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Wall Street Journal, February 14, 2011 article


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Season of Shareholder Angst


U.S. businesses are bracing for a noisy proxy-voting season this year.


European Pressphoto Agency

The BP oil spill is spurring other kinds of demands. Above, the Deepwater Horizon last April.


Many companies could face outcry over executive pay and board accountability during their annual shareholder meetings. Other recent high-profile management dilemmas that stirred controversy, such as Apple Inc. Chief Steve Jobs's medical leave, may prompt additional tough questions for directors.

"The economic malaise partly explains investor angst," says Charles Elson, head of the Weinberg Center for Corporate Governance at University of Delaware's business school. "People who lost a lot of money in the market are mad."

Say on Pay

Likely the biggest issue confronting boards this proxy season is "say on pay." Under the new Dodd-Frank financial overhaul law, any company whose stock-market value exceeds $75 million must let shareholders voice their approval or disapproval on pay packages for the top brass. The requirement, which took effect in late January, gives shareholders a potent weapon to express disapproval of board oversight. Businesses must reveal whether and how they consider results of advisory "say-on-pay" votes in setting management rewards.

"It's going to be a really tough year," says the chairman of four board compensation committees.

Two companies already have gotten investors' thumbs down about executive pay during 2011 annual meetings. Defeats occurred at Jacobs Engineering Group Inc. of Pasadena, Calif., and Beazer Homes USA Inc. of Atlanta. Institutional Shareholder Services, influential proxy advisers, recommended votes against pay practices at both businesses, citing a disconnect between the chief executive's increased compensation and poor corporate performance.

It remains unclear how Jacobs and Beazer directors will handle the nonbinding setback. "The [Jacobs] board is disappointed about the outcome," and mulling the next steps, says John Prosser, finance chief of the engineering and construction concern.

Beazer directors intend to "carefully consider the perspective of shareholders in compensation matters," says a spokesman for the big home builder.

Rich paychecks for Wall Street banks and securities firms may spark more say-on-pay defeats. Total compensation and benefits in that industry rose 5.7% to a record $135 billion in 2010, a recent Wall Street Journal analysis concluded. Overall, "I would not be surprised to see more than 50 companies lose their say-on-pay votes in 2011," estimates James D.C. Barrall, head of global executive compensation and benefits for Latham & Watkins LLP in Los Angeles.

Patrick McGurn, an ISS executive director, predicts that "several times that number of corporate boards will experience a high negative vote that prods them to engage with their big shareholders."

Last year, investors rebuked pay practices at only three of 300 concerns that embraced say-on-pay votes voluntarily or had to offer them because they received government bailout funds.

Political Contributions

A Supreme Court ruling in January 2010 that loosened the limits on corporate political spending has prompted activists to prod companies harder to reveal more about such donations.

Shareholders have filed 76 political contribution resolutions so far this year, according to ISS. The measures mainly seek semi-annual reports about direct and indirect corporate spending for candidates and referendums. The first 2011 vote is set for April 21 at Citigroup Inc.'s annual meeting. A similar proposal won 30.3% of votes cast last year. The big bank continues to believe it already complies with the gist of the measure, a Citigroup spokeswoman says.

Succession Planning

The pressure on boards to divulge succession plans for CEOs took on new urgency this year when the Apple CEO began an unexpected medical leave last month. Mr. Jobs, who underwent a liver transplant in 2009, has said nothing about the latest health issue prompting his time off or when he might return.

Ten resolutions submitted so far this proxy season request that boards divulge detailed succession-planning policies for CEOs. Apple investors vote on the year's first such proposal at its Feb. 23 annual meeting.

The Apple resolution from the Laborers' International Union wants directors to issue an annual report on the CEO succession plan, review it yearly, develop criteria for the CEO and identify internal candidates.

The computer giant says the measure would offer rivals an advantage, hurt recruitment and constrain the board's actions.

Board Elections

Investors are also targeting numerous businesses in their drive to overhaul board elections. Board members often keep their seats with a single "yes" vote in uncontested elections. Resolutions submitted at 54 concerns so far this year, mainly by the United Brotherhood of Carpenters union, favor rules requiring directors to win a majority of the vote—and thus become more accountable.

Activists felt angry over the last-minute omission of a majority-voting requirement from the 2010 financial-overhaul law, Mr. McGurn says. "This is a payback."

Apple represents the first big business with a 2011 vote on majority voting. The proposal comes from the California Public Employees' Retirement System, the biggest U.S. public pension fund. In its proxy statement, the Apple board argues the measure "is not in the best interest of the company."

BP Blowback

The disastrous 2010 oil spill involving BP PLC is spurring different executive-compensation demands. The activist LongView Funds, managed by union-backed Amalgamated Bank, introduced a shareholder resolution asking three other deep-water drillers to add bonus incentives "that would decrease the risks of an environmental disaster," says Scott Zdrazil, Amalgamated's head of corporate governance.

The first-time proposal may attract significant support, says Mr. McGurn. "When the environment and money come together, that's green squared."

Write to Joann S. Lublin at


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