IRRC Corporate Governance Highlights, July 13, 2001 article

Dark Horse Candidate Defeats CEO

ACTIVISTS SAY VICTORY SENDS A MESSAGE TO COMPANIES. In what could be labeled as one of the most unusual and exciting proxy fights of the season, dissident Guy Adams managed to unseat Lone Star Steakhouse & Saloon CEO Jamie Coulter. Preliminary voting results released by the inspector of elections for the proxy fight indicate that Adams received 10.6 million votes and Coulter received 8.3 million votes. The dissident’s election to the five-member board does not affect Coulter’s status as CEO. Following the election, some observers speculate that the company could expand the board size and could possibly put Coulter in one of the newly created seats.

In 2001, a number of proxy fights are challenging CEOs’ board seats, however in all of the fights other than the one at Lone Star, the dissidents are trying to unseat a number of directors along with the CEO. It is unusual for an individual dissident to go head to head against a chief executive. In an extremely close vote, Weyerhaeuser succeeded in getting its three nominees on the Willamette board and in unseating Willamette CEO Duane McDougall. (See Highlights, July 6, 2001.) At Hercules, shareholders elected three members of a four-member dissident slate, but CEO Thomas Gossage managed to retain his seat. (See Highlights, May 25, 2001.) Dissidents at Morton’s Restaurant Group were not successful in their attempt to unseat CEO Allen J. Bernstein.

Lone Star, which had launched a nasty lawsuit against Adams that even went as far as to delve into his divorce proceedings (See Highlights, June 29, 2001), issued a press release saying that the board of directors “welcomes Guy Adams to the board and looks forward to working with him in the future.”

Adams issued his own press release saying he was “pleased with the shareholder support I received.” The dissident also pointed out that “If you look at the votes after subtracting our management’s ownership, I received approximately two of every three votes cast.” Before the shareholder vote, Calpers and the LongView Collective Investment Fund announced that they were throwing their considerable weight behind Adams. “We believe that the Lone Star Board and Jamie Coulter have done a poor job in representing shareholders’ interests at Lone Star, and it shows in the company’s poor long-term performance and poor valuations relative to its peers,” says a voting notice on the Calpers web site. “It is our opinion that more independence on the Lone Star board can help bring much needed accountability to the management of Lone Star, and improve the long-term performance of this company,” Calpers adds.

Con Hitchcock of LongView points out that “It’s not every day that you see a CEO get voted off his own board.” He says the unusual victory should be “a wake up call to unresponsive boards everywhere.” He describes the dissident win as a “Cinderella story in which someone with just 1,000 shares is able to oust a sitting CEO.” Hitchcock also says Adams’ victory sends several strong messages. First of all, he says it tells companies not to ignore shareholders’ wishes when their proposals receive a strong level of support. He points to the classified board proposal that LongView submitted to Lone Star in 2000. That proposal received 71 percent of the votes cast. Following that vote, the company did not initiate any move to declassify the board. He also says Adams’ victory is a warning that companies need to be cognizant of shareholders’ concerns about executive compensation. The Lone Star board has been criticized for doling out executive pay packages that were too generous at the same time that company’s stock price was plummeting.

Finally, Hitchcock says the dissident victory at Lone Star is clear indication that “shareholders will take a chance on a dark horse candidate if management is generally unresponsive.”

Ann Yerger, director of research for the Council of Institutional Investors, calls the outcome at Lone Star “an extraordinary proxy fight on so many levels.” First of all, she says it was unusual because it was launched by an individual who does not have deep pockets. Secondly, she says, it was extraordinary because it unseated the CEO and finally, she classifies the level of opposition to the company as remarkable. “It shows that our members are much more willing to consider candidates that are not your typical director type, especially when the situation is right,” she adds.

The final voting results will be released at a meeting on July 20. Some observers speculate that the company might be negotiating with Adams now and that any deals reached between the dissident and the company also will be announced then.

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