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Financial Week, November 10, 2008 article


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Monday, November 10, 2008


Proxy activists upping exec-pay ante
Latest idea for ’09 season: a ban on selling stock options until well after you retire



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 public companies.

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 2010.

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 access.

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 changed.)

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

Write to Nicholas Rummell at Or write to the editors at


Copyright ©2008 Crain Communications Inc




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