Financial crisis fuels corporate
Fri Oct 17, 2008
By Martha Graybow
NEW YORK (Reuters) - For U.S. investor
advocates, the financial crisis could be the opportunity to rally more
shareholders around a slew of long-sought corporate reforms -- with a big
bull's-eye on executive payouts and board independence.
The sharp declines in investors'
portfolios, widespread dismay with Wall Street's leadership and the
possibility of a Democrat in the White House in January could set the stage
for a dramatic annual meeting season next spring.
The political pressure from angry
politicians may also pressure companies to negotiate with activist
shareholders and acquiesce to their demands to avoid public showdowns.
In recent days, New York's attorney general
has taken American International Group Inc (AIG.N:
Buzz) to task for lucrative executive severance packages and corporate
retreats at the same time it receives a taxpayer bailout. And a U.S.
Congressional panel grilled the head of bankrupt Lehman Brothers Holdings
Buzz), Richard Fuld, over the fairness of his past pay packages valued
in the hundreds of millions of dollars.
Shareholders introduce many ballot
initiatives every year, though many are defeated because of lack of support
by big investors, which often prefer to sell a stock than try to press for
changes at problem companies.
Given how much wealth investors have seen
wiped away in the market collapse, this year could be different. Union
pension funds, labor groups and other investor organizations are busy
strategizing now in preparation for filing proposals they hope to get on
ballots during spring proxy season, the time when most corporate annual
meetings are held.
Among the hottest issues, says long-time
executive pay critic Richard Ferlauto, will be proposals seeking to
eliminate what he sees as perverse incentives for corporate leaders that
help foster excessive risk-taking by their companies.
Once the financial crisis struck, "we
ripped up the game card that we had created for the shareholder season,"
said Ferlauto, director of pension policy at the American Federation of
State, County and Municipal Employees (AFSCME).
"We want to take a new look particularly at
the characteristics of pay that focused on short-sighted risk taking," he
AFSCME plans to introduce resolutions at an
array of companies that would require top managers to hold all of their
stock options and restricted stock awards for two years past their tenure
with the company.
"It puts the CEO in the same position as
the shareholder, and that is focused on long-term value creation," he said.
"You can't leave in the middle of a crisis or on the front end and still
make off with tens of millions of dollars from your option package."
The group also plans to press some of its
perennial issues, such as "say on pay" votes to give shareholders a greater
voice on executive pay as well as advocating bans on tax "gross-ups" that
use shareholder money to help pay the tax obligations of top executives.
The say-on-pay measures, which aim to give
shareholders advisory votes on pay packages, have gotten a mixed reception
when they have appeared on proxy ballots, with many of the proposals failing
Still, next year could be a big year for
these proposals as more shareholders are fired up about pay matters.
Governance experts say they also think legislation making such votes
mandatory will pass the U.S. Congress next year. Democratic presidential
candidate Barack Obama is the Senate sponsor of a "say on pay" bill, while
Republican rival Sen. John McCain has said he supports the measure.
When good times roll, shareholders often do
not pay much attention to calls for corporate reforms. No one likes economic
downturns, but the current crisis may spur some investors to take a closer
look at such demands for better governance, said Michael Garland, an
official at the Change to Win Investment Group, an adviser to labor union
"I'm hopeful that based on recent
experience there will be stronger support for reining in abusive
compensation and enhancing the independence of corporate boards," he said.
Garland said he anticipates greater support
for proposals to split the roles of chairman and CEO among different people,
a measure designed to improve board independence.
Many banks at the center of the financial
storm, Lehman Brothers as well as Morgan Stanley (MS.N:
Stock Buzz) and
Merrill Lynch & Co Inc (MER.N:
Buzz), all have one executive in both top roles.
Companies that combine the chairman and CEO
jobs typically argue that dividing the roles can cause confusion over who is
in charge, and a closely watched proposal by dissident shareholders to split
the CEO and chairman at Exxon Mobil Corp (XOM.N:
Buzz) earlier this year failed.
But governance advocates say such a
separation provides checks and balances, arguing these are more important
now than ever, given Corporate America's financial straits.
"The crisis may increase support for those
proposals," said finance professor Espen Eckbo, director of the Center for
Corporate Governance at the Tuck School of Business at Dartmouth. "The major
role of the board is to hire, fire and set compensation of the CEO. For the
CEO to be chairman of the board is an inherent conflict of interest."
(Editing by Gary Hill)
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