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MSN Money, June 17, 2009 column


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Company Focus 6/17/2009 12:01 AM ET


How shareholders are fighting greed

At annual meetings across the country, fed-up investors are taking stands against excessive CEO pay packages, princely perks and sloppy board oversight.

By Michael Brush

MSN Money


You've heard the stories: gilded pay deals and bonuses for fat cats from faltering companies, an endless gravy train of perks, multimillion-dollar payouts even to dead CEOs -- and lapdog boards that sign off on all this.

Well, shareholders are fed up and say they won't take it anymore.

With about half the votes in from this year's round of annual company meetings, investors have clearly signaled they want an end to the sweet deals and the sloppy oversight behind them.

To be sure, this isn't the investor equivalent of Lexington and Concord, the battles that led to the overthrow of British rule in the American Colonies. Everyday investors don't have the power to change things dramatically overnight.

But the revolt this year has opened the way for significant progress on key issues and has cost several board members their jobs. It shows we can change things.

"Shareholders are finally waking up to the fact that they have a responsibility to stand up on these issues," says Steve Abrecht, the director of benefits and capital stewardship for the Service Employees International Union, or SEIU.

The key votes

Consider these highlights from annual-meeting season, which is now winding down:

  • Shareholders ousted Bank of America's (BAC, news, msgs) Ken Lewis as chairman of the board in a highly unusual binding vote that forced the bank to comply. He remains as chief executive.

  • Unhappy with the performance of board members at Pulte Homes (PHM, news, msgs), shareholders voted to kick three of them out, though the rest of the homebuilder's board rejected the advisory vote.

  • More shareholders voted yes on nonbinding proposals to limit executive pay, with support rates running from 48% to more than 50%, depending on the kind of proposal.

  • Advisory votes against "golden coffin" payments to execs when they die got unusually strong support for first-time initiatives, with at least two passing.

  • Shareholder support for proposals to increase the independence of boards advanced 10% to 30%.

If that doesn't sound like a revolution, keep in mind that what shareholders get to vote on are often baby steps. And because it's one vote per share, stock-rich insiders and a few big investors hold much of the power.

The most significant trend actually plays out behind the scenes: Dozens of shareholder-friendly proposals were withdrawn from ballots because companies raised white flags and agreed to enact them.

Why all the fuss?

Shareholder concern about CEO pay and perks is no longer only about the widening gap between the rich and poor in the U.S.

Many analysts believe that poor board oversight and excessive pay contributed to the financial meltdown that tanked the economy. Huge incentives -- such as bonuses that ran into hundreds of millions of dollars -- for short-term goals encouraged financial-sector CEOs and their underlings to take excessive risks. Meanwhile, boards stood by and watched. So the banking sector ran amok, creating problems for the rest of us.

Studies also indicate that companies where executives get excessive pay and perks underperform the market and are more likely to get credit downgrades. The theory is that when boards spoil execs with sweet pay deals, it's a sign those boards are too cozy with management. This means they're probably less focused on their true job: working for shareholders by driving managers to do things that would make the stock go up.

Shareholders, stung by losses and horrified by the disasters at so many of the companies whose shares they own, spoke up this annual-meeting season to let boards and companies know they want change. Here's a look.

Who's the boss?

By far the biggest upset of the season came when Bank of America shareholders -- unhappy with decisions by Lewis, like the purchase of Merrill Lynch and mortgage lender Countrywide Financial -- stripped the CEO of his role as chairman of the board.

The vote was unusual because it was binding. Typically, shareholder votes are advisory. Governance experts have long argued that splitting those roles makes sense, because boards are supposed to act as watchdogs over management. "They can't do that when there is an imperial CEO who is also chairman of the board," says Abrecht, of the SEIU, which sponsored the vote to remove Lewis as chair.

Overall, shareholder support for proposals asking companies to bar executives from also serving as board chairman increased to 38% from 29%, according to RiskMetrics Group (RMG, news, msgs). "That is the highest it's been since we've been keeping records," says Carol Bowie of RiskMetrics.

Office Depot (ODP, news, msgs) and Weyerhaeuser (WY, news, msgs) shareholders approved nonbinding measures by well more than 50%.

Throw 'em out

Shareholder rebellions directly challenged board members at Pulte Homes and Bank of America, though shareholders didn't get all that they wanted.

At Pulte, shareholders voted to oust three directors -- a strong statement of disapproval, since Pulte insiders control about 17% of the company's stock. The vote was nonbinding, but the three directors offered their resignations. However, the company's board rejected the resignations, reasoning that the votes were actually a statement against corporate governance at Pulte. The company promised to improve governance instead.

Four directors at Bank of America did step down after a relatively poor showing in elections. The directors resigned because of a combination of shareholder opposition and government pressure, believes Michael Garland of CtW Investment Group, which had campaigned against the directors.

Say on pay

Excessive CEO pay can be one of the most obvious signs of a lapdog board. To wake up boards, shareholder activists ask companies to allow nonbinding votes on executive compensation. Though these votes technically have no teeth, they can send members of a board's pay committee the message that their days may be numbered unless they tone it down.

Activists filed 85 so-called say-on-pay proposals this year, according to RiskMetrics. With results on 50 of them tallied, the average vote was 47.5% in favor, up from 42.7% last year. Apple (AAPL, news, msgs) shareholders were among those who approved say on pay outright.

"The say-on-pay movement really took off," says Rich Ferlauto, the director of pension and benefit policy for the American Federation of State, County and Municipal Employees.

Indeed, the momentum is now so strong that there's a good chance that Washington will make most companies put pay packages to a vote before long.

Golden coffins

By far the most morbid, not to mention pointless, perk for execs is the so-called golden coffin. These are multimillion-dollar payouts to executives -- or their estates, really -- when they die.

What irks activists most about these deals is that pay should serve as an incentive to make execs work harder and perform better. No one performs better after death.

Companies typically respond that these benefits are really a kind of life insurance. So why not just let them buy insurance?

Activists put up a dozen proposals against golden coffins this year, and with the results of eight of them tallied, investors have voted 41% in favor on average, according to RiskMetrics.

That may seem like a miss, but a 41% "yes" vote is actually high for a first-time type of proposal.

So far, two anti-golden-coffin proposals have been approved, says Scott Zdrazil, the director of corporate governance at Amalgamated Bank, which focused on these proposals this year.

One, at Shaw Group (SGR, news, msgs), got a 67% approval, which might not come as a surprise when you see how egregious this example appears. Upon the death of Shaw Group founder and chief J.M. Bernhard Jr., a "noncompete" agreement would kick in and award him $18 million, even though it's tough to imagine how he'd compete from the grave. He'd also get a full year's pay, and his unvested stock would vest, for an additional $38.2 million, as calculated by Amalgamated Bank.

In company filings, Shaw Group responded that promising executives a bonus upon death is "crucial to attracting and retaining executive talent in today's market." Yet the company also goes on to argue that golden coffins are rarely awarded because executives normally don't die on the job.

Just more than 50% of shareholder voters opposed a golden coffin at XTO Energy (XTO, news, msgs). It would award Chairman and CEO Bob Simpson, upon his death, an $111 million cash bonus and $4.35 million in salary, and accelerated options vesting and life insurance payments worth millions more. Mysteriously, Simpson's golden coffin also would offer him a "car allowance" of $158,000 after he dies.

Both votes were nonbinding, though, and the companies have not changed these benefits.

Special meetings

Support for the right of shareholders to call special meetings jumped 6%, to 52.4%, with nonbinding measures supported by shareholders of Beckton, Dickinson (BDX, news, msgs), Pfizer (PFE, news, msgs) and Bristol-Myers Squibb (BMY, news, msgs).

When shareholders have the power to call special meetings to do things such as elect new directors, theoretically it keeps boards and managers on their toes.

Quiet victories behind the scenes

Activists often have their greatest success with proposals that never make it to ballot -- because companies feel pressure and agree to reform, says Vineeta Anand, the chief research analyst at the AFL-CIO Office of Investment.

For example, about two dozen companies have agreed to regular say-on-pay votes, including Ameriprise Financial (AMP, news, msgs), Ingersoll-Rand (IR, news, msgs), Occidental Petroleum (OXY, news, msgs) and Hewlett-Packard (HPQ, news, msgs).

Likewise, Amalgamated Bank submitted proposals at about a dozen smaller companies that would have asked shareholders to approve majority voting for directors. This means that directors have to get a majority of all votes cast to win, not just the largest number among several candidates. Jabil Circuit (JBL, news, msgs), Universal Technical Institute (UTI, news, msgs), ITT (ITT, news, msgs), Strayer Education (STRA, news, msgs) and Marinemax (HZO, news, msgs) agreed to the proposals before they even went before shareholders.

"That's one of the good side effects of putting in these proposals," says shareholder activist John Chevedden. "Companies sometimes have the foresight to adopt them."

At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.



2009 Microsoft




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