SEC Quizzed on Proxy Rules
Submitted by: L. Reed Walton, Staff Writer, and Ted Allen, Director of Publications
Chairman Christopher Cox of the Securities and Exchange Commission told lawmakers this week that the agency plans to issue proposed proxy rule changes by late July, in an effort to have final rules in place before the 2008 U.S. proxy season.
Cox said the proposed rules would address non-binding shareholder resolutions and proxy access (i.e., the ability of long-term investors to nominate directors to appear on management proxy statements). As part of this process, the commission also is reviewing a proposed New York Stock Exchange rule to bar brokers from casting uninstructed shares in board elections.
While Cox signaled that the SEC would not revive a draft 2003 proxy access rule that would apply to all companies, his comments suggested that the commissioners are still trying to reach an agreement on the issue. "We're still actively engaged in discussions," he said.
Cox made his comments during a rare appearance by all five SEC commissioners before the House Committee on Financial Services. For almost four hours on June 26, lawmakers quizzed the SEC officials on various topics, including the competitiveness of U.S. capital markets, the ability of shareholders to sue bankers and others who help companies defraud investors, whether small companies should be subject to internal control reporting requirements, and a pilot program that requires advance commission approval of corporate fines.
While Cox said earlier that the SEC would issue a rule this summer, he was more definitive at the House hearing about the expected timetable. However, he declined to shed much light on the new rules during generally respectful questioning from lawmakers. Cox, a former Republican congressman from California, previously served on the financial services committee.
Rep. Barney Frank, the Massachusetts Democrat who chairs the House panel, said the committee would hold a "full hearing" after the new proxy rules are proposed. "There is a lot of interest on the issue," he noted.
The commission has struggled for years to reach a consensus on proxy access. The SEC, which abandoned the draft rule in 2005 amid corporate opposition, was forced to revisit the issue after a New York-based federal appeals court ruled in September 2006 that the agency improperly allowed American International Group (AIG) to exclude a proxy access proposal.
Shareholder advocates, who say that proxy access is needed to ensure board accountability, have urged the SEC to clarify that investors may continue to file access resolutions at specific companies. Access proposals received 45 percent support at UnitedHealth and 43 percent at Hewlett-Packard this year. An access proposal filed by a dissident investor will be on the ballot July 16 at Cryo-Cell International, a small-cap firm in Florida.
Corporate interests have argued that proxy access is not necessary, given the various reforms already adopted by many companies, such as majority voting in board elections.
During the hearing, several Democratic lawmakers spoke in favor of proxy access. "This is an issue of great significance," Rep. Frank noted, according to the Associated Press. Another lawmaker said he would be concerned if the SEC adopts a high economic threshold that would bar most shareholders from participating. Rep. Brad Sherman from California observed that "the world has not caved in" after the SEC stopped granting corporate "no action" requests to omit access proposals following the AIG ruling.
Noting that the AIG decision applies only to one section of the country, Cox said, "we need to make sure that there's one rule for the whole country, that everyone understands it, and that we have it in time for the next proxy season," he said.
Annette Nazareth, one of two Democratic commissioners on the SEC, noted her support for the commissioners to address the issue. "I would want action on proxy access as soon as we can," she said.
It appears that Cox is leaning toward allowing shareholders to pursue access proposals at specific companies, instead of proposing a universal rule that applies to all issuers. "I share your concerns about imposing a federal set of detailed rules on what is a matter of state law," Cox told lawmakers. "A national bylaw is not an approach I would favor."
Shareholder Proposals
When asked by Rep. David Scott of Georgia about the utility of non-binding (or precatory) shareholder proposals, Cox recalled the arguments made by proponents and critics at three agency roundtables in May.
While some companies view these proposals as a "nuisance" and a distraction, Cox acknowledged: "they're non-binding, and therefore there is a limit to the distraction that [they] can provide."
While Cox didn't reveal his views on whether stricter filing requirements are needed, he did say that the SEC is studying the feasibility of electronic shareholder forums. "We want to make sure we have healthy communication at all times with companies," he said.
"The more communication, the better," Cox told lawmakers. "We’re looking for a cost-effective means that doesn’t interfere with the running of the company."
The commission has acted three times since 1970 to revise Rule 14a-8, which governs shareholder proposals. In 1998, the SEC backed away from stricter limits on resubmitted proposals after companies objected to another provision that would have allowed investors who own more than a 3 percent stake to override no-action decisions by agency staff.
Broker Votes
Democratic Rep. Melvin Watt of North Carolina asked Cox about the proposed NYSE rule and voiced concern that broker votes enabled a CVS/Caremark director to win election in May. Watt noted that investor advocates and North Carolina Treasurer Richard Moore have asked the company to provide more information on how broker votes were cast, but they were "stiff-armed."
Cox explained that some smaller companies would be unable to meet quorum requirements without broker votes. He said this concern will be “in the mix” as the commissioners consider broker votes and other proxy issues, and he noted that the SEC may conduct a separate rulemaking to address the NYSE rule.
Broker votes do account for a significant percentage of the shares in U.S. companies. About 85 percent of exchange-traded securities are held by brokers and banks on behalf of their clients, according to the SEC. Traditionally, brokers have cast those shares in favor of management nominees, prompting the Council of Institutional Investors and other shareholder advocates to describe the practice as "ballot-box stuffing."
U.S. Competitiveness
Rep. Paul Kanjorski, a Pennsylvania Democrat, asked Cox about complaints by business groups that the Sarbanes-Oxley Act is discouraging foreign companies from entering American capital markets.
"I don't think the sky is falling," Cox said. "All around us, there's more competition." At the same time, he noted that U.S. markets are still attracting foreign companies. "We’re on pace to have the most foreign listings in the U.S. since 1997."
Commissioner Paul Atkins offered a different view. "There is no doubt that regulatory costs do discourage issuers from coming to the U.S.," he said. While he agreed that some companies are attracted by U.S. legal protections, Atkins said, "others can be repelled if regulations are not in balance."
Securities Litigation
The lawmakers expressed widely divergent opinions on securities class-action lawsuits. Several Democrats praised the SEC’s recommendation that the U.S. government submit a brief in support of investors in an upcoming Supreme Court case on “scheme liability” (i.e., whether shareholders should be able to sue bankers, vendors, and other "secondary actors" who help companies engage in fraud.) The outcome of that case may affect the efforts of Enron investors to recover billions of dollars from three of the company’s former underwriters.
The case, known as Stoneridge Investment Partners v. Scientific-Atlanta, produced a rare SEC split under Cox. He joined with the agency's two Democratic commissioners to vote for filing a brief to support investors. The Office of the Solicitor General, which represents federal agencies, decided not to back investors after hearing opposition from the Treasury Department, the Federal Reserve, and White House officials, according to news reports.
Noting that the Solicitor General represents the government, not just the SEC, Cox said it's not uncommon for other agencies to have different views on a Supreme Court case. He said the SEC was within its rights to make its recommendation, "given our charter and our responsibilities" to protect investors. Cox defended his vote by noting, "I thought it was important to be consistent" with the 2004 position that the agency took in the Homestore litigation, where investors claimed that AOL Time Warner helped the company inflate its revenues.
Rep. Frank praised the SEC's position in Stoneridge and distinguished that case from other securities law disputes, such as the recent Tellabs decision, where the Supreme Court tightened pleading standards. Frank said he supports efforts to require more evidence of fraud, but he opposes the elimination of a whole class of scheme liability claims.
Atkins and Commissioner Kathleen Casey, who voted against the Stoneridge recommendation, said the liability standards detailed in the agency’s brief were too vague. "It's important to have a test that draws a clear line," Atkins noted.
Meanwhile, several Republicans denounced the SEC's recommendation. Rep. Richard Baker of Louisiana said the agency’s position is a “clear and present danger” to U.S. capital markets. Rep. Tom Price of Georgia warned of "settlement extortion" by plaintiffs' lawyers, noting that there have been $43 billion in securities settlements in the past decade.
Rep. Ed Royce of California cited the concerns about frivolous litigation raised in a report by U.S. Senator Charles Schumer and New York Mayor Michael Bloomberg. Royce and 15 other Republican lawmakers have asked the SEC to prepare a report on the costs and benefits of securities lawsuits.
In a June 22 letter, the lawmakers asked the agency to examine settlements and detail the transaction costs--including attorneys’ fees--that decrease the value of shareholders' investments. The letter also asked the SEC to address if there are sufficient legal protections to deter “professional plaintiffs,” and whether there is a need for a "pay-for-play" ban on political contributions by plaintiffs’ lawyers to government officials who oversee public pension funds. Finally, the SEC was asked to recommend whether private settlements should be coordinated with Fair Fund distributions by the agency.
Royce asked the SEC to complete that report by the end of the year. Cox said the agency would produce the report, and he appeared receptive to the suggested pay-for-play ban.
Cox was asked by several Democrats about whether the SEC was considering a proposal to allow companies to mandate the arbitration of investors' claims. In response, Cox said, "we have no pending proposal" to do so, repeating comments that he made to a Senate panel in May.
*This article originally ran in the June 28 edition of Governance Weekly.
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June 26, 2007 |
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2007 Post-Season Preview
Submitted by: Sarah Cohn, Director of Communications
ISS is pleased to make available its 2007 Post-Season Preview article. During the 2007 proxy season, shareholders gave greater support to proposals seeking advisory votes on executive pay, majority voting in director elections, and the right to call special meetings. "Clawback" and golden parachute resolutions also fared better this year, as did new resolutions seeking reforms in stock option practices and how companies calculate supplemental retirement benefits.
Pay-related proposals received the most attention; almost 40 proposals that seek an annual shareholder vote on compensation—or "say on pay"—have been voted on. To learn more about proxy season 2007 developments, visit here.
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June 25, 2007 |
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All Five Commissioners to Testify at House Hearing
Submitted by: L. Reed Walton, Staff Writer
All five commissioners of the Securities and Exchange Commission will appear at a committee hearing in the House of Representatives. Commissioners are scheduled to testify before the Committee on Financial Services on June 26 at 2:00 p.m. in Washington.
The SEC has drawn criticism from investors this year on a number of issues. Investor groups and state officials complained after the agency decided to file a "friend of the court" brief with the U.S. Supreme Court in February in support of corporate defendants in a securities case involving pleading standards. Shareholders also have expressed concern over Chairman Christopher Cox's push for unanimous commissioner approval of corporate fines, and about news reports that the agency was considering mandatory arbitration of securities claims.
Earlier this month, Cox, a Republican, sided with the two Democratic commissioners in asking the Solicitor General's office to support shareholders in another Supreme Court case involving the liability of bankers, vendors, and accountants who help companies defraud investors. That recommendation was opposed by other Bush administration officials and business groups.
Meanwhile, business representatives and some lawmakers are urging the SEC to ease the internal control requirements of Section 404 of the Sarbanes-Oxley Act and to exempt smaller companies. Companies complain that compliance costs are too high and that Section 404 leads to needless duplication of work. The SEC will be taking public and industry comments until July 12 on a proposal to streamline auditing standards.
For more information on the hearing, visit here.
Despite criticism of the SEC from both investors and companies, Rep. Barney Frank, the Massachusetts Democrat who chairs the House panel, stresses that the hearing is merely exploratory. "The fact that we're having a hearing doesn't mean that we've come to any negative conclusions" he told the Washington Post.
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June 22, 2007 |
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Investors, Issuers Await Tokyo Court Ruling on Pills
Submitted by: Subodh Mishra, Managing Editor
A forthcoming court ruling on a foreign investor's request to bar condiments maker Bull-Dog Sauce from deploying its "poison pill" takeover defense holds the promise of measurably altering Japan's market for corporate control.
The court's decision will have far-reaching implications for merger and acquisition activity in Japan while also signaling to investors how seriously the world's secon-largest capital market views the rights of shareholders, governance observers say.
"This will be a seminal case," Scott Jones, a corporate lawyer at the Tokyo office of Jones Day, told The Wall Street Journal. "It will shape the playing field."
At issue is the pill adopted by Tokyo-based Bull-Dog Sauce in response to a bid last month from activist fund Steel Partners Japan Strategic Fund (Offshore). The defense specifically targets Steel Partners, whereby the company could issue warrants to selectively dilute the fund’s stake from a current 10.5 percent to less than 3 percent.
Provisions within the plan bar Steel Partners from converting warrants into shares, unlike other shareholders would be allowed to do. The fund would be entitled to just 396 yen per share, or roughly 23 percent of the value of its current tender offer to shareholders, and provisions also allow the company to forgo a cash award, potentially leaving the fund with little more than worthless paper.
Fund officials have branded the pill discriminatory and in contravention to Japanese company law, which requires equal treatment for all shareholders.
Bull-Dog Sauce, whose trademark Worcester-style sauce is a fixture in most Japanese kitchens, rebuffed the Steel Partners offer on June 7, saying it would damage "corporate value and the collective interests of shareholders." Management is defending the pill as "legal and appropriate."
Steel Partners is calling on shareholders to vote against a proposal authorizing the pill's deployment at the company's June 24 annual meeting. Those calls are being buttressed on the legal front where the fund has filed an injunction request with the Tokyo District Court to keep the company from installing the pill if shareholders approve the measure.
Analysts suggest the court's decision may hinge on how it views the fund’s May 18 offer for the company. Specifically, deliberations will likely center on whether the fund is strictly seeking control, or is attempting to use the bid to achieve short-term gains in a practice known as "greenmail."
Greenmailing, by definition, precludes other investors from seeing the same financial benefits as those of the bidder, which, under terms of the Bull-Dog Sauce offer, would not be the case. The fund also says it has held a stake in Bull-Dog Sauce since 2002.
Steel Partners has in recent years bid on a handful of Japanese companies that saw their stock price head upwards on news of the offer or the potential for a "white knight" entrant. While never successful in achieving control, the fund has walked away with a tidy profit in virtually every case, either through the sale of portions of its stake, or through defensive management actions to enhance value such as through increased dividends.
That history is not lost on Steel Partners head Warren Lichtenstein. The normally media-shy investor has spent much of the past two weeks defending the strategic outlook of his fund’s bid while seeking to counter his portrayal in the Japanese media, which has in recent weeks highlighted his aggressive manner of investing.
"Many so-called activists force changes at a company and then sell their entire investment to reap short-term gains. This is not Steel Partners' investment style," Lichtenstein said at a June 12 media briefing, according to Business Week.
Japan's courts have twice ruled against the use of pills or the issue of diluting warrants. In 2005, a court barred control and measuring systems manufacturer Nireco from deploying its pill without shareholder approval. However, in its decision, the court noted that pills could be allowed if they were used to defend against greenmailers.
Foreign investors worry that should the court decide in favor of the company, Japanese boards-- which are overwhelmingly made up of insiders--will view the decision as a green light to selectively determine who their shareholders should be. That, analyst say, will have broad implications for Japan’s capital markets.
"Japan [would be] going back to the dark ages," one corporate lawyer told the Financial Times."It will really depress the stock market."
Conversely, a ruling in favor of Steel Partners may embolden activist funds to further press for change, a trend evidenced already this year. Between 2004 and 2006, ISS’ Governance Research Service tracked just 18 shareholder proposals calling on Japanese companies to boost dividends. This year, foreign activist funds alone--who prior to this proxy season have never before circulated shareholder proposals of any kind at Japanese firms--have submitted nearly half that number.
Meanwhile, non-Japanese investors have raised their holdings in Japanese companies to an all-time high, the Financial Times reports. International investors increased their stake in Japan's stock market to 28 percent in March from just over 26 percent in 2006 and just 4.7 percent in 1990, according to figures released by the Tokyo Stock Exchange and four smaller Japanese exchanges.
The expiration of the Steel Partners tender offer was pushed back from June 28 to Aug. 10 in what analysts say is a bid to give the courts more time to weigh in. The fund also raised its May 18 offer from 1,584 yen per share--an 18.6 percent premium to the May 16 share price--to 1,700 yen per share.
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June 20, 2007 |
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European Commission Formally Adopts Shareholder Rights Directive
Submitted by: Vaughn Stewart, International Analyst
On June 12, 2007, the European Commission announced the formal adoption of the "Directive on the Exercise of Certain Rights of Shareholders in Listed Companies." This new measure not only increases shareholders' access to information but also increases their ability to exercise their rights. According to Internal Market and Services Commissioner Charlie McCreevy, "These new rules will mean that shareholders, no matter where they are located in the EU, can have their say about the way companies are run and can hold management accountable."
Among other noteworthy improvements, the Directive requires minimum notices periods of 21 days for general meetings, mandates disclosure of voting results on company Web sites, and abolishes the old practice of share blocking. Furthermore, it abolishes many of the obstacles preventing shareholders from participating electronically at meetings (including electronic voting). The protection of a shareholder's right to ask questions and the company's obligation to answer them are also set out in the Directive.
The Directive represents a significant step forward for European corporate governance. Member States now have two years to implement the Directive in their national laws.
More information on the Directive and the consultation is available here.
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June 18, 2007 |
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French Lawmakers to Consider Curbs on Golden Parachutes
Submitted by: Subodh Mishra, Managing Editor
French President Nicolas Sarkozy, acting on a recent campaign pledge, is proposing restrictions on the use of "golden parachutes" and stock option grants for senior executives, according to press reports.
The restrictions, part of a broader economic package that will be submitted to lawmakers in the coming weeks, will likely be passed into law. Sarkozy's center-right Union for Popular Movement party consolidated its power during a first round of parliamentary elections on June 10.
Sarkozy's proposal would effectively ban the use of golden parachutes for departing executives who fail to meet performance requirements. The executive board would set performance criteria, the Financial Times reports, which would then be made public and put to a shareholder vote.
"No performance, no bonus," Sarkozy told the French daily Le Figaro, detailing the fundamental principle underlying the proposed law.
Sarkozy's proposal is meant in part to quell public anger over the roughly $11 million payout awarded to Noel Forgeard, the former co-chief executive of aerospace giant EADS, the European Aeronautic Defence & Space Co. Forgeard stepped down last summer following revelations that Airbus's A380 jetliner would be subject to production delays. Toulouse-based EADS, which owns 80 percent of Airbus, lost roughly one-quarter of its value on the news.
Investors have voiced outrage over golden parachutes and other forms of exit pay elsewhere in Europe this year. In March, the Ethos Foundation called for a vote against Hans-Joerg Rudloff, the compensation committee chairman at Novartis, in light of his support for severance packages for top executives, including CEO Daniel Vasella.
Meanwhile, stock option awards, which have been less contentious than cash-based payouts in France and other continental European markets, also would be reformed under Sarkozy's proposed legislation.
Options would only be available to senior managers at market price and only if the options--or a similar stock-based compensation plan--were offered to all employees, the Financial Times reported. The proposed legislation also would require companies to consult with labor unions on option awards.
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June 15, 2007 |
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A Closer Look at "Perks"
Submitted by: L. Reed Walton, Staff Writer
This year, as U.S. companies file proxy statements under the new compensation disclosure rules, the perquisites and other extra benefits that top executives enjoy are becoming more apparent to investors.
Before this proxy season, many executive perks were largely obscured, with a few coming to light years later during litigation or government probes. Prominent examples include the $15,000 umbrella stand and other luxury items purchased by Tyco International CEO L. Dennis Kozlowski, the personal aircraft use by former Tyson Foods Chairman Donald J. Tyson and his family, and the retirement perks received by General Electric CEO Jack Welch, which included use of an $11 million Manhattan apartment and a Mercedes. These headline-grabbing benefits helped spur investor demands for better disclosure of perks and other forms of executive compensation.
The new Securities and Exchange Commission rules mandate that companies disclose perks in aggregate of $10,000 (down from the former limit of $50,000) in the summary compensation table. The rules are causing some firms to cut back on perks, while other companies seek to defend these extra benefits by citing retention and security concerns.
Some investor advocates are not persuaded by corporate arguments that perks are still needed to retain top executives.
"Pay should be tied to long-term sustainable corporate performance, so perks can break this pay-for-performance link," Justin Levis, a senior analyst with the Council of Institutional Investors (CII), told Governance Weekly.
Levis said he "has yet to hear a convincing rationale" from companies about why they provide free personal travel on the corporate plane, club dues, home security, and other "extras."
Perks reform, said Michael Garland, director of value strategies for the CtW Investment Group, the investment arm of labor federation Change to Win, is "obviously a reform that the labor funds are highly supportive of."
"In situations where there are egregious perks," Garland told Governance Weekly, "you will see shareholders develop either ... proposals or [requests for] greater accountability of board members."
As companies file their first proxy statements under the new disclosure rules, it's not yet clear whether a significant number of firms are scaling back the perks, supplemental retirement plans, and other benefits that are not provided to regular employees. However, anecdotal evidence suggests that many firms still offer these benefits, and they now are making a greater effort to explain these practices to shareholders.
For instance, Boeing's proxy statement provides a breakdown of CEO James McNerney Jr.'s personal use of the corporate jet, which the company valued at $331,649. That total includes $63,053 for personal travel associated with relocation, $268,396 for general personal travel, and $9,160 for travel to outside board meetings. McNerney serves on two boards aside from Boeing's.
Drugmaker Eli Lilly's proxy specifies that CEO Sidney Taurel only used the company jet for personal travel to and from outside board meetings. "The company does not provide significant perquisites or personal benefits to executive officers, except that the company aircraft is made available for the personal use of Mr. Taurel and [Chief Operating Officer John] Lechleiter, where the committee believes the security and efficiency benefits to the company clearly outweigh the expense," the proxy statement reads.
While Goodyear Tire & Rubber offers top executives home security services, financial planning, tax preparation, country club dues, and annual physical exams, the company's proxy statement said the compensation committee "does not consider these perquisites to be a significant component of executive compensation."
Retention and security are the most-often cited reasons for executive officer perquisites. Morgan Stanley and eBay say in their proxy statements that perquisites (and other benefits such as bonuses and equity awards) are essential to retaining the same quality of executives that lead other firms in their revenue and industry grouping. The companies provide bulleted lists of peer companies with which they must "compete" for top executive talent.
Margaret Whitman, CEO of online auction firm eBay, received more than $1 million in personal travel on the company plane, including nearly $240,000 in reimbursements for taxes (also known as "gross-ups") owed on that travel. The company also notes that it paid finance chief Robert Swan close to $1 million in relocation fees and related tax gross-ups for "costs and expenses related to moving from Texas to the San Francisco Bay Area and the sale of his home." EBay also offers information technology support for executives' home computer systems.
Southern Union's proxy statement notes that it has a "policy that encourages [CEO George] Lindemann and his spouse to use company aircraft for all business and non-business purposes for their personal security and safety." The Houston-based natural gas company reports that Lindemann accrued $609,862 in personal travel on the company jet in 2006, not including $44,393 in tax gross-ups.
United Technologies reported $612,303 in personal airplane use by CEO George David in 2006. Like Southern Union, the United Technologies proxy statement says that the CEO and CFO "use corporate aircraft for personal travel in accordance" with the company's security policy, but no further explanation of the security policy is provided.
Meanwhile, Morgan Stanley CEO John J. Mack incurred $321,848 for personal aircraft use in fiscal 2006 and $407,762 in fiscal 2005, according to a footnote to the company's summary compensation table. At Morgan Stanley, a "board-approved policy directs the Chairman and CEO to use the [c]ompany aircraft when traveling by air."
Reduction in Perks
Though many companies are retaining perks, some firms have scaled back these benefits in anticipation of closer scrutiny by investors this year. According to The Wall Street Journal, a November report by Mercer Human Resources indicated that 14 of 110 companies surveyed had decided to drop certain perquisites or were considering doing so because of the new SEC disclosure regulations.
Embarq, a telecommunications company, eliminated a number of perks after a spinoff from Sprint Nextel. CEO Daniel R. Hesse now must reimburse the incremental costs of travel on the company plane--except for travel to outside board meetings, about which the firm says it "believes [Hesse's] ability to conduct company business during travel to these meetings is beneficial to the company," Embarq said in its proxy statement.
"We believe executive perquisites should be limited because the overall structure of our compensation and benefit programs should be broadly similar across the organization," the Embarq proxy statement reads, adding that the firm believes the cash and equity compensation it offers are more than adequate to attract skilled executives.
At Sunoco, CEO John G. Drosdick has asked the company to stop paying tax gross-ups on personal travel when using the corporate jet, according to the oil company's proxy statement. Drosdick also has given up his company-leased car, country club dues, and financial planning service allowances formerly provided by the firm, Sunoco said.
Telecommunications company Avaya also has stopped paying the gross-ups on personal travel, though it still offers top executives financial counseling, home security monitoring, annual physical exams, and vehicle allowances.
Fortune Brands eliminated automobile allowance, club dues, and financial planning services as perquisites, though certain officers still retain limited use of the company aircraft, according to the proxy statement. A footnote to Fortune's summary compensation table specifies that the only officers allowed limited use of the company plane--CEO Norman H. Wesley and CFO Craig Omtvedt--must reimburse the company for any personal travel on a company-owned plane.
Other companies, such as Lockheed Martin, Ryder System, and Xcel Energy, eliminated specific perks altogether and substituted a cash allowance to be spent as executives choose. Lockheed CEO Robert Stevens and Xcel CEO Robert C. Kelly each will receive $30,000 annually.
At United Technologies, the highest-paid executives receive a perquisite allowance in addition to personal use of the company jet. According to the proxy, the amount of the allowance is 8 percent of salary, which can be put toward a company-leased car or "otherwise paid in cash." The company states that "a cash perquisite allowance provides transparency and simplicity."
Supplemental Retirement Plans
Many companies offer their executives special retirement plans or pensions that go far beyond the benefits received by regular employees. These arrangements, called Supplemental Executive Retirement Plans, or SERPs, can deliver high-dollar values because many of them figure in bonuses and other incentive payments when calculating how much an executive can receive.
SERPs aren't considered "perks" per se, but they can be a significant part of the compensation packages received by senior executives. Shareholders have expressed concern that some executives are getting paid multiple times for the same performance if variable pay is included in SERP calculations. Investors filed about 20 proposals this season that ask companies to limit SERPs or exclude bonus payments from future benefit calculations. So far, those resolutions have averaged about 33 percent support, including a proposal by the United Brotherhood of Carpenters and Joiners of America that received a 51.6 percent vote at Goodyear in April.
At Black & Decker, CEO Noland Archibald has an accumulated pension value of over $36 million from his SERP and other retirement plans. Those benefits dwarf the $581,325 he is to receive from the company's standard pension plan, according to the hardware maker's proxy statement.
AT&T defends CEO Edward E. Whitacre's $84.5 million in accumulated pension benefits by citing his work in "reshaping the company and transforming it into a market-leading global competitor." Whitacre's former firm, SBC Communications, acquired AT&T in 2005 and took its name.
The communications firm stated in its proxy that it would subject all severance agreements that exceed 2.99 times a senior executive's salary and bonus to a shareholder vote, but AT&T did not specifically reference agreements on any other compensation.
High SERP and other supplemental plan values (some companies have additional supplemental plans for top executives) have cropped up for chief executives at other large firms, including a $40 million accumulated package for Textron CEO Lewis Campbell, and SERP calculations that include $2.6 million in dividend payments for CEO W.C. Weldon of Johnson & Johnson.
Former SouthTrust CEO and current Wachovia director Wallace Malone Jr., whose $100 million severance agreement was activated when the banking company was acquired by Wachovia, has six retirement plans from both companies totaling about $41 million, according to Wachovia's 2007 proxy.
On the other side of the coin, confectioner Hershey reduced CEO R.H. Lenny's pension benefits by 10 percent by eliminating all SERP plans effective October 2006. Sherwin Williams CEO Chris Connor does not participate in a company pension plan and received no bonus in 2006, but the paint company gave him a million-dollar salary and perks such as a car, club dues, financial planning, a home security system, and personal use of the company jet.
Extended Years of Service
One factor that can bump up the value of executive pensions is extra credit for years of service to the company, which often are provided to compensate executives recruited mid-career for unvested SERPs they leave behind at a previous employer.
For instance, Steven R. Rogel, CEO and chairman of papermaker Weyerhaeuser, has been credited 26 years of service, even though he has only been with the firm for about five years. Rogel was credited for his prior decades of work at Willamette Industries, which was acquired by Weyerhaeuser in 2002.
In 2001, Newmont, a mining company, entered into an agreement with CEO Wayne W. Murdy guaranteeing him 1.5 times his years of accredited service when calculating retirement benefits "as a retention incentive," according to the company's proxy statement this year.
Goodyear painstakingly explains the additional 15 years credited to CEO Robert Keegan include the time he served as executive vice president of Eastman Kodak. Accordingly, "the present value of accumulated benefit in the pension benefits table is $5,882,189 higher for Mr. Keegan," the tire maker said in its compensation analysis.
Valerie Ho, manager of compensation research at ISS, contributed to this article. This article originally appeared in the June 15 edition of Governance Weekly.
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June 11, 2007 |
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CEO Departures Remain Frequent, Study Says
Submitted by: L. Reed Walton, Staff Writer
Chief executives continue to leave office at a high rate, with many departures stemming from pay issues or board disputes, according to new study by consulting firm Booz Allen Hamilton.
Almost one in three CEOs was forced out of office in 2006--compared with one in eight in 1995--Booz Allen Hamilton reported in its sixth annual Global CEO Succession Study. The survey of the world's 2,500 largest companies showed that corporate boards in the past few years have replaced underperforming CEOs at a quicker rate, though the number of performance-related dismissals actually declined slightly in 2006. There is also an increasing focus on grooming internal candidates in the face of mediocre performance by CEOs recruited from outside the firm.
"It's clearly time to say goodbye to the age of the imperial CEO," Steven Wheeler, senior vice president of Booz Allen Hamilton, said in a May 22 press release on the study, which is subtitled, "The Era of The Inclusive Leader."
Wheeler said inclusiveness is a new critical CEO survival skill--and those top executives who do not give board members a voice in the company's growth strategy are in real danger of being forced out. The number of CEOs who lost their jobs because of conflicts with directors rose from 2 percent in 1995 to 11 percent in 2006.
However, the study does suggest that the wave of performance-related turnover--which grew by 318 percent between 1995 and 2006--may be subsiding. Thirty-two percent of CEOs who left office involuntarily in 2006 were forced out because of performance issues or board infighting--a slight decrease from 2005, the authors write.
In fact, the authors write that overall CEO turnover worldwide peaked in 2005. Study data shows that average CEO tenure is beginning to rise again as well, reaching a worldwide average of 7.8 years in 2006, with the Asia-Pacific region having the highest average retention period, 9.5 years.
The one notable exception was the increased rate of departures due to mergers and acquisitions. In 2006, 22 percent of departing CEOs left because of a merger or buyout, compared with 18 percent in 2005. Europe and North America saw the highest rates of turnover, the study says, because of elevated merger activity in both regions.
Study data continues to indicate that outside CEOs with prior experience as a chief executive of a publicly traded company deliver slightly lower returns to shareholders than internally promoted candidates.
The authors also advocate for the separation of the roles of chairman of the board and CEO, saying those companies with a completely independent chair who had not previously been CEO brought the best returns to investors over the study period. U.S. shareholders continue to press for separation of the two roles, though this proxy season has only seen an average of 28.4 percent support for the proposal at 10 meetings where results are known.
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June 8, 2007 |
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Online Communications Grows
Submitted by: L. Reed Walton, Staff Writer
Even before the Securities and Exchange Commission's new "e-proxy" rules take effect on July 1, shareholders and companies are increasingly using the Internet to communicate on governance matters.
Online sources like weblogs, video sites, and e-mail campaigns--not to mention company-sponsored Web sites--have emerged in recent years, sparking hope among investors for improved communication. In addition, these new forms of communication have gotten more attention since the SEC announced recently that it was studying the feasibility of "electronic shareholder forums."
Among the notable Internet efforts this season was the California Public Employees' Retirement System's (CalPERS) campaign for proxy access at UnitedHealth Group. The pension fund set up a Web site, www.healunitedhealthgroup.com, to accompany a letter sent to shareowners before the company's May 29 annual meeting.
CalPERS urged investors to vote for a proposal that calls on the company to amend its bylaws to permit investors who own at least a 3 percent stake for over two years to nominate up to two directors to appear on the management proxy statement. That proposal received 45.3 percent support, according to a company regulatory filing.
In addition, Yahoo! shareholder Eric Jackson is using a weblog (also known as a "blog") and streaming video to generate retail investor support for a "vote no" campaign against seven directors in advance of the company's June 12 meeting.
Earlier this season, ExxonMobil provided an online forum for shareholders to ask questions on proxy materials before the company's May 30 meeting. The company set a cut-off date of May 15 for all questions.
One of the primary goals of the new SEC rules is to reduce the cost to companies that mail thousands of hard-copy proxy statements--a package which, as SEC Chairman Christopher Cox has noted with chagrin, has gotten bigger with the advent of new compensation disclosure standards.
The new proxy rules stipulate that a company may--but is not required to--send proxy materials to investors via a "notice and access" model, meaning that the default method of proxy delivery will be an e-mailed notice of the annual meeting with Internet-based links to proxy materials.
The company can then send a paper proxy card 10 days or more after the release of the original notice, and shareholders are free to "opt out" of electronic delivery in favor of hard-copy materials.
In its announcement of the new rules in December, the SEC explicitly barred companies from transitioning to the predominantly electronic format until after the July 1 effective date.
Electronic Forums
The commission also has hired consulting firm Broadridge Financial Solutions to report on the feasibility of setting up secure "electronic shareholder forums" that would allow investors to discuss, debate, and potentially vote on issues.
The idea was discussed at SEC roundtables on the proxy process on May 7 and May 25. Both corporate and investor advocates raised some doubts, with some arguing that shareholders wouldn't take the idea seriously or trust such a forum if it is run by management and unregulated by the commission.
In a May 25 letter to the SEC, CalPERS General Counsel Peter Mixon praised the voluntary efforts by ExxonMobil and other firms to facilitate communications with shareholders. However, he urged the SEC not to replace non-binding shareholder proposals with "an unproven chat room concept that is riddled with concerns."
"It is doubtful that a chat room even with informal voting could adequately replace" non-binding proposals, which are taken seriously by companies and shareholders, Mixon wrote.
William J. Mostyn III, deputy general counsel at Bank of America, expressed concern about the staff resources that his company would have to devote to monitor an electronic forum if it was a supplement to non-binding proposals.
"I look at this as a parallel operation that would tie up my resources all year long," Mostyn told the commissioners at the May 25 roundtable.
Evelyn Davis, a long-time shareholder activist, also spoke out against electronic forums. "You should not force the Internet on senior citizens and small shareholders," she said.
At the May 7 roundtable, Paul Neuhauser, a University of Iowa law professor, expressed skepticism that "serious" investors would use such a mechanism.
"To the extent it looks like an Internet chat room, it would be entirely useless," he said, citing examples of irrelevant postings that appeared on the Yahoo Finance chat room for General Electric.
Dissident Challenges
The new e-proxy rules are expected to reduce solicitation costs for dissidents as well. Dissatisfied shareholders have been using the Internet to win support for alternate proxy campaigns for at least seven years. In 2000, lawyer Les Greenberg used an online campaign to nominate himself and four other dissidents to the 12-member board at Luby's Cafeterias.
Greenberg attracted supporters through postings on a Yahoo online message board, including some former members of Luby's management, according to The Wall Street Journal. Greenberg said his nominees won 24 percent of the vote and received significant support for two of their proposals.
In 2005, Alaska Air dissidents tried to conduct an all-online proxy contest. They posted their alternate proxy card on the Internet and urged shareholders to scratch out the names of the incumbent directors and replace them with the dissidents'--a sort of "write-in" campaign. The bid was defeated when the New York Stock Exchange ruled that the dissidents had not physically mailed proxy cards to enough shareholders to make it a legitimately contested election. The new e-proxy rules will officially open the online avenue to dissidents.
This season, investor Eric Jackson is using several online methods to enlist support for his "vote no" campaign at Yahoo. Jackson, CEO of consulting firm Jackson Leadership, maintains a blog about Yahoo called Breakout Performance and has posted several video appeals to shareholders on streaming video site YouTube (now owned by Yahoo rival Google).
Jackson told Governance Weekly that he received several responses--many from current and former Yahoo employees--when he posted a blog entry in January speculating that Yahoo's financial recovery had more to do with market conditions than with CEO Terry Semel's leadership.
"It became clear to me that it was kind of an emotional topic," Jackson said.
Jackson, who says he has the support of investors who own about 0.2 percent of Yahoo's voting shares, said he expects significant withhold votes against seven of the company's 10 directors.
*This article appeared in the June 7 edition of Governance Weekly. Director of Publications Ted Allen contributed to this article.
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June 6, 2007 |
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SEC Seeks to Revamp Proxy Process
Submitted by: Maureen O'Brien, Senior Research Analyst
The U.S. Securities and Exchange Commission says it plans to propose changes to
the proxy rules this summer, and three panel discussions this month suggest a wide range of options are on the table. An SEC proposal to create a secured online forum for shareholders to engage more frequently with companies and each other on proposals that are now addressed through the proxy process seemed to be the only item that stirred a common response among the panels’ participants. Panelists from academia, state judiciaries, shareholder activism, and the corporate sphere mostly agreed that the chat room was a bad idea, although for different reasons.
Nomination of Directors
Last year's AFSCME v. AIG decision by the U.S. Court of Appeals for the Second Circuit, and protests from other institutional investors that SEC regulation on director nominations is overreaching and unwarranted, has put pressure on the Commission to allow shareholders access to nominate directors. (For more information on the case, see the September 8, 2006, issue of Governance Weekly.) "We believe that the court's interpretation breaks a significant logjam in the evolution of procedures to encourage more responsive and responsible boards in the United States. We urge the SEC to allow shareholders access to the proxy for resolutions relating to the director election process," wrote one group of institutional investors representing more than $3.4 trillion in a statement to the SEC.
Ann Yerger of the Council of Institutional Investors echoed similar sentiments during one of the panel discussions. "There's no topic more important to our members than the issue of the process for nominating and electing directors, and we feel that’s definitely an area that should be permissible under the shareholder proposal rules," she said.
Precatory Proposals
In crafting a solution to these pressures, the Commission also seems mindful of a workload problem. The SEC Acting Director of the Division of Corporation Finance, Martin P. Dunn, who moderated many of the discussions, asked the first panel's attendees to congratulate SEC staff on processing more than 400 no-action letters. The SEC also acknowledged criticisms that it renders inconsistent decisions on what proposals are permissible under 14a-8, the rule that enables shareholders to file resolutions at companies, as long as they steer clear of the 13 exclusionary provisions. Dunn said that 14a-8 was not intended to be an invitation for the flood of social proposals the SEC now receives, suggesting the Commission is looking for an alternative to its role in the vetting process and is mostly focused on reducing traffic from social proposals.
In the past 20 years, the number of social proposals filed at companies has increased more than 200 percent, from 113 resolutions filed at 96 firms in 1987 to 359 resolutions at 214 companies this year.
Some panelists voiced annoyance with socially oriented proposals, which were often generically categorized as non-binding, or precatory, proposals. Others, however, urged the SEC to expand their assumptions about the ways precatory proposals are used. One such panelist was Paul A. Neuhauser, emeritus professor of law of the University of Iowa College of Law and a longtime consultant to religious investors. He commented that proposals that could be filed as binding are frequently filed as non-binding because "intrusions are not desirable; people basically don't want to command the company." He continued:
What do you want to use to prod [the corporations]? Do you want an elephant gun: i.e., let's have a proxy fight and kick out the board? Do you want a spear [in the form of], a binding proposal? Or, do you want to use a fly swatter and try to get their attention? That’s the function of the non-binding proposal, to get their attention without being intrusive.
Delaware Judge Leo E. Strine Jr. referred to precatory proposals as "pizza on the walls," a reference he also made in a speech at the University of Iowa where he argued, "In a real corporate republic with a vibrant election process, proxy access for stockholders seeking to propose bylaws, and strong voting power for stockholders over important transactions, where management is also disciplined by an active market for corporate control, there would be little justification for the continued cost of throwing pizzas at corporate boards every year."
Stanley Keller, an attorney with Edwards Angell Palmer & Dodge LLP, outlined what he views as three types of non-binding proposals: governance resolutions, social proposals that may relate to the business of the corporation, and proposals "by the new breed of investors, which '’ll call tactical, which are really the proposals maybe made for other motives, maybe to embarrass the corporation. Indeed, it may be to put the corporation in play."
While no one argued that every resolution is worthy of the recognition it receives, shareholder proponents questioned the characterization of all precatory proposals as illegitimate and reminded commissioners of the strides made possible through social activism among shareholders.
Socially oriented proposals have "frequently been ahead of the curve," Neuhauser said, citing current efforts to prompt corporate actions to reduce greenhouse gas emissions as one example. Ted White of Knight Vinke Asset Management likewise argued that precatory proposals "have served a unique purpose in our market in which they've been almost an incubation tank for what have turned out to be, over the course of a decade, best practices.” Some of the issues raised in shareholder proposals a decade ago were "considered somewhat of a joke, frankly," he said, arguing that they later become mainstream through the forum offered by the proxy process.
A case in point is ExxonMobil investors’ efforts to push the company to adopt more environmentally friendly policies. The company first received a social resolution on the climate change in 1990 when Friends of the Earth, a U.S. environmental group, proposed that the company "reduce production of carbon dioxide emissions from its energy production plants and facilities." The resolution received 6.3 percent support. Since then, proponents have continued to call on ExxonMobil to step up its response to global climate change, and in 2005, more than 28 percent of the shares voted endorsed a proposal that management report on efforts to cut GHG emissions in compliance with the Kyoto Protocol.
New Directions
The SEC appears to be weighing two major alternatives to the current proxy process: to remove itself from the process and allow state law to vet proposals, or to utilize an online forum with the aim of moving precatory proposals off the annual meeting ballot.
The SEC also discussed smaller changes that may reduce the number of precatory proposals, such as requiring proponents to own more shares or adding a materiality threshold, but commissioners were warned to avoid basing materiality on content. Larry E. Ribstein, an attorney with the University of Illinois, cautioned, "Given that we’ve got a mechanism for dealing with the dynamic evolution of corporate law, which is state law, the SEC should take as modest an approach as possible and that would include shying away from any kind of merit regulation, that is making substantive [decisions] about the kinds of proposal that ought to be brought."
For example, investors have reacted very differently to two types of proposals on political contributions. Evelyn Y. Davis has been asking companies for decades to disclose political contributions, but while her proposal has received only marginal support, another more recent shareholder campaign asking for similar information—but in a more convenient online report format—has been widely successful. A SEC rule regarding resolutions on political contribution likely would not reflect this subtle distinction.
But some panelists argued a materiality threshold could be based on objective criteria and still restrict proposals. Other suggested measures for restricting precatory proposals include raising the resubmission threshold, implementing a fee for filing proposals, and restricting proxy access to long-term shareholders. Proponents should have more "skin in the game," said Jonathan Gottsegen, Director, Corporate and Securities Practice Group at Home Depot.
One panelist argued that an investor group that should be restricted is hedge funds. R. Franklin Balotti, an attorney of business law with the American Bar Association, commented, "It's certainly important to hedge funds that they have the right to impinge upon the power of the directors to run the business and affairs of the company, but I submit to you it's for all the wrong reasons—the reasons being the short-term benefit of the hedge funds and not the long-term interests of the corporation or the shareholders."
Chat Room
The SEC envisions a chat room that would be confined to investors and would allow shareholders to engage with companies outside of the annual meeting. Evelyn Y. Davis argued that investors should be skeptical of any online forum that released shareholders’ identities to management, but Nell Minow of the Corporate Library said it is "essential to have identities disclosed" to ensure the participants dialogue in good faith.
SEC Chairman Christopher Cox noted that the chat room would operate year round 24 hours a day, seven days a week. Richard J. Daly of BroadRidge Financial Solutions (formerly ADP) said the technology is available to ensure the forum’s security. (He mentioned that the SEC had asked him to develop the idea more than a year ago.)
One corporate representative, William J. Mostyn III of Bank of America, suggested that the idea of a chat room would be "laudatory" if it were used to "siphon off what would have been precatory proposals and put them into a different forum and basically simplify the normal proxy statement process each year for our company." But if the chat room were merely "supplemental" to the proxy process, as investor representatives were suggesting, he said, it will require additional resources from his company without much benefit.
While companies' participation could be the added benefit that distinguishes the SEC chat room from other online forums where shareholders communicate, companies would be unlikely to participate if they suspected they would be held liable for their entries. There would be "uncertainty about the duty to update and duty to correct. It’s the equivalent of responding to market rumors," said Amy L. Goodman, an attorney with Gibson, Dunn & Crutcher LLP. Yet if the SEC set out that firms could not be held legally accountable for chat room discussions, then proponents would be unlikely to trust them. Also, legal experts were unwilling to give the SEC definitive answers on whether management would be violating proxy solicitation rules if it discussed an upcoming shareholder vote in the chat room.
More panel discussions and comments will follow when the SEC releases its proposal on rule changes this summer.
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June 4, 2007 |
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Proportionality Principle in Europe..The Facts are Out and Investors Have Spoken
Submitted by: Christel Dumas, Marketing and Communications Manager, ISS Europe
Control enhancing mechanisms (CEMs) are common in Europe and are not well perceived by investors. There is a variety of national practices regarding CEMs, but investor opinions converge regarding their non-desirability. This observation stems from a study on the proportionality between ownership and control in EU listed companies that was just handed in to the European Commission by ISS and its partners, Shearman & Sterling LLP and the European Corporate Governance Institute (ECGI).
Some facts in the Study, which are likely to get attention in the coming months are:
* Investors say they are not in favor of CEMs. This influences their investment decisions. 80% of investors expect a discount for companies with CEMs. For most investors, this discount should range between 10% and 30% of market price.
* While all countries allow CEMs from a legal point of view, not all companies use them as much. Of all the European sample analyzed, 56% of companies feature no CEM.
* The countries with the highest proportion of companies featuring at least one CEM are France, Sweden, Spain, Hungary and Belgium, which all have a majority of companies featuring CEMs.
* Recently listed companies have less CEMs than large companies. This means less occurrences of CEMs but also less combinations of CEMs
* The academic review shows that academic research on CEMs is non-conclusive at this date. Any action taken by the commission will have to weigh the expected benefits of regulating these mechanisms against the perceived costs of unexpected consequences.
For more information on the content of the Study, please visit here.
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