Investors Look Ahead
Though they weren’t able to send as strong a message as they would have liked to the board at Morgan Stanley, labor funds are pressing ahead to highlight governance problems at other firms with heavy subprime losses.

Both AFSCME and CtW are campaigning against directors at Seattle-based banking firm Washington Mutual. CtW, spurred by the company’s decision to shield 2008 executive bonuses from its subprime losses, announced it would vote against two committee chairs, James Stever of the human resources committee, and Mary Pugh of the finance committee, at the company’s April 15 meeting. AFSCME sent a letter on March 31 urging investors to vote against Stever and four other members of the human resources committee--Stephen Frank, Charles Lillis, Phillip Matthews, and Margaret Osmer McQuade--for authorizing the bonus exemptions.

Both Garland of CtW and Ferlauto of AFSCME said they expect higher withhold votes at WaMu. “The scale of the losses, the clear failures--both around risk and compensation--there is no well of support for the leadership at WaMu the way there is at Morgan Stanley,” Garland said.

WaMu sustained a $2.19-per-share loss in the fourth quarter of 2007, and may write down an additional $1.8 billion for this year. While the company’s shares rallied to around $13 this week after it announced a $7 billion cash infusion from a group headed by TPG Capital, the shares still lag far below WaMu’s $44 high in May of last year.

“[Washington Mutual’s] performance is some of the worst, and the board took specific action to hold the executives harmless from subprime losses caused by the company's business plan,” Ferlauto told R&GW.

The AFL-CIO briefly waged a “vote no” campaign at Citigroup, which reported $18.1 billion in subprime-related losses last year. In a draft letter to investors, the labor federation urged a vote against the re-election of C. Michael Armstrong, chairman of the audit and risk management committee. Armstrong, who has been a member of the committee since 1994--and chair since 2004, “failed to protect shareholders from excessive exposure to credit, interest rate, and liquidity risks,” the letter stated.

However, the financial company announced on April 7 that Armstrong would step down as chairman of the audit committee, and the labor federation ended the campaign. Citigroup said the end of Armstrong’s chairmanship was part of a regular rotation of committee chairs. “As stated in our [p]roxy, committee membership and chairs are rotated periodically, and we expect to begin the process of rotating chairs this summer,” Citigroup spokesman Michael Hanretta said in a statement.

Daniel Pedrotty, director of the AFL-CIO’s office of investment, told R&GW that the labor federation believes that Armstrong’s departure as committee chair eliminates the need for a “vote no” campaign.

CtW has also announced a possible opposition campaign at Citigroup, but Garland told R&GW that the federation is still in talks with the company over potential governance changes. Other financial firms that may face CtW campaigns against board members at their annual meetings include Wachovia (April 22), Bank of America (April 23), and Merrill Lynch (April 24).

At homebuilder Ryland Group’s April 16 meeting, CtW plans to oppose three directors on the compensation committee. The labor organization faults the William Jews, Norman Metcalfe, and Charlotte St. Martin for awarding “egregious” pay packages to top executives, and ignoring shareholder disapproval on the issue. Compensation committee members at the Calabasas, Calif.-based firm received more than 25 percent opposition in 2007.

According to regulatory filings, Chairman and CEO Chad Dreier has a provision for a bonus of 2 percent of the company’s pre-tax income built into his incentive plan. CtW disapproves of this bonus, given Ryland’s $201.9 million loss during the fourth quarter of 2007. Ryland says in its 2008 proxy statement that while Dreier’s incentive pay has increased, his base salary has not been raised since 2002.

Homebuilder Toll Brothers asked shareholders to approve a similar incentive plan for Chairman and CEO Robert Toll at its March 12 meeting. A “vote no” campaign led by the Laborers’ International Union of North America helped generate 33 percent shareholder opposition to Toll’s re-election.

Subprime-Related Shareholder Proposals
In addition to “vote no” campaigns against directors, shareholders filed a raft of proposals at financial firms and homebuilders aimed at improving disclosure and compliance in the wake of the credit crisis.

Many of the companies received permission from the Securities and Exchange Commission to exclude these proposals, but some will still go to a vote this year. On May 4, shareholders at home construction firm Standard Pacific will vote on a Laborers proposal asking for an annual board report on mortgage business risk--including an evaluation of the company’s practices and an account of how many of the firm’s mortgages are subprime, alt-A, or other “exotic” types. Another Laborers resolution on this issue may go to a vote at Beazer Homes, if the homebuilder is able to hold an annual meeting this year. The company is restating nearly 8 years of financial results and is under investigation by the FBI regarding its mortgage and foreclosure practices.

A proposal submitted by the labor-affiliated Amalgamated Bank asks homebuilders to establish a “compliance committee” to conduct a review of regulatory, litigation, and compliance risks associated with mortgage lending. The resolution went to a vote at the nation’s second-largest homebuilder, Lennar, on April 8, but those vote results were not immediately available. That proposal also will be on the ballot at MDC Holdings (April 29) and Pulte Homes (May 15). Pulte shareholders will also decide whether they would like the company to establish a committee on mortgage loans, aimed at establishing “prudent lending practices.” That proposal was submitted by the International Brotherhood of Electrical Workers.

Another subprime-related proposal, asking financial firms and credit rating agencies to adopt policies to limit conflicts of interest, will not go to a vote this year. The proposal, submitted by the Laborers, was excluded at Moody’s, McGraw-Hill (which owns Standard & Poor’s), Citigroup, and Wells Fargo--and withdrawn by proponents at Indymac Bancorp.

In addition, investors have filed proposals at Bank of America, Citigroup, and Wells Fargo that seek an independent board chair. None of the financial firms targeted by labor investors have independent board chairs, although Citigroup has separated the roles of chairman and CEO. At Morgan Stanley, CtW called on Mack to step down as chairman, but there was not an independent board chair proposal on the ballot.