6/17/2009 12:01 AM ET
shareholders are fighting greed
annual meetings across the country, fed-up investors are taking stands
against excessive CEO pay packages, princely perks and sloppy board
heard the stories: gilded pay deals and bonuses for fat cats from faltering
companies, an endless gravy train of perks, multimillion-dollar payouts even
to dead CEOs -- and lapdog boards that sign off on all this.
shareholders are fed up and say they won't take it anymore.
about half the votes in from this year's round of annual company meetings,
investors have clearly signaled they want an end to the sweet deals and the
sloppy oversight behind them.
sure, this isn't the investor equivalent of Lexington and Concord, the
battles that led to the overthrow of British rule in the American Colonies.
Everyday investors don't have the power to change things dramatically
the revolt this year has opened the way for significant progress on key
issues and has cost several board members their jobs. It shows we can change
"Shareholders are finally waking up to the fact that they have a
responsibility to stand up on these issues," says Steve Abrecht, the
director of benefits and capital stewardship for the Service Employees
International Union, or SEIU.
Consider these highlights from annual-meeting season, which is now winding
Unhappy with the
performance of board members at
msgs), shareholders voted to kick three of them out, though the
rest of the homebuilder's board rejected the advisory vote.
that doesn't sound like a revolution, keep in mind that what shareholders
get to vote on are often baby steps. And because it's one vote per share,
stock-rich insiders and a few big investors hold much of the power.
most significant trend actually plays out behind the scenes: Dozens of
shareholder-friendly proposals were withdrawn from ballots because companies
raised white flags and agreed to enact them.
all the fuss?
Shareholder concern about CEO pay and perks is no longer only about the
widening gap between the rich and poor in the U.S.
analysts believe that poor board oversight and excessive pay contributed to
the financial meltdown that tanked the economy. Huge incentives -- such as
bonuses that ran into hundreds of millions of dollars -- for short-term
goals encouraged financial-sector CEOs and their underlings to take
excessive risks. Meanwhile, boards stood by and watched. So the banking
sector ran amok, creating problems for the rest of us.
Studies also indicate that companies where executives get excessive pay and
perks underperform the market and are more likely to get credit downgrades.
The theory is that when boards spoil execs with sweet pay deals, it's a sign
those boards are too cozy with management. This means they're probably less
focused on their true job: working for shareholders by driving managers to
do things that would make the stock go up.
Shareholders, stung by losses and horrified by the disasters at so many of
the companies whose shares they own, spoke up this annual-meeting season to
let boards and companies know they want change. Here's a look.
Who's the boss?
the biggest upset of the season came when Bank of America shareholders --
unhappy with decisions by Lewis, like the purchase of
Merrill Lynch and
mortgage lender Countrywide
Financial -- stripped the CEO of his role as chairman of the
vote was unusual because it was binding. Typically, shareholder votes are
advisory. Governance experts have long argued that splitting those roles
makes sense, because boards are supposed to act as watchdogs over
management. "They can't do that when there is an imperial CEO who is also
chairman of the board," says Abrecht, of the SEIU, which sponsored the vote
to remove Lewis as chair.
Overall, shareholder support for proposals asking companies to bar
executives from also serving as board chairman increased to 38% from 29%,
according to RiskMetrics Group
msgs). "That is the highest it's been since we've been keeping
records," says Carol Bowie of RiskMetrics.
msgs) shareholders approved nonbinding measures by well more than
Throw 'em out
Shareholder rebellions directly challenged board members at Pulte Homes and
Bank of America, though shareholders didn't get all that they wanted.
Pulte, shareholders voted to oust three directors -- a strong statement of
disapproval, since Pulte insiders control about 17% of the company's stock.
The vote was nonbinding, but the three directors offered their resignations.
However, the company's board rejected the resignations, reasoning that the
votes were actually a statement against corporate governance at Pulte. The
company promised to improve governance instead.
directors at Bank of America did step down after a relatively poor showing
in elections. The directors resigned because of a combination of shareholder
opposition and government pressure, believes Michael Garland of CtW
Investment Group, which had campaigned against the directors.
Excessive CEO pay can be one of the most obvious signs of a lapdog board. To
wake up boards, shareholder activists ask companies to allow nonbinding
votes on executive compensation. Though these votes technically have no
teeth, they can send members of a board's pay committee the message that
their days may be numbered unless they tone it down.
Activists filed 85 so-called say-on-pay proposals this year, according to
RiskMetrics. With results on 50 of them tallied, the average vote was 47.5%
in favor, up from 42.7% last year.
msgs) shareholders were among those who approved say on pay
say-on-pay movement really took off," says Rich Ferlauto, the director of
pension and benefit policy for the American Federation of State, County and
Indeed, the momentum is now so strong that there's a good chance that
Washington will make most companies put pay packages to a vote before long.
the most morbid, not to mention pointless, perk for execs is the so-called
golden coffin. These are multimillion-dollar payouts to executives -- or
their estates, really -- when they die.
irks activists most about these deals is that pay should serve as an
incentive to make execs work harder and perform better. No one performs
better after death.
Companies typically respond that these benefits are really a kind of life
insurance. So why not just let them buy insurance?
Activists put up a dozen proposals against golden coffins this year, and
with the results of eight of them tallied, investors have voted 41% in favor
on average, according to RiskMetrics.
may seem like a miss, but a 41% "yes" vote is actually high for a first-time
type of proposal.
far, two anti-golden-coffin proposals have been approved, says Scott Zdrazil,
the director of corporate governance at Amalgamated Bank, which focused on
these proposals this year.
at Shaw Group
msgs), got a 67% approval, which might not come as a surprise
when you see how egregious this example appears. Upon the death of Shaw
Group founder and chief J.M. Bernhard Jr., a "noncompete" agreement would
kick in and award him $18 million, even though it's tough to imagine how
he'd compete from the grave. He'd also get a full year's pay, and his
unvested stock would vest, for an additional $38.2 million, as calculated by
company filings, Shaw Group responded that promising executives a bonus upon
death is "crucial to attracting and retaining executive talent in today's
market." Yet the company also goes on to argue that golden coffins are
rarely awarded because executives normally don't die on the job.
more than 50% of shareholder voters opposed a golden coffin at
msgs). It would award Chairman and CEO Bob Simpson, upon his
death, an $111 million cash bonus and $4.35 million in salary, and
accelerated options vesting and life insurance payments worth millions more.
Mysteriously, Simpson's golden coffin also would offer him a "car allowance"
of $158,000 after he dies.
votes were nonbinding, though, and the companies have not changed these
Support for the right of shareholders to call special meetings jumped 6%, to
52.4%, with nonbinding measures supported by shareholders of
Bristol-Myers Squibb (BMY,
shareholders have the power to call special meetings to do things such as
elect new directors, theoretically it keeps boards and managers on their
Quiet victories behind the scenes
Activists often have their greatest success with proposals that never make
it to ballot -- because companies feel pressure and agree to reform, says
Vineeta Anand, the chief research analyst at the AFL-CIO Office of
example, about two dozen companies have agreed to regular say-on-pay votes,
including Ameriprise Financial
Likewise, Amalgamated Bank submitted proposals at about a dozen smaller
companies that would have asked shareholders to approve majority voting for
directors. This means that directors have to get a majority of all votes
cast to win, not just the largest number among several candidates.
Technical Institute (UTI,
msgs) and Marinemax
msgs) agreed to the proposals before they even went before
"That's one of the good side effects of putting in these proposals," says
shareholder activist John Chevedden. "Companies sometimes have the foresight
to adopt them."
the time of publication, Michael Brush did not own or control shares of any
company mentioned in this column.