Proxy ballot access for shareholder nomination of directors - what some institutional investors consider the holy grail of corporate governance - was removed from proxy statements this season.
The proposal doesn't have universal support among corporate governance activists; even those who support it believe it would be used rarely.
But the proposal is getting consideration from the Securities and Exchange Commission. The SEC this month directed its division of corporate finance to recommend changes to proxy rules on the election of directors "to improve corporate democracy," including the nomination process.
The directive referred to a resolution submitted to Citigroup Inc. by the $600 million American Federation of State, County and Municipal Employees' Pension Plan, Washington. The SEC upheld Citigroup's request to keep the resolution off the proxy statement. It would have allowed shareholders with at least 3% of the stock to nominate director candidates.
The SEC ordered the division to present its recommendations by July 15.
Unions very active
Union pension funds have been among the most active institutional investors this year, said Charles M. Elson, law professor at the University of Delaware and director of its Center for Corporate Governance.
"Unions have a lot of interesting shareholder resolutions," said Kenneth A. Bertsch, vice president and director-corporate governance, Moody's Investors Service, New York.
"We really stepped up the pace," filing 24 resolutions this year vs. six last year, said Richard C. Ferlauto, director-pension and benefit investment policy, AFSCME.
Union-staff and Taft-Hartley pension funds in all filed some 400 resolutions this year, up from about 280 last year, he added.
Corporate scandals, the catalyst of shareholder anger last year, haven't receded from importance, others agreed.
"I think they're in the back of people's minds, reflected in the lack of confidence in the equity market," said Elizabeth Fender, director-corporate governance, TIAA-CREF, New York.
"There are a lot of scandals still going on," Mr. Elson said. "Shareholder votes have demonstrated a clear suspicion of management. Governance resolutions are doing well, rubbing off from the scandals," although proposals aren't necessarily getting a majority of votes.
Up for vote
Major issues coming to a vote in this proxy season include:
- generous executive severance, so-called golden parachutes;
- expensing of stock options;
- performance-based options; and
- reincorporation of U.S. companies to the United States from Bermuda and other offshore tax havens.
Some 862 shareholder proposals had been filed so far this year, according to the most recent count by the Investor Responsibility Research Center, Washington, and the Interfaith Center on Corporate Responsibility. Many never make it to a vote; they are withdrawn after negotiations or challenges.
Corporate governance resolutions numbered 625 of the total, compared with 529 in all of 2002.
Executive pay issues are the overwhelming focus of this year's corporate governance resolutions, accounting for 44%. Last year, resolutions related to traditional anti-takeover and board issues accounted 57% of all proposals submitted, according to the two groups.
At TIAA-CREF, executive compensation is the centerpiece of its corporate governance approach, said Ms. Fender. "Executive compensation is a key issue to evaluate how directors are exercising their fiduciary duty in overseeing management. This is one area where directors have to stand up to management, giving shareholders insight into the effectiveness of the board," she said.
The SEC in mid-April upheld TIAA-CREF's efforts to sponsor resolutions at SBC Communications Inc. and Siebel Systems Inc., calling for reduced use of executive stock options, including megagrants, that have no performance hurdles, said Peter C. Clapman Sr., senior vice president and chief counsel of corporate governance at TIAA-CREF. He said TIAA-CREF would like to see greater reliance on stock, which has a downside risk and aligns interests of management more with shareholders, he said.
TIAA-CREF has no position on the issue of giving shareholders access to the proxy ballot to include their nominations for directors. "It's a newer issue," Ms. Fender said, noting TIAA-CREF hopes to issue new corporate governance guidelines this summer.
The AFSCME is a leading advocate of such access. "I think ballot access would be used fairly rarely and only when the board has abdicated its responsibility" in nominating directors aligned with shareholder interest, said Mr. Ferlauto.
Mr. Elson opposes the effort. "If the nominating committee is truly independent and takes into consideration the interest especially of large shareholders, access to the proxy ballot is unnecessary."
He noted that proposed New York Stock Exchange rules awaiting SEC approval call for all directors on key committees, including nominating committees, to be independent. He believes the newly formed committees should be given a chance to function in the interest of shareholders, to see if ballot access is necessary.
Opening proxy ballots to shareholder nominations "could create a free-for-all," Mr. Elson said."The problem is there is nothing now between an all-out war of a proxy fight and passivity" in approving directors, added Moody's Mr. Bertsch.
The reincorporation issue, another leading union stand, has the backing of many large public pension funds but not all institutional investors, as witnessed by its defeat at scandal-tainted Tyco International Ltd. The vote in favor was 26.4%.
"We look at it on a case-by-case basis," said Ms. Fender. TIAA-CREF, which doesn't disclose its votes, weighs the potential tax saving of offshore incorporation and the loss of any shareholder rights.
But Mr. Elson believes shareholder protection outweighs any tax advantages. "I don't believe Bermuda provides adequate protection for shareholders," he said.
The AFSCME and the California Public Employees' Retirement System, Sacramento, in April jointly withdrew a reincorporation resolution at McDermott International Inc. The company agreed to work with the two pension funds "to bring a fair resolution to the issue of whether McDermott should redomesticate from Panama to the United States," according to a statement by the three parties.
McDermott, which operates from New Orleans, agreed to place a management resolution on reincorporation in its next proxy statement. The resolution will recommend reincorporation in the event the tax, costs and other considerations are believed by McDermott's directors to be in the best interests of shareholders. If the resolution does not gain support of McDermott's board of directors and its management, the ballot will contain a 500-word statement of support from the union pension fund and CalPERS.
Another hot button is stock options. Mr. Ferlauto noted that expensing stock options "is gaining momentum without votes." Some 200 companies, amounting to about 30% of the market's capitalization according to Mr. Bertsch, have decided to expense options. The Financial Accounting Standards Board should decide on the issue by year-end. Many companies are waiting for the FASB decision, Mr. Bertsch said. For that reason, many shareholders are not supporting such a change in resolutions this year.
Union funds have won some significant votes on executive severance agreements. While reincorporation lost at Tyco, an AFL-CIO pension fund resolution on golden parachutes got 57.7% of the Tyco shareholder vote.
Similar resolutions, sponsored by the AFL-CIO fund and the Amalgamated Bank and Communication Workers of America, got majority votes at Alcoa Inc., United Technologies Corp., Union Pacific Corp. and Hewlett Packard Co., according to the AFSCME.