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Financial Times, July 7, 2008 article


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Shareholder democracy is on hold

By Kristin Gribben

Published: July 7 2008 03:00 | Last updated: July 7 2008 03:00


With the effects of the subprime mortgage crisis sweeping across corporate America this proxy season, US shareholders failed to force much change in boardrooms, despite anger over declining stock prices and companies' failure to manage risk.

Based on mid-year voting results, support for many types of shareholder proposals has dropped in the last proxy season, which officially ended June 30. On perhaps the single biggest investor issue this year - allowing shareholders to vote on executive pay packages, called "say on pay"- support has remained flat.

The lacklustre showing by shareholder activists appears to have one root cause: the downtrodden economy.

A perfect storm was brewing at the start of 2008, Patrick McGurn, special counsel to RiskMetrics Group, parent company of proxy advisor ISS Governance Services, said at the time. The Securities and Exchange Commission had denied shareholders the right to nominate company directors on the company proxy statement, a movement known as proxy access, which would make waging proxy battles cheaper and easier. In response, some shareholders vowed to support proposals that would increase their power over boards.

Meanwhile, stock prices dropped as companies wrote down assets and reported losses due to the widening credit crisis. Nevertheless, despite suffering losses, shareholders put the brakes on some of their activism.

"While we clearly saw some contentious [annual shareholder] meetings this year," says Mr McGurn, "at some point . . . [shareholder] anger turned to angst."

The collapse of Bear Stearns in March could be viewed as the tipping point for shareholders. Concerns grew that more companies and firms, particularly Lehman Brothers, could collapse or be forced to merge for bargain basement prices. So instead of sending a message through their proxy voting that they were upset, shareholders largely supported the status quo.

"Concerns about the market and economy trumped concerns about individual management or boards," Mr McGurn says. "The irony here is management and boards may have benefited from how bad the market was."

Shareholder proxy voting support has fallen for proposals that would allow investors to elect corporate directors through a majority vote instead of a plurality, and eliminate super-majority voting requirements. Other ideas losing support are proposals to hold annual elections for the entire board and give shareholders the right to call special meetings of the board and management throughout the year.

Before this year, support for all of these proposals had been steadily rising.

Furthermore, say-on-pay proposals did not have the breakout year experts predicted. Shareholder votes in favour of the resolutions averaged 42.5 per cent last year and around 43 per cent so far this year. Some of the lowest votes were actually at financial services companies hit by the subprime crisis.

Investors might be taking a wait-and-see approach to say on pay, says Cornish Hitchcock, outside counsel for the labour union Amalgamated Bank's LongView Funds. At last count, eight companies, including RiskMetrics, Verizon Communications and Blockbuster have adopted "say on pay". Aflac became the first company to adopt the measure last year and held a vote on its executives' compensation packages in May. Around 93 per cent of shareholders approved the executives' pay.

There is speculation that the private equity funds and sovereign wealth funds that helped rescue banks through large infusions of cash, becoming large shareholders in the process, are not supporting these initiatives, says Mr Hitchcock.

Another reason for the relatively low support at financial firms is that chief executive pay, a lightning rod for shareholder criticism, fell. Median pay at financial services firms for CEOs who have been in place for two consecutive years dropped by 4.3 per cent in 2007 from the prior year according to analysis by the Associated Press. Meanwhile the median pay for CEOs in the S&P 500 rose 3.5 per cent.

Still, the season is not without some notable successes for shareholder activists. The two most noteworthy changes to come out of the credit crisis are the increased support for independent chairmen and a renewed focus on risk management, says Scott Fenn, managing director of policy at Proxy Governance, another proxy advisory firm.

A number of companies pledged to focus more on risk management after meeting with shareholders. Citigroup announced it would recruit three new directors with expertise in finance and investments, while Morgan Stanley replaced its chief risk officer. Mary Pugh, the head of Washington Mutual's finance committee, who was criticised for not being independent from management, resigned during Washington Mutual's annual meeting after realising she probably would not receive enough votes for her re-election.

Shareholder proposals asking companies to set in place an independent chairman of the board increased in support from 30.2 per cent in 2007 to 32.1 per cent so far in 2008. That follows several years of declining support for the initiative.

Investor activists and corporate raiders may want to write off the 2008 proxy season and set their sights on next year. But their ability to induce change in corporate boardrooms will be largely contingent upon how the economy performs, Mr McGurn says. If the economy continues to perform poorly, shareholders may continue to be cautious. "It's really a time of uncertainty for investors," he says.

The success of shareholder activists will also be shaped by who ends up in the White House and what direction the SEC takes. The Senate recently confirmed the appointment of three new commissioners, all of whom said they would consider re-opening the proxy access debate. Meanwhile, presumptive presidential nominees Barack Obama and John McCain have said they support say on pay.

Kristen Gribben is a senior reporter on Agenda, an FT publication




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