Proxy activists upping exec-pay ante
Latest idea for ’09 season: a ban on selling stock
options until well after you retire
2008 12:01 AM ET
Activist investors hope to catch some of the
anti-executive-suite tailwinds that helped Democrats last Tuesday and push a
new weapon in their battle against corporate pay practices: a ban on selling
stock options until two years after retirement for the top executives of
The latest gambit comes as activists see fresh hope in the wake of last
week's elections that a bill giving shareholders the right to vote on
executive pay will be passed into law next year and mandated as early as
They're also cranking up efforts beyond mere say on pay to curtail tax
gross-ups for executives and what are called “golden coffin” payouts to the
estates of executives who die while at a company.
This year there were about 90 shareholder say-on-pay proposals in corporate
proxies. And last week Rep. Barney Frank (D-Mass.), who proposed the
original say-on-pay bill in 2007, said he wants to reintroduce such
legislation early next year—and pair it, perhaps, with a provision allowing
shareholders to nominate independent directors, a right known as proxy
Activists aren't waiting for congressional action, however.
“Even if Congress does pass something, it probably wouldn't go into effect
this proxy season,” observed Shirley Westcott, managing director of policy
at Proxy Governance. “[A say-on-pay proxy proposal] is also a fallback for
activists to keep the issue fresh in people's minds.”
Experts predict a similar number of say-on-pay proposals this year, but
expect other compensation issues to slip into proxies too.
“Today our focus will be looking beyond say on pay—now that we believe it
will be established—to find new compensation models that appropriately
reward CEOs,” said Rich Ferlauto, pension investment director at the
American Federation of State, County and Municipal Employees.
The union's “signature shareholder proposal” this year will be to require
executives to hold stock options until after retirement. The proposal will
target as many as a dozen companies next year, Mr. Ferlauto said. He
declined to give examples.
Other unions are also moving past say on pay. “Most of the governance
pieces, I think, are in place,” said Ed Durkin, director of corporate
affairs at the United Brotherhood of Carpenters. He noted that majority
voting requirements for director elections have caught on, and predicts that
every company in the S&P 500 could have them in place by 2010. “You could
almost take the season off, if those were your core issues.” A mini-vacation
may be in the works for the carpenters union, one of the leading proponents
of say on pay in the last two seasons. Over the next several months, the
union will evaluate about 130 companies to see how their executive pay
stacks up against peers, which will lay the groundwork for a handful of
targeted proposals for the 2010 proxy season.
But the carpenters union still plans to pursue more aggressive proposals to
curb what it sees as excessive risk-taking by banking executives. It plans
to target about 25 financial services firms on “core executive comp issues,”
such as freezing new stock option awards to senior executives unless those
options are indexed to peer-group performance, and limiting severance to
double an exec's annual salary.
Corporations are bracing themselves for these proposals. “We would not be
surprised to see proposals to mirror what was in the bailout bill but
applied more broadly,” said Tim Bartl, general counsel at the Center for
Executive Compensation. He noted that tax-deduction proposals in the bailout
bill could be expanded to other companies.
It's understandable that unions feel emboldened by the election, said Tom
Lehner, director of public policy at the Business Roundtable. However, he
hopes unions tone down the confrontational atmosphere that permeated last
year's proxy season, noting that Mr. Obama is known as a “consensus-builder”
who may try to bring both business and union concerns to the table.
Large institutions such as TIAA-CREF say they'll engage companies more on
executive compensation but will seek a voluntary, market-based adoption of
say on pay and other changes. Schering-Plough plans to send out a survey
with its proxy next spring asking shareholders whether they approve of the
company's governance and compensation structures. A company spokesman
declined to offer details.
The 2009 proxy season may also raise some other controversies. Individual
investor John Chevedden has introduced proxy proposals at Oshkosh Corp. to
have the truck maker reincorporate in North Dakota, which last year passed a
raft of shareholder-friendly laws.
Similar reincorporation proposals have been sent to Whole Foods, PG&E and
Hain Celestial, the latter of which tried to have it excluded on its proxy.
At least one reincorporation proposal passed in 2007, requiring Convergys
Corp. to take steps to move its legal base from Ohio to Delaware. (Unions
dropped the reincorporation request once Ohio shareholder laws were
Golden coffins and golden parachutes will also be a popular target in 2009.
For example, union-run LongView Funds has a new change-in-control proposal
planned for Ryland Homes, which would require a “double trigger” before
severance—the company would have to merge or be bought and the CEO would
have to stop working before receiving a golden parachute.
One thing's certain. Shareholders don't look ready to back down. While 2009
will not likely top the 40 high-profile proxy fights this year, it will
include some action, said Pat McGurn, special counsel at RiskMetrics.
“You can't put the genie back in the bottle,” he said. “Shareholders have
gotten comfortable criticizing companies in public, and won't go back to
pre-Enron levels of passivity.” FW
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