The nasty takeover battle between AlliedSignal Corp. and AMP Inc. has catapulted "deadhand poison pills" into the corporate governance limelight.
Deadhand poison pills -- which can be redeemed only by the board of directors or board members who originally adopted them -- and the repricing of executive stock options are expected to be key issues in the 1999 proxy season.
TIAA-CREF has become the powerful foe of deadhand poison pills, taking what for it was the highly unusual step of filing a friend-of-the-court brief in the lawsuit by AlliedSignal against AMP's deadhand poison pill. AMP's board has taken the deadhand pill one step further, enacting a "no hand" pill that can't be redeemed or amended by anybody for almost a year.
(AlliedSignal's plans suffered a setback Oct. 8, when a federal judge rejected the company's claim that AMP's poison pill is illegal and ruled AlliedSignal's slate of nominees for AMP's board of directors cannot stand for election unless each declares a "fiduciary duty" solely to AMP.)
TIAA-CREF, meanwhile, has bigger plans -- it will go through its entire equity portfolio of about 2,600 companies looking for other firms with deadhand pill provisions.
The $240 billion Teachers Insurance & Annuity Association -- College Retirement Equities Fund normally pursues more quiet diplomacy in its corporate governance dealings. But, said Peter Clapman, chief investment counsel, it likely will file several resolutions against deadhand pills during the upcoming proxy season.
"We're not going to file a resolution in every case, but we will certainly communicate that the deadhand poison pill is contrary to good corporate governance," Mr. Clapman said. "We will make the decision to file shareholder resolutions (about deadhand pills) on an individual basis."
TIAA-CREF filed the brief in the AlliedSignal-AMP lawsuit because it believes AMP has displayed egregious corporate misconduct by attempting to use the deadhand pill to thwart a takeover by AlliedSignal, even when it became clear the majority of AMP's shareholders favored the deal.
"There has to be a fair balance between the role of shareholders and the board of directors," Mr. Clapman said. "If the current slate of (AMP) directors loses the fight for control of the board, it (the deadhand pill) disenfranchises the new directors elected by the shareholders by not allowing them to redeem the poison pill."
"What AMP has done is incredibly outrageous," said James Heard, chief executive officer of The Proxy Monitor, New York, which advises institutions on proxy voting.
"The notion that AMP is trying to do anything but keep its current management and directors in place is ridiculous," he added.
"When CREF steps up and takes this kind of action, you have to feel things are seriously out of whack," Mr. Heard said, noting CREF
does not take legal action until all other means of redress have failed.
Because of the AlliedSignal-AMP flap, Mr. Heard predicts, more poison pill shareholder proposals will be introduced next proxy season.
Meanwhile, the high level of executive compensation remains a big concern for many activist shareholders, particularly with the deep swoon now bedeviling the stock market.
"A lot of CEOs claimed they were singlehandedly responsible for their companies' rising stock prices (during the market boom), but now they're saying they have no responsibility for the lower stock prices," said Bartlett Naylor, director, office of public affairs, International Brotherhood of Teamsters, Washington.
"We think executive compensation has reached a scale that is undefendable."
Mr. Naylor challenged both Sanford I. Weill, co-CEO of Citigroup, and C. Michael Armstrong, chairman and CEO of AT&T Co., on their companies' executive compensation policies after they addressed the fall meeting of the Council of Institutional Investors in New York earlier this month.
"There should be pay for performance, but . . . it is an insult to middle management and the rank and file to give these gargantuan pay packages," Mr. Naylor said.
One labor source said the compensation battle has an element of class warfare to it. "For a long, long time, labor's been resentful that executives have been getting more pay and stock options for laying people off," the source said.
The Teamsters has a list of target companies for the 1999 proxy season, but Mr. Naylor won't yet release it. The union is in discussions with some of the companies, hoping to resolve their differences before filing shareholder resolutions, he said.
The repricing of executive stock options in conjunction with the decline of stock prices is another issue expected to be hot.
"Repricing is a problem -- it's going to the trough twice, and companies ought to go back to their stockholders for approval" before they do it, said Martin A. Coyle, executive vice president of TRW Inc., Cleveland, and chairman of TRW Investment Management, the firm's investment management subsidiary.
"Reload" stock options, which contributed to a large portion of Mr. Weill's compensation when he ran Travelers Group, also are under fire. These allow executives to obtain new stock options after exercising their existing ones. "It may not have been the reload so much as" the total value of Mr. Weill's options, Mr. Coyle said. Again, he said, there is nothing intrinsically wrong with the reload options, as long as shareholders approve them.
In the executive compensation study Graef Crystal did for the Council of Institutional Investors, Mr. Crystal criticized Mr. Weill's reload options, noting he had exercised options with a gain of $220 million in 1997.
But all of the issues discussed above might become moot, Mr. Coyle said, if one other important issue was addressed -- companies having truly independent directors.
"That's the most significant issue facing companies today," he said. "If a company has truly independent directors, it would solve some of these other problems.
"Shareholders can't run companies. They have to depend on the board of directors as their agents. The board has to represent the interests of the shareholders."