal to bar brokers from voting on behalf of investors who don't submit
their votes on uncontested director elections within 10 days of the annual
meeting. According to Broadridge Financial, these "broker votes" average
about 20% of votes cast at U.S. corporate meetings. Because they usually
side with management, removing them from the tally at companies where a
majority vote rule is in place could swing the vote in shareholders' favor.
Some of the narrow margins now being seen in director elections, such as the
56% majority received by one board member at CVS Caremark Corp. (CVS
), might not hold.
The change in the rule on broker votes is just one reason proxy watchers
believe the 2008 season could be turbulent. Outsize executive pay revealed
in this year's new compensation disclosures could prompt more resolutions on
pay levels next year. In addition, there may finally be a ruling this summer
on whether to give large shareholders "proxy access," or the right to
nominate their own candidates to the company's slate of directors. "Next
year is being set up as the proverbial 'perfect storm' season," says ISS's
McGurn. "But I think boards have become good at sensing changes in the
weather, and so it could be that before then boards will take steps to try
and diffuse any potential controversies."
Corrections and
Clarifications
"Activist Investors Get More Respect" (News
& Analysis, June 11) should have specified that the rate of increase of
withdrawn shareholder proposals, from 15% to 22% for annual meetings
through May 31, was for resolutions related to corporate governance
issues.
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By Jena McGregor
Copyright 2000- 2007 by The McGraw-Hill Companies Inc.
All rights reserved.
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