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New York Times, Sunday Business Section, December 17, 2006 column


The New York Times

December 17, 2006

Gretchen Morgenson

A Sneak Preview of Proxy Battles

Kate Cosby for The New York Times

John A. Hill is the chairman of the trustees at Putnam Funds, which has voted against management on matters involving executive pay.



FASTEN your seatbelts, ladies and gents. United States shareholders are stirring and promise to make next year’s proxy season mighty lively.

Annual shareholder meetings typically take place in the spring, but deadlines are nigh or past for owners submitting proposals to be voted on at 2007 confabs. As a result, the battle lines for coming meetings have been drawn.

Not all proposals make it onto proxies, of course. Companies like to keep shareholder wish lists off the agenda at annual meetings and routinely ask the Securities and Exchange Commission for a blessing to exclude them.

But many reasoned proposals make it over this hurdle. As was the case last spring, proposals urging that corporate directors win election only if they receive support from a majority of shareholders voting will be common when spring arrives. The signal issue among stockholders in 2007, however, is executive compensation, and owners hoping to bring some sanity to the pay process will have center stage.

Look for a flurry of requests for clear policies on the timing of option grants at companies in an attempt to cure the backdating disease. And expect votes on so-called clawback proposals, asking that pay be returned if subsequent restatements at companies mean performance-based executive pay was not earned.

Ten days ago, Sunrise Senior Living, a provider of residential communities and services for the elderly, received a clawback proposal from one of its shareholders. Last spring, the company announced that accounting irregularities had forced it to restate financial results for the last three years.

The Sunrise resolution was submitted by the LongView Small Cap index fund, run by the union-oriented Amalgamated Bank in New York. It asks the company’s board to review all bonuses and other performance-related awards for senior executives and to recoup pay if performance targets were not reached as a result of restatements.

Sunrise said it was in the process of reviewing the LongView proposal. Such proposals have survived other companies’ protests, however. Last week Sunrise disclosed that the S.E.C. had asked it for information about $32 million in insider sales at the company during the months before the restatement was announced. The company said that the sellers had acted properly and that it was committed to sound corporate governance.

An even bigger shareholder movement relating to executive compensation will come in the form of so-called say-on-pay proposals, requesting that pay packages be put to a shareholder vote each year. Such votes, which are advisory only and not binding, are an import from Britain, where they have been required since 2001.

A result there, shareholders say, has been more detailed disclosures from companies in their annual reports, not only on pay levels but also on how the compensation is structured and the rationale behind it. And when shareholders vote against a pay structure, companies get the message and change their ways.

Back in 2003, for example, GlaxoSmithKline’s shareholders voted against its compensation by a slim margin — about 51 percent to 49 percent. At issue was the structure of the chief executive’s pay package — shareholders disapproved of his three-year contract, thrice the length that is standard in Britain, and did not find his long-term pay to be linked closely enough with the company’s performance.

Since then, Glaxo, which is based in Britain, has talked with large shareholders about ways to improve compensation plans, including changing performance conditions. Now, shareholders said, the company’s pay has a more obvious performance link and there is reduced risk of paying for failure, as occurs when an executive is ousted but receives a huge exit package.

Paul Munn is commercial director of governance and engagement at Hermes Investment Management, a money management firm owned by the British Telecom Pension Scheme, the largest pension plan in the Britain. Hermes oversees United States-based assets of more than $12 billion, and Mr. Munn said in an interview that the firm would submit proposals in 2007 at a variety of companies in the United States urging advisory votes on pay.

“We see it as a useful means of engaging with companies on the issue of executive pay,” Mr. Munn said. “Having an advisory vote sets up the basis for having a dialogue, and that is what is very useful.”

MR. MUNN declined to identify the companies where he expects to file “say on pay” resolutions. “Our tactic is generally to talk to the company and engage them privately,” he said. “If you go on the offensive, it does tend to polarize opinion and drive people into their corners and that is not good for a negotiating position.”

In this collaborative mode, Hermes is participating in the Options Policies Forum, a New York program that asks companies and shareholders to set aside differences on the use of stock-based compensation and focus on common goals. The forum, which was developed by Gary Lutin, an investment banker at Lutin & Company in New York who advises shareholders on corporate control matters, held its first meeting in early December.

“Things like compensation policies should get sorted out by natural selection instead of by bureaucratic rules,” Mr. Lutin said. “The purpose of the forum is to get responsible decision-makers to exchange views so that they, themselves, can figure out how to make things work. All it takes is common sense and responsibility. People should think about that when they invest in a company or choose a fund trustee.”

John A. Hill, chairman of the trustees of the Putnam Funds, is a forum participant. Unlike many of the largest mutual funds, his organization voted against corporate management in 2006 on matters relating to director independence and executive pay. Putnam withheld support from 16 percent of directors and opposed 64 percent of proposals by companies looking to adopt or amend stock plans for executives or directors.

Now, just ahead of annual meeting season, Mr. Hill reports that other fund companies have contacted him to learn how his trustees keep the best interests of their clients in mind when voting proxies. Another shocker: Mr. Hill said that executives of companies in which Putnam has a stake want to meet with him before the proxy voting process begins. This is in stark contrast to earlier this year, when companies didn’t even respond to his letters explaining why Putnam had withheld support on compensation issues.

Gee, dare we call it progress?


Copyright 2006 The New York Times Company




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