Activist shareholders are ‘cabbing it’ to 2004 proxy season

Compensation, auditing and board issues are proliferating this proxy season.

Patrick McGurn, special counsel, vice president and director-corporate programs, Institutional Shareholder Services Inc., Rockville, Md., calls them CAB issues. "I guess I'd call this proxy season the taxi season" because of the focus of corporate governance reform, he said.

Among the CAB issues, he said, activist shareholders are demanding:

-- linking pay to performance for executive compensation packages;

-- expensing executive options;

-- voting on golden parachutes, or excessive executive severance packages;

-- showing zero tolerance on non-audit fees;

-- voting for ratification of auditor;

-- rotating auditors periodically;

-- requiring independent boards;

-- electing directors annually; and

-- separating the positions of chairman and chief executive officer.

Many of this year's issues are the same as last year, according to Investor Responsibility Research Center, Washington. "Activists believe that despite major governance reforms implemented by Congress, the stock exchanges and the (Securities and Exchange Commission), some issues still have not been addressed adequately," an IRRC report noted.

Among companies, Walt Disney Co., Burbank, Calif., faces a "vote-no" revolt by Roy Disney and Stanley Gold at its March 3 annual meeting. Both quit as directors last year. The Roy Disney-Stanley Gold campaign calls for votes against Michael D. Eisner, chairman and chief executive officer, and three other directors: John E. Bryson; Judith L. Estrin; and George J. Mitchell.

ISS recommends a "no" vote only for Mr. Eisner.

An influential shadow hanging over this proxy season is the SEC proposal to grant shareholders access to the corporate proxy ballot to nominate directors in certain circumstances, Mr. McGurn said.

"It's already having an effect," he added, even though the proposal is still under consideration.

More companies than ever before have changed practices and policies in response to shareholder resolutions, which are non-binding.

Some 170 shareholder resolutions received a majority vote last year, while 36 companies made changes so far, he said. In recent previous years, "only a handful of companies" would respond positively to a resolution that received a majority of votes, he added.

"Clearly something changed," causing the companies to react to majority votes, he said. He attributes it to the SEC access proposal. One trigger for shareholder director nominations under the proposal would be a board ignoring a majority vote.

So far, 650 shareholder proposals have been filed for the proxy season, according to IRRC. Of them, 36% deal with executive compensation issues, compared with 44% last year and 19% in 2002.

Among other proposals, 20% deal with board issues, compared with 15% in 2003 and 32% in 2002, and 24% deal with anti-takeover measures such as poison pill devices, compared with 23% last year and 30% the year before.

Some activists aren't satisfied that the Sarbanes-Oxley Act is tough enough or the Financial Account Standards Board is moving quickly enough.

About 120 proposals, filed by activists apparently not convinced that the Sarbanes-Oxley Act is tough enough on auditor conflicts of interest, want either shareholder approval of a company's auditing firm or limits on non-auditing work by the auditor, according to the IRRC. Mr. McGurn said only about half of the 500 largest companies ask shareholders to ratify the auditor.

He said Sarbanes-Oxley provides restrictions on only certain areas of non-auditing work, limits that some activists don't believe go far enough. ISS generally won't endorse an auditor whose non-audit fees surpass its audit fees, he said.

Although FASB is expected to issue a rule this year on expensing options, many activists, fearing the proposal could get derailed, have continued introducing proposals on options in order to keep FASB on course for adopting the new standard, corporate governance experts said.

Among issues this year, "we will see for the first time a significant number of ‘no' votes for audit committee members (of boards) for insignificant linkage of pay for performance," Mr. McGurn predicts.

Labor union pension funds are the leaders in shareholder proposals, submitting some 54%, or 330, so far this year, according to the IRRC. In 2003, they submitted 45% of the more than 700 proposals tracked by IRRC — the most ever by an institutional investor group.

Public pension funds submitted only 4% of proposals this year, up from 3% last year. Religious and social funds submitted 7% of proposals, up from 5%. Individuals account for the rest of the proposals this year.

Among social investors, Calvert Group Ltd., Bethesda, Md., introduced resolutions at 33 companies, seeking more disclosure of environmental and social performance, greater diversity among board members and improved corporate governance.

Religious organizations' pension and other funds filed 129 resolutions at 93 companies, according to the Interfaith Center on Corporate Responsibility, New York. Of their proposals, 29 involved corporate governance, including 13 related to executive compensation; eight on annual election of directors; and 21 on global warming.

The AFSCME Employees Pension Plan of the Washington-based American Federation of State County and Municipal Employees, which has about $600 million in assets, submitted proposals at 21 companies, targeting issues that include ignored majority votes from previous years, as well as excessive executive pay and board transparency.

It filed proposals at Time Warner Inc., ExxonMobil Corp. and McKesson Corp., asking for an annual report disclosing both non-proprietary agenda items that the board and its committees voted on and any director votes that were not unanimous. The information would help shareholders evaluate directors, "the next logical step when shareholders have the right to nominate directors on the company proxy," Gerald W. McEntee, chairman of the plan, said in a statement.

AFSCME also filed proposals at Tyco International Ltd. and Ingersoll-Rand Co., asking the companies to reincorporate in the United States from Bermuda. Last year, such proposals lost, receiving 26.4% and 42.3% or the vote, respectively.

It also submitted proposals at Sears Roebuck & Co., Eastman Kodak Co. and Merck & Co., calling for declassifying boards to have annual election of directors.

TIAA-CREF, New York, revised its corporate governance guidelines this year. Among the changes, TIAA-CREF now will support annual election of all directors to make them "more responsive" to shareholders, said Peter Clapman, TIAA-CREF senior vice president and chief counsel. Previously, it gave corporations some latitude to have staggered terms.

TIAA-CREF will also support the designation of a lead director when the position of chairman and chief executive officer is not separate, to provide independent oversight of the board and management.

But TIAA-CREF will leave to a board's discretion whether to separate the positions of chairman and CEO, Mr. Clapman said, "except if the company has severe corporate governance problems which demonstrate the CEO has imperial ambitions."

On auditor independence, TIAA-CREF's new policy doesn't preclude an auditor from non-audit work but calls for the company's audit committee to ensure that the auditing firm's "independence is not compromised by the provision of non-audit services or by a long-standing relationship with the company."

Aside from the new policy, Mr. Clapman said TIAA-CREF supports the SEC proposal, including its limited triggers, for giving shareholders access to corporate proxy ballot to nominate directors.

He calls it a "modest proposal" that should improve dialogue between shareholders and corporate directors and should be given time to see how it works.