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Financial Times, April 5, 2009 article


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Pay proposals to dominate proxy season

By Kristin Gribben

Published: April 5 2009 10:02 | Last updated: April 5 2009 10:02


Mutual funds in the US are expected to spend more time and analysis evaluating key shareholder issues this proxy season as a result of the financial crisis. At the top of their lists are compensation-related resolutions filed by shareholders.

“Plain vanilla” or mainstream mutual funds are more willing to back shareholder activism this year because of outrage over mismanagement at some companies, says Christopher Young, head of M&A and proxy fight research at RiskMetrics Group, parent of ISS Governance Services, the largest proxy advisory firm.

This is part of an ongoing trend that is expected to accelerate due to the worsening financial crisis. Only one stock mutual fund among 8,200, the Forester Value Fund, posted a profit last year and that was limited to 0.4 per cent. With funds reeling from losses, they are taking aim especially at executive compensation. Last proxy season, more mutual funds began to support shareholder proposals calling for elimination of tax gross-ups, pay for superior performance and advisory votes on executive compensation. Mainstream funds backed compensation-related shareholder proposals 43 per cent of the time on average in 2008, compared with 20 per cent in 2004, according to analysis of 47 mutual fund families by Fund Votes, an independent project that aggregates fund voting records.

With executive compensation being blamed as one of the main culprits for the blow-up in the financial sector, pay-related proposals are expected to dominate this proxy season. Compensation proposals have been filed at more than 40 financial firms so far this year representing a 60 per cent increase from 2008, according to RiskMetrics Group. The Corporate Library predicts there will be an all-time high number of withhold votes against directors, particularly for compensation committee members at banks.

Funds’ support will mean shareholder resolutions that have been on the brink of receiving majority support in recent years might get the key votes needed to pass. This is particularly true of so-called say-on-pay proposals. It is a “good assumption” some mutual funds will begin to support say-on-pay in 2009 due to anger over pay packages at financial firms, says Charles Nathan, a partner at Latham & Watkins and global co-chair of the firm’s M&A practice. Financial companies that accept monies from the troubled asset relief programme are forced to offer say on pay. That will affect upwards of 400 companies. But some experts predict there could be shareholder pressure spilling over for other industries to adopt the measure.

The idea of giving shareholders advisory votes on executive pay – a concept that is practised in the UK and Australia – gained popularity in the US in 2007 with Aflac becoming the first company to voluntarily adopt it. In 2007 and 2008, say-on-pay proposals received about 40 per cent support from shareholders.

Many mutual funds have given support to say on pay. Invesco Aim backed the measure before the financial crisis erupted, says Karoline Carlson, an equity research manager with the funds. Oppenheimer Funds says it supports “reasonable” say-on-pay proposals. TCW, on the other hand, opposes the measure except in rare circumstances. Last year’s voting record shows TCW voted for only one say-on-pay proposal, at Cisco Systems.

The focus on compensation by mutual funds is part of a more general re-evaluation of companies’ corporate governance guidelines. “We re-evaluate all the time in light of market developments and clearly there are big developments right now,” says Kenneth Bertsch, executive director of corporate governance at Morgan Stanley Investment Management. Morgan Stanley voted in favour of shareholder resolutions 26.1 per cent of the time in 2008, down from 32.4 per cent in 2007 but up from 19.9 per cent in 2004, according to Fund Votes.

Along with say on pay, stock option repricing proposals are expected to be a more closely watched issue for mutual funds this year. More companies made option exchange or repricing offers to address underwater employee stock options in the first month of 2009 compared to all of 2007, according to the research firm Equilar.

Invesco’s proxy voting division is adding stock option repricing to the list of compensation-related proposals it is preparing to evaluate this year, says Ms Carlson. The fund has recently added staff to its proxy voting department. Invesco does not unilaterally support or oppose repricing underwater options, but looks at the market conditions of each company, she adds. The fund supported shareholder resolutions at its portfolio companies 40.9 per cent of the time in 2008, compared with 18.2 per cent in 2004.

Like Invesco, TCW Funds has added staff to its proxy voting division to prepare for the hectic proxy season. “The proliferation of shareholder proposals is making it a more labour intensive process,” says Michael Reilly, director of equity research and proxy voting at TCW. “There’s been a lot of volatility in the markets and the momentous developments in the financial markets have been severely tested . . . we’ve been busier than ever.”

TCW is more likely to vote against re-election of particular directors rather than support shareholder proposals that call for sweeping action at a company. The fund voted against compensation committee members last year at one company that was underperforming compared with its peer group while paying executives more than the industry average. In another instance, Mr Reilly says, the fund voted against directors sitting on compensation committees because they had “changed compensation performance metrics too often and set an easy hurdle”.


Kristin Gribben is a senior reporter with Agenda, a Financial Times publication

© Copyright The Financial Times Ltd 2009.




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