ISS Releases 2007 Board Practices, Board Pay Study
Submitted by: Sarah Cohn, Director of Communications
ISS today released its 2007 Board Practices, Board Pay Study, a report that examines the board structure and compensation of boards of directors at S&P 1500 companies based on 2006 disclosures. The most significant study finding was that the proportion of S&P 500 companies with classified boards dropped dramatically by 8 percentage points. This led, for the first time, to a majority of these companies holding annual elections for all of their directors.
To learn more about the findings from the study, please listen to ISS' Governance Leadership Interview with Carol Bowie, Vice President of Governance Research Services.
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January 29, 2007 |
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ThyssenKrupp Grants New Voting Power to Foundation
Submitted by: Roland Escher, International Research Analyst
At the Jan. 19 annual meeting of German steelmaker ThyssenKrupp, shareholders approved an article amendment that gives the Alfried Krupp von Bohlen und Halbach Foundation (Krupp Foundation) the right to appoint three out of the 10 supervisory board members elected by shareholders.
The foundation, which was set up by the founder of a predecessor company, is ThyssenKrupp's largest investor, and recently increased its stake to 25.1 percent. The direct appointment of foundation representatives will bypass the traditional director election process.
If the three foundation appointees join forces with the 10 members who are elected by employees, they would outnumber the seven members who will continue to be elected by outside shareholders. Against the background of a rapidly consolidating steel industry dominated by emerging-market players, some analysts see this as a defensive measure to protect the company against hostile takeovers.
The story has taken on added significance because the chairman of ThyssenKrupp's supervisory board, Gerhard Cromme, who defended the measure in front of angry shareholders attending the annual meeting, is also the head of the government commission that created the German Corporate Governance Code (Kodex). According to provisions of the Kodex, it is the general meeting that should elect shareholder representatives on the supervisory board, and those members should represent the interests of all shareholders. Those critical of Cromme's support for the change also point to his role as CEO of ThyssenKrupp until 2001 and longstanding close ties to the Krupp Foundation.
In defending the move, Cromme argued that giving the Krupp Foundation the right to appoint supervisory board members would actually improve transparency, one of the main aims of good governance, by clearly disclosing the foundation representatives' allegiance.
Cromme also sits on the supervisory board of Siemens, which is under criminal investigation by the state attorney's office in Munich in a bribery scandal involving 420 million Euros ($557 million) of payments under review. A large number of shareholders were expected to vote against the annual management proposal to absolve the management and supervisory boards from liability for their actions at Siemens' Jan. 25 annual meeting.
The controversial ThyssenKrupp resolution received 289.8 million votes in favor, or 78.9 percent of votes cast, according to a company press release. Press reports indicated that a number of large German investors voted with ThyssenKrupp management for fear of upsetting Cromme, who sits on nine German supervisory boards.
Vereinigung Institutionelle Privatanleger (VIP), a German association of shareholders, filed a counterproposal opposing the measure. According to Hans Buhlmann, head of VIP, the measure is "a poison pill, which can only be removed by a three-quarters majority vote." However, shareholders voting by proxy were not able to vote on the counterproposal because of the compan's procedural rules.
Some industry observers, including Dieter Fockenbrock of the German-language daily Handelsblatt, expressed concern that the ThyssenKrupp vote will set a precedent whereby other large shareholders will try to enshrine their representation on German supervisory boards. One example is Porsche, which owns a 29.1 percent stake in Volkswagen, and has openly called for more influence at the German carmaker.
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January 26, 2007 |
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ISS Viewpoint: Proxy Access
Submitted by: Dr. Martha Carter, Managing Director, Corporate Governance, and Stephen Deane, Vice President, Center for Corporate Governance
The following is the text of the Jan. 19 comment letter that ISS sent to the Securities and Exchange Commission on proxy access.
We are writing to reiterate ISS' support for shareholder access to the corporate proxy ballot for the purpose of director nominations. This statement represents the views of ISS and not necessarily those of our clients. We urge the Securities and Exchange Commission to complete consideration and adopt a proxy access rule. Meanwhile, we believe that shareholders should have the right to place proxy access resolutions on corporate ballots. Such resolutions will stimulate constructive discussion and will subject the idea to a series of market tests on a company-by-company basis.
Shareholder proposals on proxy access will facilitate private ordering by enabling investors to consider what is right for individual companies. Shareholders already have the right to submit proposals and to vote on other matters concerning procedures of director elections, including declassified boards, cumulative voting, and majority voting. It would be logical and consistent to include shareholder proposals on proxy access among the topics protected from ballot exclusion.
In our Dec. 18, 2003, comment letter, we explained our support for the SEC's proposed rule on security holder director nominations. We believe that the considerations discussed in that letter remain equally valid today. Providing eligible investors with reasonable access to place their nominees on corporate proxy ballots will improve the performance of boards and boost the confidence of investors in corporations. While nearly all the reforms adopted in the past five years enhance boardroom oversight of management, ballot access will enable shareholders to hold directors more accountable.
Since 2003, as proxy access reforms stalled, many shareholders have shifted their focus to the voting standard for director elections. Shareholders and companies increasingly have come to accept majority voting in director elections as a democratic reform that transforms board elections from the symbolic to the meaningful. Nonetheless, there are clear distinctions between majority voting and proxy access--and we believe both reforms are needed. Majority election standards enable shareholders to vote directors out of office or to prevent nominees from assuming office. In this sense, majority voting can be likened to a limited form of veto. Proxy access, on the other hand, gives eligible shareholders the right to nominate one or more directors to the board. In this way, proxy access enables shareholders to make a positive contribution in building the board. The two reforms, far from being mutually exclusive, are complementary. They share the common aim of making boards more accountable.
In our 2003 letter, we took issue with the contention of opponents of ballot access that shareholders would allow themselves to be stampeded by special-interest groups. We are confident that a proxy access rule--such as the one proposed by the SEC--will contain numerous safeguards to prevent any abuses by special-interest groups. Moreover, proxy voting behavior by institutional investors shows that the rhetoric of critics is not in line with reality. In our decades of experience with institutional investors, we have found that the vast majority of them approach corporate governance issues in a thoughtful manner to build value for themselves and their portfolio companies. We believe that investors will apply that same thoughtful process to proxy access, should the SEC provide them with this important governance tool. It is a tool that will enable investors to fulfill their ownership responsibilities while improving board accountability.
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January 24, 2007 |
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Swissair Trial Targets Directors Over Perceived Mismanagement
Submitted by: Roland Escher, International Research Analyst
A criminal trial over the collapse of Switzerland's national air carrier, which began this week in a Zurich suburb, may help define the extent to which Swiss boards can be held accountable by investors and stakeholders.
Most shareholders of SAirGroup, the holding company for Swissair, have long written off their investment after the corporate icon went bankrupt in October 2001. However, the trial may set an important precedent regarding the liability of directors and executives over what ended up as the country's largest corporate collapse--estimated at CHF 17 billion ($13.6 billion).
Nineteen former directors, executives, and outside advisors are on trial on charges that they breached their fiduciary duties by granting fraudulent authorizations, making false reports, and committing personal income tax fraud, among other crimes.
After originally being rejected by a court as too broad, the case was re-filed in July 2006 by the office of the state prosecutor for financial crimes for the Canton of Zurich. The office has set up a separate team focused exclusively on investigating the circumstances surrounding Swissair's collapse.
The current criminal case is the result of only the first half of the team's investigation. Prosecutors expect to file a second criminal case based on violations of accounting rules, at the earliest in the second half of the year. According to Bloomberg News, the trial is the first time that outside directors have faced criminal charges for their involvement in a Swiss corporation's failure.
The list of defendants reads like a who's who of Swiss industry. Those being prosecuted include Mario Corti, a former CFO of food multinational Nestlé; Eric Honegger, a former director of Swiss banking giant UBS and former government official for the Canton of Zurich; Lukas Muehlemann, a former CEO of both Credit Suisse and insurer Swiss Re; and Thomas Schmidheiny, the former chairman and CEO of cement conglomerate Holcim.
Because of the precedent-setting nature of the trial and the stature of those targeted, commentators have compared the proceedings to Germany’s Mannesmann trial, in which Josef Ackermann, the powerful chairman of Deutsche Bank, and other members of Mannesmann's supervisory board, were accused of illegally approving payments made to Mannesmann executives during a 2000 buyout by Britain's Vodafone. That trial had wide-ranging implications for the German market and helped spur best practice regulations including those to improve pay disclosure.
Germany's Lufthansa agreed to buy Swiss International Air Lines, Swissair's successor airline, in 2005. However, Karl Wuethrich, the liquidator appointed to oversee the winding up of SAirGroup, has filed a number of civil proceedings to recover damages on behalf of former creditors and shareholders, in parallel with the criminal case now underway.
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January 22, 2007 |
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2007 Preview: Executive Pay
Submitted by: Rosanna Landis Weaver, Manager, Taft-Hartley Research
While the Securities and Exchange Commission approved new executive pay disclosure rules in July, investors are continuing their efforts to seek additional reforms at U.S. companies.
From the proposal filings so far, it appears that investors have sharpened their interest in pay disclosure and giving shareholders a greater voice over compensation decisions. This interest has been fueled in part by the stock-option timing scandal that led to internal or regulatory probes at more than 150 firms, as well as investor anger over generous packages for departing chief executives, such as Home Depot's Robert Nardelli.
Moreover, lawmakers who traditionally have advocated for greater curbs on executive pay now have a greater voice following the November elections, when control of the House Financial Services and the Senate Banking and Finance Committees shifted to the Democrats. (This week, the Senate Finance Committee approved a bill that targets a tax break received by hundreds of top corporate executives. The measure, which is attached to popular minimum-wage legislation, would bar individual taxpayers from deferring more than $1 million a year in compensation.)
One set of compensation-related proposals in 2007 likely to receive considerable attention are those seeking to give investors the right to approve compensation practices. In 2006, the American Federation of State, County, and Municipal Employees (AFSCME) filed the first U.S. proposal seeking a non-binding referendum on compensation. That proposal averaged 39.9 percent support at seven firms last year. The resolution was patterned on similar measures in the United Kingdom, Australia, and Sweden.
A growing number of investors are joining AFSCME's campaign by submitting similar proposals, dubbed "say on pay." ISS is now tracking 35 proposals filed by labor funds, and an additional 20 by other institutional investors and individual activists, including some funds that have traditionally focused on social issue advocacy. The California Public Employees' Retirement System (CalPERS) has filed such a proposal at technology company EMC, and fund officials indicate more may be filed.
The language in some of these proposals has changed slightly from that used in 2006 to reflect modifications to the SEC's pay disclosure rules. The new version of the proposal asks that shareholders be given the opportunity at each annual meeting "to ratify the compensation of the named executive officers set forth in the proxy statement summary compensation table and the accompanying narrative disclosure of material factors provided to understanding the summary compensation table (but not the compensation discussion and analysis)."
Options Backdating
Shareholders are responding in a variety of ways to problems related to the timing of option grants. The option-timing imbroglio of 2006 has led to greater investor skepticism over the ability of boards to oversee executive compensation. To that end, the Amalgamated Bank's LongView fund has already filed proposals at six companies under investigation for the alleged backdating of options calling on them to reform their option grant policies.
The LongView proposals ask the affected companies to permanently fix grant dates or set dates for making option awards that will be announced before a fiscal year begins. An exception would be made for awards to executives recruited from the outside, provided that the strike price is not linked to the release of material, non-public information that could affect the stock price.
The LongView fund has filed the proposal at Analog Devices, Apple, Brooks Automation, Macrovision, Progress Software, and Sanmina-SCI. The Apple proposal was co-filed by the Connecticut Retirement Plans and Trust Funds while a Teamsters' fund has filed the proposal at Broadcom.
"LongView is having a useful dialogue with some of the companies to which we addressed proposals on options backdating issues," Amalgamated Bank Vice President Julie Gozan said. "The full story on this practice has not yet been written, and we're trying to learn not only how this came about, but what can be done to prevent similar... practices in the future."
LongView withdrew the proposal at Brooks Automation after the company agreed to adopt it. Although the company has generally moved away from options to a stronger reliance on restricted stock, Brooks made a commitment to select a presumptive date for any future option grants. "Their suggestions were good ones. Why wouldn't you do it?" said Thomas Grilk, the company's senior vice president, general counsel, and secretary. "They made good observations and they really were good discussions. We're always delighted with good advice from all quarters."
Pay for Superior Performance
"Pay for superior performance" proposals have already been filed by labor funds at more than 50 companies for 2007, making it the second most frequently filed proposal after majority voting. The proposal--filed for the first time in 2006--broadly calls for companies' compensation committees to establish a pay-for-superior-performance standard in executive compensation plans.
Under the proposal, annual incentives or bonuses would use defined financial performance criteria benchmarked against a disclosed peer group of companies, and no bonus would be paid unless the company's performance exceeds its peers' median or mean performance on the selected financial criteria.
Similarly, the proposal recommends that options, restricted shares, or other equity or non-equity compensation used be "structured so that compensation is received only when the company's performance exceeds its peers' median or mean performance on the selected financial and stock price performance criteria." Finally, the proposal calls for sufficient plan disclosure "to allow shareholders to determine and monitor the pay and performance correlation."
Ed Durkin, corporate affairs director at the United Brotherhood of Carpenters and Joiners, said the union pension fund chose to file such proposals at companies with a "poor link" between pay and performance. The Carpenters fund based its decision on an analysis looking at companies where CEOs made over the median CEO total compensation for their industry and market capital peer group. Performance against industry peers was determined for each company in three categories: total shareholder return for one year compared with industry peers, total shareholder return for three years compared with industry peers, and total shareholder return for five years compared with industry peers.
ISS also is tracking 16 proposals seeking performance-based options, which represents a large increase from last year. Fifteen of these proposals were filed by individual investors, including members of the Steiner and Chevedden families.
SERPs
While shareholder proposals on supplemental executive retirement plans (SERPs) have been filed in recent years, most have focused on seeking investor approval of the plan or additional disclosure of awards. However, a new SERP-related proposal, filed by the Carpenters at 18 companies so far, calls for the compensation committee to establish a "SERP policy" that limits the covered amount to a senior executive's annual salary and excludes all "incentive or bonus pay from inclusion in the plan's definition of covered compensation used to establish benefits."
The proposal was filed only at companies where the current SERP includes such compensation in its calculation measure, Carpenters’ officials say. “Variable pay should not be part of the calculation in providing a lifetime stream of income,” Durkin said. The supporting statement of the proposal expands on Durkin’s comments, noting that, “the inclusion of annual bonus or incentive payments in determining increased pension benefits can dramatically increase the pension benefit afforded senior executives and has the additional undesirable effect of converting one-time incentive compensation into guaranteed lifetime pension income.”
Along with this proposal, resolutions seeking shareholder approval of SERPs have been filed by the AFL-CIO at Raytheon, and by the Laborers' International Union of North America (LIUNA) at Ryland, labor fund sources say. LIUNA reports that it withdrew the proposal at Ryland after the company agreed to change its policies.
Compensation Consultant Independence
As the SEC’s new disclosure rules take effect, and proponents consider next steps in attempts to reform pay practices, the AFL-CIO is revisiting the issue of compensation consultants for the 2007 proxy season. The labor federation's Office of Investment has crafted a proposal, similar to one last filed in 2000, which calls for firms to disclose the company's relationship to any compensation consultants. "The independence of compensation consultants has received little scrutiny, and this is an important next step in the effort to align CEO pay with performance," notes fund official Daniel Pedrotty.
Specifically, the report would identify who hired the consultant (whether it was the board or the company), and whether the firm's senior management participated in the process of selecting or retaining the consultant. The report would also look at the historical relationship, disclosing whether the consultant has provided during the last five years any non-compensation-related services to the company or any affiliate of the company, including services provided by the consultant through an affiliate.
Additionally, the report would disclose whether the consultant has any service contracts with the company's senior management, or with any organizations that the company's senior management is affiliated with, and disclose whether the consultant has other public company clients at which an executive officer of the company or an affiliate of the company serves as a director. Finally, the report would disclose whether the consultant has employees who are family members of any person described above.
The proposal has thus far been filed at Exxon Mobil, General Electric, Home Depot, and Wal-Mart by the AFL-CIO, at DTE Energy by LIUNA, at Washington Gas by the Teamsters, and at CVS by the LongView fund, labor fund sources say.
At least two targeted companies have responded by agreeing to investor demands to enhance disclosure. In late December, General Electric said it would for the first time disclose the full extent of the work performed by its compensation consultant, Frederick W. Cook & Co. The move may prompt other companies to follow suit, proponents say. "GE is setting a precedent that other companies should follow," Pedrotty told Bloomberg News. The AFL-CIO has withdrawn the proposal. In addition, LIUNA withdrew its proposal at DTE after that company implemented the union's recommended changes.
The AFL-CIO said it believes the proposal would survive no-action challenges by companies that seek to omit it from their proxy. In 2000, when the labor fund filed a similar proposal at Washington Mutual requesting compensation consultant-related disclosures, the SEC ruled for the resolution’s inclusion on proxies.
A variation of the proposal also was filed in 2000 at IBM, which the commission allowed the company to omit on the grounds that it requested additional information to be included in SEC filings. The labor fund revised the proposal to ask for a separate report, much as is called for in the draft 2007 proposal.
Additional Proposals
Additional compensation proposals for 2007 include those concerning golden parachute payments and those seeking to cap pay or a report on pay distribution. The number of resolutions seeking shareholder approval for golden parachutes appears to be down slightly in 2006. ISS is tracking just 12 shareholder proposals on this topic for 2007, 11 of which were filed by labor funds. CalPERS has filed a bylaw proposal at Shaw Group and urged other investors to support the resolution at the engineering company's Jan. 30 meeting.
"Historically, [the company’s compensation committee] approved some of the most egregious severance and change-of-control provisions ever to catch the attention of CalPERS,” Christianna Wood, the pension fund's senior investment officer for global equity, wrote in a letter to Shaw Group shareowners.
ISS is currently tracking seven proposals seeking to recoup or "clawback" executive bonuses in the event of a restatement, six of them filed by members of the Steiner family. CalPERS has so far filed one such proposal and plans to file between five and eight more. ISS tracked 10 clawback proposals that came to a vote during the first half of 2006 with average support amounting to 23.6 percent. That figure is down from 2005, when the average support was 31 percent at four companies.
Shareholder activist Evelyn Y. Davis tells ISS she also plans to file proposals seeking to abolish stock options at Verizon Communications, Goldman Sachs, and Bank of America, among others.
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January 18, 2007 |
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Executive Pay Dominates Australia's 2006 Proxy Season
Submitted by: Martin Lawrence, Lead Analyst, ISS Australia
Executive pay issues dominated the 2006 Australian proxy season, the second year in which investors had the opportunity to cast an advisory vote on company remuneration reports.
In Australia, the highest profile annual general meeting was at telecommunications giant Telstra, where two issues dominated: the company's new executive pay practices and the successful attempt by the Australian government to install its board nominee, Geoff Cousins, despite 88 percent of non-government shareholders voting against his election. The vote was the state's last opportunity to exercise its majority voting power before it reduced its stake in November.
Telstra's board was also forced to rely on the government's 51-percent majority stake to ensure passage of a resolution approving the company's remuneration report. Fifty percent of minority shareholders voted against the resolution, citing concerns over the nature of executive performance hurdles, the level of bonus payments, given the company's poor performance and the low hurdles applied to incentives granted to the CEO.
No other annual meeting generated the same level of press coverage as Telstra, although high dissenting votes were recorded at a number of other meetings. Australian gambling company Tabcorp withdrew two resolutions, one concerning a proposed constitutional amendment that would have required a 75-day notice period for director nominations, and another concerning a grant of options to its CEO. Despite increasing the performance hurdles for the CEO option grant three days before the meeting, Tabcorp was forced to withdraw its resolution after a reported 60 percent of proxies were cast against it.
Other high votes against were recorded at meetings of both small and large mining companies, stemming from significant pay increases that have come in the wake of the global commodities boom.
Two small resources companies, Beach Petroleum and Kagara Zinc, recorded "no" votes of more than 20 percent and 30 percent, respectively, against option grants and other pay-related resolutions after substantial salary increases and option grants saw executives and directors at both companies profit handsomely from their companies' rocketing share prices over the past year.
Similarly, major global zinc and lead producer Zinifex recorded a 40-percent against vote on its remuneration report after increasing the pay package of its CEO by 100 percent despite the CEO holding over $20 million in vested and unvested equity incentives.
Outside of the resources sector, 41 percent of shareholders at Adelaide Bank voted against its remuneration report. Severance provisions called for a termination payout to the departing CEO equal to just under 9 percent of the company's fiscal 2006 after-tax profit. Takeover target Mayne Pharma also saw strong opposition from investors to its remuneration report, with 41 percent voting against.
In the media sector, Ten Network Holdings - in one of the last meetings of the season -recorded a 37-percent against vote on its remuneration report resolution over concerns about the size of the potential termination payout for its executive chairperson and the lack of disclosure of the performance hurdles for its long-term incentives.
Outside of traditional executive remuneration issues, the listed infrastructure sector experienced its first major signs of investor dissent at the ballot box in 2006 over alignment of the interests of investors and the managers of these vehicles. Externally managed infrastructure vehicles were pioneered by investment banks Macquarie and Babcock & Brown, and usually have external management agreements. These usually allow the external manager (usually a subsidiary of the sponsoring bank) to get large fees. These vehicles also pay substantial related-party fees to the sponsoring investment banks, and the ability of investors to remove the external manager is limited, even in cases of poor performance.
Four firms --Babcock & Brown Infrastructure, Babcock & Brown Wind Partners, Macquarie Communications Infrastructure Group, and Macquarie Media Group - all recorded against votes of more than 10 percent on their remuneration reports. In response to investor concerns over the issue of aligning management fees with investor interests, both Macquarie and Babcock & Brown promised to change the remuneration structures for their staff involved in managing these vehicles. However, no changes have been proposed to deal with the fee arrangements for the external managers.
A number of emerging governance issues also influenced events during this year's Australian proxy season. Investors discovered during 2006 that a number of large capital companies had been granting equities to executive directors over a number of years without shareholder approval, under a little known change to the Australian Stock Exchange (ASX) listing rules. The ASX allows companies to make grants without shareholder approval in cases where shares are bought on the market and are not newly issued.
The ASX, after representations from investors, has reopened debate over this rule change. However, a number of institutional investors have signified their disquiet at this practice by voting against the remuneration report of any company that had not put equity grants to executive directors to shareholder approval.
The Australian annual meeting season was also dominated by debate over board responsiveness to shareholders during takeover bids, as Australia's continuing bull market spawned a series of takeover offers by listed companies and private equity bidders.
One of Australia's two largest retailers, Coles Myer, rejected a bid at a substantial premium to its prevailing share price from a private equity group during this proxy season, leading to criticism from several institutional investors. The board of car part manufacturer Pacifica Group also rejected a takeover bid earlier in 2006 before later accepting a lower offer from the same bidder after its performance failed to improve.
New Zealand
Remuneration, however, was not the only issue at the top of local investors' minds. In New Zealand, the Contact Energy annual meeting turned into a high-profile forum for minority shareholders expressing anger at majority shareholder Origin Energy's failed attempt to transform Contact into one-half of an Australia-New Zealand dual-listed company.
Contact shareholders submitted resolutions calling for the removal of the independent directors - namely, those not tied to Origin -and greater oversight of the relationship between Origin and Contact. Another resolution called for the repayment by Origin of the fees associated with the failed merger attempt.
The meeting saw significant votes cast for the removal of the independent directors, and for the removal of one of the three directors associated with Origin on the sixperson Contact board, that reached as high as just under 15 percent. Nearly 23 percent supported a measure to create an ongoing independent director committee to review the relationship between Contact and Origin.
The Contact meeting became a symbol of mounting institutional investor discontent in New Zealand over the protection of minority investors during takeovers. A growing number of New Zealand companies make use of provisions allowing takeovers to proceed with the consent of only 75 percent of shareholders and without independent review of the transaction. This practice persists despite the fact that the New Zealand Takeovers Code calls for a 90-percent consent by shareholders and a report by independent experts.
Prompted by several recent transactions that were not subject to the Takeovers Code (most
prominently, the purchase of listed New Zealand company Waste Management by Australian listed company Transpacific), the New Zealand Takeovers Panel with the support of local institutions called for changes to the law for all takeover transactions, regardless of their structure, to receive Panel approval.
*This article originally appeared in ISS' October-December 2006 Corporate Governance Bulletin.
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January 17, 2007 |
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2007 Preview: Board Elections
Submitted by: Rosanna Landis Weaver, Manager, Taft-Hartley Research
As of Jan. 1, ISS is tracking almost 450 governance-related shareholder resolutions for the 2007 proxy season. The issue of majority voting in director elections will again feature prominently, based on the number of proposals filed to date as well as momentum gained from support of such measures in recent years.
However, companies have shown an increased willingness to adopt majority voting bylaws and policies, prompting several union pension funds to withdraw resolutions and actively engage with other issuers to reach agreements. In the past six weeks, more than 25 firms have adopted majority voting or announced plans to do so.
In addition, proxy access--the proposed, tabled, litigated, and much-debated suggestion that shareholders meeting certain requirements be allowed to nominate a limited number of corporate directors--will likely appear on a few proxies this year after the American Federation of State, County, and Municipal Employees (AFSCME) successfully challenged the exclusion of an access proposal.
The topic that dominated last year's proxy season--calls for director elections by majority vote--will likely feature just as prominently in 2007. In 2005 and 2006, activist investors pushed for companies to allow for majority voting after the SEC abandoned a 2003 draft rule designed to give investors greater say over director nominations.
Since then, activist shareholders have become so focused on gaining more influence over corporate boards that the most frequently filed proposals last season and in 2005 were those asking boards to provide that director nominees in uncontested elections be elected by "the affirmative vote of the majority of votes cast at an annual meeting of shareholders."
According to ISS records, shareholders filed 84 majority election proposals that came to a vote in the first half of 2006. This compares with 54 proposals that came to a vote in the first six months of 2005, and 12 in 2004. For the first half of 2006, shareholder support for these majority vote proposals averaged 47.7 percent (compared with 44.3 percent during the first half of 2005). And by August 2006, 36 proposals had received more than 50 percent support, nearly triple the number in 2005. In 2004, these proposals averaged less than 12 percent of votes in favor, without a single proposal winning a majority.
Building trades funds led by the pension fund for the United Brotherhood of Carpenters and Joiners of America filed most majority vote proposals in 2005 and 2006. And labor funds, such as the Carpenters, will again spearhead efforts on this issue in 2007, having so far filed roughly 100 such proposals, with an additional 10 submitted by individual investors.
Majority Vote Proposals
The Carpenters fund remains the single biggest filer on the topic in 2007, with 53 proposals filed already, and with fund officials planning to file more. Most of the funds' proposals are advisory, according to corporate affairs director Ed Durkin, requesting that boards amend company governance documents to provide for director elections by majority vote, while reserving the plurality vote standard for contested director elections.
While the text of the proposal does not deal with post-election issues, the supporting statement notes that, "with a majority vote standard in place, the board can then consider action on developing post-election procedures to address the status of directors that fail to win election."
The Carpenters fund is telling targeted companies that a combination of a majority vote standard and a post-election director resignation policy would "establish a meaningful right for shareholders to elect directors, while reserving for the board an important post-election role in determining the continued status of an unelected director." This, the fund argues, "represents a true majority vote standard."
The union fund tells ISS that the proposal has been filed for 2007 meetings at companies that have failed to address past investor support for measures seeking majority vote policies and at companies with director-resignation policies, whereby director nominees who receive more "withhold" votes than "for" votes must tender their resignation to the board, which, at its discretion, can accept or reject the offer.
More than 150 companies have since June 2005 adopted some form of a director-resignation policy, dubbed the "Pfizer" model for the company that first adopted the measure. Companies adopting the policy say it provides the board sufficient flexibility to continue meeting fiduciary requirements while, concurrently, empowering shareholders.
Resignation policies recently became more enforceable as a result of Delaware corporate law amendments that took effect in August. In addition, the American Bar Association in June revised the Model Business Corporation Act, which is the basis for most state corporate laws, to give companies and shareholders a greater ability to adopt director resignation policies. That, say policy proponents, obviates the need for boards to go beyond the Pfizer model.
While many companies adopted Pfizer policies in an attempt to satisfy shareholder concerns, labor fund officials continue to argue that such measures fail to give investors a meaningful say in corporate elections.
Companies Take Action
In recent months, an increasing number of firms have agreed to labor proponents' demands to adopt both majority voting and a director resignation policy, an approach known as the "Intel" model. Durkin reports that the Carpenters have withdrawn proposals at nine companies, including Bank of America, Deere, General Electric, Kimberly-Clark, Lehman Brothers Holdings, and Textron, after the companies agreed to change their election policies. In addition, Walt Disney, First Data, Schering-Plough, and Zimmer Holdings have agreed to adopt majority voting in response to proposals from the Sheet Metal Workers International Association (SMWIA).
The Carpenters fund also withdrew proposals at Chubb and Pitney Bowes--where shareholder approval is required for bylaw changes--when the firms agreed to put management-supported proposals to adopt majority voting on their 2007 annual meeting agendas.
Other large companies that recently instituted or announced plans to adopt majority voting include Humana, Qwest Communications, AT&T, Bristol-Myers Squibb, Lexmark, Cummins, and McKesson, according to news reports. In the past year, at least 90 companies have adopted a majority election standard, according to ISS data.
"Companies now seem to realize that this is a reasonable next step to take," Durkin said, adding he expects the number of companies to implement majority voting, and thus have proposals withdrawn, will grow.
Durkin also expects to see withdrawals on proposals filed by building trade funds at 12 Ohio-incorporated companies where plurality voting is mandated under state law. The fund is urging them to reincorporate to Delaware. Ohio lawmakers are to consider legislative changes to address the standing plurality requirement. The Ohio State Bar Association's Council of Delegates approved an amendment on Nov. 3, and the issue could come before the legislature as early as this spring. Durkin notes that these proposals were filed as a "basis for moving the issue forward."
The Carpenters fund reports that it withdrew its proposal at Wickliffe, Ohio-based Lubrizol after the company agreed to support the legislation, and SMWIA says it has withdrawn a proposal at Cincinnati Bell after reaching an "amicable resolution" with the company.
Binding Majority Vote Proposals
The Carpenters plan to file binding majority vote proposals at companies where the issue has twice been put to a vote and where average investor support amounted to more than 45 percent.
Fund officials expect there will be approximately 15 such proposals. One of these binding proposals, filed at Verizon Communications, has been withdrawn. A majority vote proposal at the telecommunications giant had received 61.3 percent support in 2006, and 43 percent support in 2005, but the company was in the process of considering a change when it received the 2007 proposal, Durkin notes. The Carpenters also withdrew a binding proposal at Marsh & McLennan, which has adopted majority voting. AFSCME has said it intends to file binding proposals, but has yet to disclose where, as this article goes to press.
Proxy Access
Another issue that is likely to receive considerable attention is proxy access. Thus far, AFSCME--and co-filers including public pension funds for New York, North Carolina, and Connecticut--has filed only one such proposal: at Hewlett-Packard. The resolution faces a no-action challenge by the company at the Securities and Exchange Commission. In a Nov. 3 letter, lawyers for Hewlett-Packard argued that a federal appeals court ruling requiring the inclusion of a similar proposal at American International Group (AIG) is not binding on agency staff and that Hewlett-Packard, a California-based company that plans to hold its annual meeting in that state, falls outside the court's jurisdiction.
The SEC has twice scheduled and cancelled meetings that would address how the AIG decision would affect future shareholder proposals on the issue. Richard Ferlauto, director of pension and benefit policy at AFSCME, has warned that the fund may sue if Hewlett-Packard seeks to omit the proxy access resolution in light of the commission's ambiguity on the subject. "If the company... attempts to omit the proposal, we will seek to enforce our rights in court," Ferlauto told ISS.
*Staff Writer Thaddeus C. Kopinski contributed to this article. A longer version of this 2007 preview article appears in the current issue of the Corporate Governance Bulletin. For ISS clients and others not receiving the Bulletin, subscriptions can be purchased by visiting the ISS Bookstore and clicking on "Newsletters."
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January 16, 2007 |
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Agency Staff Denies H-P's Request to Exclude Pill Proposal
Submitted by: Andrea Musalem, Associate Counsel, Governance Research Services
The Securities and Exchange Commission staff has rebuffed a request by Hewlett-Packard to omit an investor proposal that seeks a bylaw or charter amendment to require a shareholder vote on any future "poison pill" takeover defense.
The binding proposal was filed by shareholder Nick Rossi, who argues that it would "improve the lack of accountability" on the company's board. H-P's board was criticized by some institutional investors and lawmakers after the firm disclosed a boardroom leak probe last year that sought the phone records of directors and journalists. The company's chairman, general counsel, and three other executives later resigned.
In seeking no-action relief, H-P argued that Rossi's proposal was excludable under SEC Rule 14a-8(i)(10) because the company already "substantially implemented" the proposal by adopting a pill policy in 2003. That policy "allows the submission of any poison pill to a stockholder vote," but it includes a "fiduciary out" provision that allows the board to act on its own, if directors conclude that such a vote "would not be in the best interests of shareholders under the circumstances."
The Palo Alto, California-based computer maker, which doesn't have a pill in place, also argued that the fiduciary out provision is required under Delaware law for directors to satisfy their fiduciary duties. H-P cited recent instances where the SEC staff granted no-action relief to Radio Shack, Tiffany, and Home Depot based on that argument.
H-P also sought to exclude Rossi's proposal by asserting that it contains irrelevant and materially false and misleading statements. The proposal calls for retaining a new outside attorney and raised the issue of proxy access. The staff of the Corporation Finance Division was not persuaded by H-P's arguments and issued a Dec. 21 letter denying the company's no-action request. (H-P also is seeking to exclude a proxy access proposal filed by four pension funds. For more on that proposal, see the lead story in this week's issue.)
Unlike poison pill proposals filed by investors last season, Rossi's proposal did not ask H-P to amend its charter or bylaws "if practicable." Last year, the SEC staff allowed Electronic Data Systems and other firms to exclude bylaw proposals that contained that phrase, as the SEC staff concluded such qualified proposals were not substantially different from the pill policies that those firms had in place.
Four other companies have filed no-action requests to exclude 2007 bylaw proposals that are similar to the resolution at H-P, but it was not known as of press time whether the SEC staff had ruled on those requests.
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January 12, 2007 |
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Introducing the ISS 2007 Proxy Season Watchlist
Submitted by: Sarah Cohn, Director of Communications
ISS is pleased to present the 2007 Proxy Season Watchlist, which offers the latest data on the number of key corporate governance shareholder proposals for the 2007 proxy season.
Watchlist highlights to-date include:
* There are 99 pending proposals on majority vote to elect directors versus 94 that came to a vote in 2006.
* There are 39 pending proposals on linking pay-to-performance versus 17 that came to a vote in 2006.
* There are 40 pending proposals to report on or disclose political contributions versus 28 that came to a vote in 2006.
The Watchlist will be updated twice monthly. We encourage you to visit this page often for all the latest shareholder proposal numbers.
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January 5, 2007 |
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Investors Decry Rule Reversal
Submitted by: Subodh Mishra, Managing Editor
A late December move by the Securities and Exchange Commission, altering the way in which U.S. companies must report the value of executive stock-option grants, is being criticized by investors and a key lawmaker as ill-conceived and poorly timed.
The move effectively allows companies to report a lower value for option awards by disclosing values as they vest, rather than upon award. The commission's original rules, approved in July, required companies to disclose option award values at the time of the grant, thus giving investors a better idea as to the overall value the board placed on the award, according to supporters of the original provision.
"We're disappointed and feel it's a step back from full transparency for investors," Amy Borrus, deputy director at the Council of Institutional Investors, told Governance Weekly. "Investors will need to do more work to determine" the full worth of pay packages.
Commission officials argue the change will give investors a more accurate picture of executive pay packages because it will prevent the reporting of compensation that might not be realized. "The object is to report accurate numbers...reporting "phantom" pay that will never be received, is just as misleading as routinely under reporting it," SEC Chairman Christopher Cox said in a statement.
Cox also noted that the new rules will require reporting of option awards in a manner consistent with that mandated by the Financial Accounting Standards Board for corporate financial statements, thus providing "maximum clarity and consistency for investors."
The interim final rule was not subject to comment before its release and will apply to all companies filing proxy statements on or after Dec. 15, 2006, which was the same effective date for the other new disclosure rules. The SEC said it would accept public comments on the rule change for 30 days after the rule is published in the Federal Register and will make changes in February, if necessary.
Industry groups, including some like the Business Roundtable that supported the original rule, are welcoming the change, calling it a "more fair and balanced" way to report stock options, which will allow shareholders to determine what executives will receive, rather than what they may obtain.
Timing Questioned
Some investors have questioned the commission's decision to publicly announce the switch on the last business day before the Christmas holiday.
"They did it at the worst possible time, during the holiday season, with no chance for investors to respond, and they made it as a final rule," said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County, and Municipal Employees (AFSCME). "They should not be surprised to see this outrage."
SEC officials are rejecting the suggestion that the announcement was timed to avoid public scrutiny, saying the information was posted publicly as soon as it was approved by the federal agency overseeing regulatory policies. "Commissioners approved the amendment on Dec. 15, and we posted it as soon as it was cleared by the Office of Management and Budget, which just happened to be late in the day on Friday," SEC spokesman John Heine told Governance Weekly.
Ferlauto predicts the last-minute reversal and resulting outcry will translate into higher support for shareholder resolutions seeking to tie pay to performance and to give investors a greater say on pay packages. Ferlauto also said he expects these concerns will resonate on Capitol Hill, where leadership of committees now rests with Democratic lawmakers who traditionally have been more responsive to criticism from labor and other groups of "excessive" executive pay.
"[T]his slippage is regrettable both substantively and for not having been open to more public discussion," Rep. Barney Frank, the incoming House Financial Services Committee chairman, said in a statement. "Backtracking by the SEC on this important matter of stock options reinforces my determination that Congress must act to deal with the problem of executive compensation."
Frank, a Massachusetts Democrat, will hold hearings to address the growing "inequality gap" evidenced by today's executive compensation packages, committee spokesman Steven Adamske told Governance Weekly, though no schedule has been set.
Focus Remains on Options, 'Say on Pay'
The SEC's rule reversal is not the only issue serving to ensure investors remain focused on executive pay in 2007. In recent months, options backdating has generated controversy as more than a hundred companies face regulatory or internal probes over allegations that executives received awards timed to coincide with share price lows.
Most recently, the board of Apple Computer has been criticized over option awards for CEO Steve Jobs. A special committee of the board said Dec. 29 that Jobs was "aware of or recommended the selection of some favorable grant dates," but did not benefit financially, The Wall Street Journal reported.
Board members, including former U.S. Vice President Al Gore, said the committee defended Jobs and gave no indication the company would hold him accountable for grants that the Cupertino, Calif.-based firm has acknowledged were backdated.
Backdating also will remain a focus in light of proposals filed by some activist investors including the Amalgamated Bank's LongView fund, which is asking companies to permanently fix grant dates or set dates for making option awards that will be announced before a fiscal year begins. (An exception would be made for awards to executives recruited from the outside, according to the proposal text, provided that the strike price is not linked to the release of material, non-public information that could affect the stock price.)
The LongView fund, with the Connecticut Retirement Plans and Trust Funds, has filed the proposal at Apple Computer, among other firms.
Labor funds, public pension funds, and individual activists have so far filed more than 30 "say on pay" proposals that seek an advisory shareholder vote on compensation. That proposal, which was introduced by AFSCME last year, averaged roughly 41 percent support at seven companies in 2006. This week, the New York City Employees' Retirement System announced it would target Par Pharmaceutical, Blockbuster, and Home Depot with the resolution.
Home Depot, a principal target last year for investors frustrated over failures to tie pay to performance, this week announced the resignation of CEO Robert Nardelli, who leaves with a $210 million separation package that includes $20 million in cash severance.
Nardelli received roughly $225 million during his six-year tenure as the company's stock price fell and the home improvement giant lost market share to rival Lowe's, Bloomberg News reported.
Frank denounced Nardelli's severance package as a "consolation prize for bad performance,'" and said the company's example illustrates why shareholders need more power to influence corporate pay decisions, according to Bloomberg News. Frank said he would sponsor legislation to allow shareholders to vote on executive compensation packages. A similar measure proposed by Frank stalled last year when Republicans controlled Congress.
Nardelli's exit follows other high-profile CEO departures including that of Henry "Hank" McKinnell at Pfizer, and Bill Ford Jr. at Ford Motor, that, analysts say, are a growing sign that boards are heeding investor demands over performance and executive compensation.
"Boards are sensitive to these issues and are responding to shareholder concerns," said Thomas Lehner, the Business Roundtable's director of public policy.
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January 4, 2007 |
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Appeals Court Rejects Class Certification in IPO Litigation
Submitted by: Ted Allen, Director of Publications
On Dec. 5, a U.S. appeals court ruled that a judge improperly granted class-action status to investors' claims against Wall Street banks over their underwriting of initial public offerings by technology firms in the late 1990s.
The investors, who previously reached a tentative $1 billion settlement with 310 Internet companies, contend that the banks manipulated IPOs to maximize their fees. The shareholders alleged that the banks created an artificial demand for the shares of these technology firms by requiring IPO clients to buy more stock later at higher prices.
A three-judge panel of the U.S. Court of Appeals for the Second Circuit ruled that the investors' claims weren't similar enough to be tried together in the same class. A federal judge certified the class based on six "focus cases."
The ruling is a significant victory for Morgan Stanley, Credit Suisse Group, and 10 other Wall Street firms, because many of the individual investors in the rejected class won't bother to pursue their claims separately or have the leverage to force the banks to agree to a generous settlement.
"Someone with a loss of $5 per share on a couple of hundred shares isn't going to waste the time and effort it takes to sue all these folks," Lawrence Hamermesh, a law professor at Widener University, told Bloomberg News. "When you combine all those losses together into $10 billion, then people have enough of a stake to keep going."
Melvyn I. Weiss, the lead lawyer for investors, said he would appeal the ruling. "It's not over," Weiss said, adding that the ruling applies only to the six focus cases and that other cases could meet the standards for class certification, The New York Times reported.
"The judges really are leaving some people who have been injured without any remedy," Weiss told Bloomberg News.
According to The New York Times and The Wall Street Journal, the appellate ruling may also jeopardize the $1 billion settlement with the IPO issuers and a separate $425 million tentative accord that investors reached with JP Morgan Chase in April. Neither settlement has received final court approval.
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January 2, 2007 |
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The Ongoing Options Saga at Apple
Submitted by: Patrick McGurn, ISS' Executive Vice President and Special Counsel
What did you know? When did you know it? These are the key questions in most investigations of possible corporate improprieties.
In the case of grant timing at Apple Computer, the answers to these questions are not in dispute. Apple's painstakingly thorough post-mortem of the calendar-shredding stock option grant practices indicates that CEO Steve Jobs knew about, and on occasion even suggested, use of "favorable" dates.
At some firms caught up in the grant-timing morass, the disclosure of similar conclusions from an investigation has been followed by the placement of a cardboard box full of the CEO's stuff out on the curb in front of corporate headquarters. The Apple board slid Jobs a break, however, based upon its conclusion that he didn't "financially benefit from" the grants or "appreciate the accounting implications" of Apple's use of a stock option time machine. While the directors (fronted by former Vice President Al Gore who may appreciate the fine legal distinctions thanks to his front row seat at the White House during Monica-gate) reached these conclusions, it's possible that the SEC or another body will not. As such, Apple will remain under a dark cloud for the foreseeable future.
Left unanswered, of course, is the more obvious question: Did Jobs appreciate the ethical implications of his actions? If the Apple board or Jobs needs a character reference, it should take former Sun Microsystems CEO Scott McNealy off its list. A New Year's Day story in the San Jose Mercury News provided McNealy's recent take on the backdating controversy at a Stanford University Faculty Club dining room event. "They never taught me in school that you are supposed to put the date that you signed it,'" McNealy said. "It was kind of intuitively obvious to me that you didn't backdate." Sun hasn't been caught with a backdating problem.
What are your thoughts on the current options saga at Apple? Please let us know.
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