NEW YORK -- TIAA-CREF toughened its policy on corporate governance, increasing it focus on executive compensation and anti-takeover measures, and, in a big change, for the first time taking a skeptical view of classified boards of directors.
It also spells out its first global corporate governance principals.
The Teachers Insurance and Annuity Association -- College Retirement Equities Fund policy statement on corporate governance, the second revision since its initial statement in 1993, places executive compensation foremost.
"We believe that how a company deals with the highly visible executive compensation issue provides a clear indication of how effectively it is handling overall corporate governance," said Peter Clapman, senior vice president and chief counsel-investments, in a statement about the new policy statement.
TIAA-CREF's policy statement generally supports the use of stock options as part of overall compensation as an important incentive for executives "whose efforts contribute to the creation of wealth for shareholders," to quote the statement. But because of its more demanding positions, TIAA-CREF expects to vote against more executive stock option proposals this year, perhaps against 35% of the proposals at the companies where the issue will come up for a shareholder vote, said Kenneth A. Bertsch, director-corporate governance. Last year, it voted against about 30%, up from about 25% a few years ago.
The revised policy calls for including the cost of stock options on the corporate income statement, to provide a "comprehensive disclosure and more realistic accounting" for the use of shareholders. Mr. Bertsch said TIAA-CREF opposes the compromises in recent years by the Financial Accounting Standards Board to relegate the cost of stock options only to footnotes in corporate financial statements. "The footnotes are helpful but don't go far enough," he said.
TIAA-CREF, which manages $285 billion for tax-exempt clients, will send the statement, a 27-page booklet, to directors of 2,000 of the 4,500 domestic companies in which it holds significant amounts of stock. It plans also to send the booklets to directors of the 1,500 foreign companies in which it also owns meaningful amounts of stock.
The revised policy uses the "window" characterization for executive compensation for the first time.
"We see it as a window on the board itself," said Mr. Bertsch, "because it's hard to see what a board does. You have the bottom line over time, but if they (the directors) are mishandling pay it looks like they are subservient to management." A new provision views practices such as excessive cash pay, unfairly enriching stock plans and subjective bonus awards as "strongly suggestive of weakness and the need for fresh perspective at the board level."
The revised policy particularly looks for abusive compensation practices, now generally opposing such practices as mega-grant options unless boards can make a convincing case for their use.
Patrick McGurn, vice president and director-corporate programs at Institutional Shareholder Services, Rockville, Md., said TIAA-CREF "has broken ranks with the investor population by going beyond just looking at the overall cost of (options and other compensation) plans to look at practices that might be abusive."
In other new provisions on executive pay, TIAA-CREF wants all stock-based compensation plans:
* to be approved by shareholders;
* to be straightforward so that investors and employees can understand them; and
* to have measurable and predictable outcomes that are directly linked to the company's performance and "within levels of comparability" of companies of similar size and competition.
The statement tightens its previous call that only independent directors belong to the compensation committee by insisting these individuals be "knowledgeable in the field of executive compensation." Mr. Bertsch said the new wording will help ensure the committee is in control of the pay-setting process.
The statement, for the first time, takes a stiff line on classified boards of directors. It still gives corporations some latitude to have either all of the directors up for election each year or to allow elections of staggered terms, making it impossible to change a board in any one year. Classified boards, often allowing only one-third of a board to be elected each year, "can provide legitimate benefits," the revision asserts. But the revision includes a warning that a classified board, coupled with other anti-takeover defenses, would generally be opposed by TIAA-CREF.
Overall, as a result of TIAA-CREF's new policy, Mr. McGurn said, "I think you will see some impact at companies" considering TIAA-CREF's "size and scope."
"There is barely a major corporation in the U.S. or the world which doesn't have some holding by" TIAA-CREF, he added.
Global corporate governance
The new policy marks TIAA-CREF's first statement on global corporate governance, asserting good practices "are important to encourage investments . . . where gaining access to capital markets is increasingly seen as very much in each nation's self-interest."
It endorses the global governance principles issued by the International Corporate Governance Network, a worldwide group that includes institutional investors.
But rather than target foreign companies, Mr. Clapman said, TIAA-CREF's position under the new international policy will be reactive, in part because of sensitive culture issues.
The revised policy spells out some accommodation on takeover defenses: TIAA-CREF "will consider the broad context of takeover defenses" at each company "with a view that the market for corporate control provides appropriate mechanisms for disciplining management, and that takeover defenses should not make a board impregnable."
Mr. Bertsch explained that TIAA-CREF supports anti-takeover provisions "in some circumstances to help lead a would-be acquirer to negotiate with the board" to get a better deal for the company.
CEO succession planning
The policy also for the first time has a statement encouraging chief executive officer performance evaluation and succession planning.
The revised policy maintains most of TIAA-CREF's previous policy positions, such as that a corporate board "should be composed of a substantial majority of independent directors," while taking tougher or new stances on other practices.
Among the revisions to its policy, TIAA-CREF now advocates:
* Directors should have a minimum ownership in the stock equal to one year's compensation as a board member. Previously, the statement called for half a year's compensation.
* Directors should be at least partly paid in stock or restricted stock. This is a new clause in the statement.
* TIAA-CREF opposes supermajority voting requirements, "except where necessary to protect the interests of minority stockholders where there is a single dominant shareholder."