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Editorial

Test of governance wills

There are good neighbors. Then there is Nabors Industries Inc.

Nabors has ignored shareholder votes on the election of directors, say on pay and proxy access. Not only this year, but for several years, Nabors' board has acted in defiance of shareholder voting seeking to bring accountability and improve corporate performance.

The lesson for shareholder activists: Do not relent on your long-term efforts on corporate governance reform.

The cost of shareholder activism might deter institutional shareholders from becoming, or staying, active in corporate governance issues. But the cost of inactivity leaves investors' holdings vulnerable to underperformance by companies unresponsive to shareholder concerns. Such underperformance, as in the case of Nabors, is far more costly to investment portfolios in the long term than the cost of engaging in shareholder activism.

The company's stock has underperformed a peer group of companies and the S&P 500 over the last 10 years, starting Jan. 1, 2004, according to Morningstar data.

Shareholders have to either step up efforts to improve corporate governance to root out entrenched directors and shareholder-unfriendly corporate governance practices, or sell their stock in such companies.

Being complacent isn't an option. Pension funds, for example have a fiduciary duty to invest in the best interest of beneficiaries and vote their proxies to enhance shareholder value. And for investors with assets in index funds, selling is not an option. Nabors is one of the constituent companies making up the Standard & Poor's 500 stock index.

In this year's voting at Nabors, major pension funds lined up against the re-election of Michael C. Linn, John V. Lombardi and John Yearwood.

The C$219.1 billion (US$200.3 billion) Canada Pension Plan Investment Board, Toronto; $180.3 billion Florida State Board of Administration, Tallahassee; C$140.8 billion Ontario Teachers' Pension Plan, Toronto; $124 billon Texas Teacher Retirement System, Austin; $104.1 billion State of Wisconsin Investment Board, Madison; and $14.5 billion Illinois State Board of Investment, Chicago, all opposed their re-election. The $293 billion California Public Employees' Retirement System, Sacramento, withheld votes from Messrs. Lombardi and Yearwood.

Indeed, a majority of shareholder votes opposed the re-election of the three directors, yet the company retained all of them on the board.

Last year, shareholders rejected by a majority vote the re-election of Messrs. Lombardi and Yearwood, again to no avail; the board overruled the voting and retained both men. In 2011, shareholders rejected one of the two directors up for re-election, yet the Nabors board retained the rejected director.

In addition, for four years in a row — since the adoption of the Securities and Exchange Commission requirement to provide shareholders with a non-binding vote on executive pay — a majority of shareholder votes have rejected the compensation of the company's CEO and other top executives.

This year through June 16, only 47 companies, including Nabors, have had shareholders cast a majority of votes against their executive pay, of 2,031 companies in the Russell 3000 stock index holding such votes.

The company has defied shareholders for a third year on a proposal that would enable shareholders to nominate directors using corporate proxy materials.

A proposal this year by the $150 billion New York City Retirement Systems and $27.1 billion Connecticut Retirement Plans & Trust Funds, Hartford, calling for proxy access to nominate directors was defeated by 51.7% of the vote, according to a Nabors tally.

But under company policy, that tally counts broker non-votes, or uninstructed voting of investors whose shares are held by brokers, as having voted against the proposal, causing its defeat.

CalPERS sought to overcome that Nabors-imposed obstacle in shareholder voting with a proposal calling for the company to change its proxy-voting counting to treat broker non-votes as having no impact. It won a majority support in shareholder votes, 57.4% by the count of Nabors including broker non-voting as opposing the proposal, and 61.8% by a count of just the shares cast. That proposal was non-binding. Mark Andrews, Nabors corporate secretary, and Dennis A. Smith, Nabors spokesman, didn't respond to inquires on whether the company would implement the proposal.

Directors are supposed to serve as representatives of shareholders and be accountable to them.

Electing directors “is one of the most important ownership rights that shareholders have,” Denise L. Nappier, Connecticut state treasurer and sole trustee of the Connecticut trust funds, said in a statement.

But the Nabors board's defiant acts have kept in place three directors the majority of shareholders rejected. Because the three owe the retention of their positions to the action of the board, not the majority votes of shareholders, it appears they owe their fidelity to serving the interests of the board as well as corporate management, rather than the interests of shareholders. Under such a situation, it becomes a challenge to reconcile the fiduciary duty the board has to shareholders when it acts against their wishes.

Shareholders have a continuing challenge to succeed in changing executive pay practices that arouse the objection of a majority of shareholder votes without a board similarly aligned.

A disconnect between pay and performance is a key reason shareholders voted against the executive pay year after year.

Unseating directors is a tough challenge. Last year, only 53 out of 17,369 nominees received less than 50% of the vote in support, among companies in the Russell 3,000 stock index, according to Institutional Shareholder Services Inc. But Nabors shareholders overcame the typical trend and rejected by a majority vote two directors last year and three directors this year.

Nabors directors are among the highest paid directors of major companies. The total compensation for non-employee or external directors at the company ranged in 2013 from $395,100 to $477,300, according to the latest data from the Nabors 2014 proxy statement.

The median value of total direct compensation for directors among 260 of the largest companies was $246,250, according to a May 29 report by Michael Bowie, an Arlington, Va.-based senior analyst at Towers Watson & Co.

Todd Lippincott, leader of executive compensation for the Americas at Towers Watson, was quoted by Pensions & Investments last year as saying, “The market for directors is also transparent and relatively deep, which also helps to keep compensation within boundaries.”

That observation might be the case generally, but it doesn't appear to fit Nabors, which despite extraordinary pay, appears unable or unwilling to find directors that better represent shareholder concerns.

Better corporate governance has yet to prove it could produce better performance. But that evidence is because the company has a long way to go to try it, based on shareholder discontent.

This article originally appeared in the June 23, 2014 print issue as, "Test of governance wills".