WASHINGTON - The Council of Institutional Investors might encourage its members to signal their loss of confidence in directors of recalcitrant companies by withholding votes for their re-election at upcoming annual meetings, said Anne Hansen, the council's deputy director.
At the same time, the influential Washington-based pension fund group also is seeking to reduce its membership fees to entice powerful new members and increase its clout.
Among the companies the council may be targeting are Armstrong World Industries, Bowater Inc. and Browning-Ferris Industries, for failing to adopt bylaw changes even after a majority of investors have voted for them at annual meetings (Pensions & Investments, Feb. 7).
Such "Just Say No" campaigns, as they are known in corporate governance circles, have proved to be effective in sending directors a message that shareholders have lost confidence in their oversight abilities.
The council also hopes, by promoting discussion of shareholder proposals and proxy voting strategies among members, to shame such companies into adopting governance changes that have received more than 50% of the votes cast by shareholders at annual meetings in previous years.
"It's a strong message to a company when you keep getting these even higher vote counts. It's more than a nudge," said Ms. Hansen.
The council's members include some of the nation's largest and most combative public pension funds, which are not shy about pushing for changes in companies in which they are invested.
This effort to flex its muscles comes at a time when the council is aggressively trying to beef up membership among the bigger pension funds by lopping 25% off its top rate of annual fees. The group also has begun preliminary discussions about allowing endowments to join, possibly as non-voting, general members.
The full membership meets in April, and will take up both issues then.
The council charges pension funds up to $40,000 in annual membership fees, based on their size. Small funds pay as little as $1,500. Non-voting members, such as money managers, pay $7,000 a year. The council has agreed to drop its ceiling on fees for pension fund members to $30,000, and might lower it still further next year, Ms. Hansen said.
"We hope that some of the large funds that don't already belong see that our hearts are in the right place and join," she said.
The $42 billion New York State Teachers' Retirement System and the $38 billion Teacher Retirement System of Texas, which would be in the top bracket because of their size, have indicated they would join so long as they didn't have to pay more than $30,000.
Still, two more corporate pension funds joined the council.
Coca-Cola Co., Atlanta, which has a $1.6 billion in pension assets, joined as a general member, having full voting rights. It brings the number of general members, open only to pension funds, to 88. Of them, 15 are corporations; the rest are public and union funds.
Pepsico Inc., Purchase, N.Y., which has a $1.8 billion in pension assets, joined as a non-voting sustaining member, open to pension funds as well as investment managers and consultants. Five other pension funds are sustaining members.
At the meeting, the executive committee's members also agreed on the need for publication once again this year of a list of the worst-performing companies to help the smaller, union members target companies for shareholder activism campaigns.
The council published a list of the 50 worst-performing companies for the first time last fall. The council will decide next month whom to hire to develop such a list.
Meanwhile, according to a recent analysis by the Investor Responsibility Research Center, Washington, there are 13 companies that, in the past three years, have not acted upon shareholder recommendations that received a majority vote. But 10 of the 17 proposals at those 13 companies did not pass by the companies' calculations.
Because such shareholder proposals usually are non-binding, companies are free to ignore them. However, rather than running the risk of adverse publicity, most companies that have received such strong signals from shareholders tend to adopt the recommendations in some form within two years, said Pat McGurn, IRRC's director of corporate governance service.
At the council's executive committee meeting, members discussed ways to push Armstrong World Industries into adopting a proposal that shareholder votes be kept confidential, introduced by the New York City Employees' Retirement System at the company's 1993 annual meeting. That proposal received 50.5% of the votes cast by shareholders, according to IRRC computations, although the company said the proposal received only 48.8% of the votes by its calculation.
Armstrong is considering adopting a confidential voting policy this year, said John Scheldrup, a company spokesman.
But Kevin Berry, a spokesman for the $23.6 billion New York City pension fund, said fund officials intend to put such a proposal on the company's ballot again. "Until we hear from them, I don't believe we would change that position."
Other companies that have not acted upon shareholder proposals that received a large percentage of the votes cast include Hartmarx Corp., which received the highest tally of votes ever for any shareholder proposal. At the apparel company, 80.5% of all votes cast last year recommended getting rid of a shareholder rights' plan that makes it more expensive for unwanted suitors to acquire the company, or putting the "poison pill" to a binding shareholder vote.
Because such rights allow shareholders to buy additional shares at a discount during a takeover fight, the company would have to compensate shareholders for the loss of those rights. Hartmarx would have to pay shareholders approximately $1 million for eliminating the poison pill, said Jim Condon, company treasurer.
And the company, which earned $6.2 million in 1993 after losing $320.1 million over the previous three years, is forbidden from making that payment to shareholders under the terms of a December 1992 loan agreement, Mr. Condon said. The company did not get the necessary approval from its lenders to override that agreement and pay shareholders, he added.
But the company, which explained the loan agreement to shareholders in its 1993 proxy statement, has not received any shareholder proposals this year. And the deadline for receiving proposals already has passed for the 1994 meeting, he said.
Meanwhile, Browning-Ferris Industries, which received 51.6% of the votes cast by shareholders for a similar proposal in 1992, does not plan on getting rid of its poison pill for the same reason. It would cost the company about five cents per share, to eliminate its shareholder rights' plan, and since the rights expire in 1998 anyway, it "is just not worth it," said Jeff Curtiss, senior vice president and chief financial officer.
Directors of International Multifoods Corp. also decided not to rescind the company's poison pill, said Wendy Patrick, a spokeswoman. A shareholder proposal on the pill in 1992 received 61.2% of the votes cast, according to IRRC data.
But Dime Savings Bank of New York, which received a 71% shareholder mandate last year to adopt confidential voting, did so in October, according to a spokeswoman.
Bowater's directors agreed last year after the annual shareholder meeting to let shareholders decide in 1996, when the company's poison pill expires, whether to renew it. That shareholder vote would be binding.