Like so much else in life, the annual proxy round has become a more complicated affair over recent years. Time was when proxy fights were launched by corporate raiders, governance boffins or socio-political banner-wavers and gadflies. In each case the motives were distinct.
The raiders were fighting for control; the activists were fighting over issues like staggered boards, confidential voting or poison pills; and the banner-wavers and gadflies were gunning for political causes (South Africa, Ireland); good corporate citizenship, including environmental and social responsibility; and, in some cases, just about anything else the proponents wanted to rail against.But it’s not like that any more. Take the battle over Nabisco. It was certainly about control, since Bennett LeBow and Carl Icahn wanted the power – through a majority on RJR’s board – to spin off Nabisco Foods. But the insurgents’ argument also relied on corporate governance issues, since they claimed that RJR’s board, by failing to realise the value of non-tobacco assets through a sell-off, was neglecting its obligation to put shareholder value at the top of its priority list. And one of the resolutions shareholders voted on during the first round consent solicitation was to reduce the percentage of shareholders needed to call a special meeting.
As for banner-waving, no tobacco company is free of that for long. And in this case two orders of Catholic priests joined in the LeBow-RJR tug of war, tabling their own resolution to split up the vice business from the food interests.
That’s just one example; the Chrysler-Kerkorian stand-off was another (see Investor Relations, April 1996). These and other cases like them reflect a crystallisation in the maturing of the relationship between shareholders and corporations, which has boiled down all the issues to just one central one: performance.
All other issues are now seen as subsidiary to the need for company managements to produce the kind of performance that enhances shareholder value. Those subsidiary issues may provide the details for the proxy form, but no-one is too concerned any more about poison pills per se, or separation of chairman and chief executive roles, or even staggered boards. Provided, that is, the company’s performance is up to scratch.
One result has been a reduction in proxy fights focused purely on social or political issues, which are now rare. Another is the blurring of divisions among the various interest groups. Of course, a union may still have a very different ultimate agenda from a money management group but both will often find themselves fighting on the same side. That’s either because the union can exploit the now widespread use of proxy voting guidelines among institutional investors, for instance by proposing a resolution which the money manager group has to support or else break its own rules; or it is because unions have learnt that if they are to win Wall Street support, they had better select as their targets companies which are underperforming – as well as offending labour groups.
This merging of the interests of formerly quite distinct groups is typified by the fact that the 1980s raiders have transmogrified themselves. No longer called corporate raiders, they have been renamed destabilisers. Even that moniker is not always fair, since some of these people are now sitting comfortably in corporate boardrooms, albeit in a quasi-monitoring role. ‘The term destabilisers really reflects the different factors and the different environment of the 1990s,’ notes John Wilcox, chairman of Georgeson & Company in New York.
Carl Icahn and Bennett LeBow both fall into the destabiliser category. So does Michael Price, manager of the Mutual Series family of mutual funds, a visible value investor who, as a 6 per cent shareholder, effectively put Chase into play. And so does Alfred Kingsley, a former associate of Icahn who now runs Greenway Partners.
Such people can still make life difficult for corporations. Kingsley and Greenway Partners’ managing director Gary Duberstein are currently seeking to split Unisys Corp into three separate companies. They were also prime movers in the US Shoe case, resolved finally by its takeover by Luxottica. And at Woolworth, Greenway is asking management to spin off its most profitable business, the Foot Locker and Lady Footlocker stores division.
There are still major differences between a group like Greenway or Bob Monks’ Lens Fund, on the one hand, and the Investor Rights Association of America (IRAA), the successor body to the United Shareholders Association, which aims to represent the interests of retail shareholders. The IRAA still tends to support small-guy issues, targeting directors’ remuneration in particular.
This year the group is focusing principally on removal of pension rights for directors, as it did last year, and on payment of directors in stock. The IRAA claims a high degree of success, although critics counter that it was pushing at an open door. ‘The directors’ pensions issue is really a motherhood one,’ says Wilcox. ‘There’s very little resistance to change on that, even from directors themselves. But it took a gadfly group to start knocking them down.’
For many, the very fact that companies were giving retirement benefits to outside directors came as a surprise. And that turned to shock when the list of retirement goodies being given by W R Grace to its late chairman came to light a year or so ago. Since then there has been a rash of resolutions to scrap retirement benefits; and many companies that haven’t yet stopped them are facing shareholder proposals at this year’s meetings to do so forthwith.
The IRAA began this proxy season by submitting resolutions at about 120 companies, but that number was rapidly whittled down, according to Ken Steiner of the IRAA’s base in Great Neck, NY. ‘Many companies have changed their policies since then so the proposals became unnecessary. But we’re going ahead with nearly 100 resolutions.’
Steiner cites a number of companies that have either withdrawn directors’ retirement plans or said they will do so for the future. These include Nynex, Merck, American Express, McGraw Hill and many others.
But that isn’t the only issue preoccupying the IRAA. It’s also submitting resolutions on staggered boards, where ‘the institutions are on our side’; and on payment of at least 50 per cent of director compensation in stock. ‘Many companies, such as Nynex and Westinghouse, have agreed to pay directors partially in stock,’ notes Steiner, who adds somewhat disingenuously: ‘I’m surprised they don’t all want this, if they have confidence in their company.’
As for next year, Steiner says the IRAA may well change tack. ‘We may target underperformers – companies that have performed poorly for five years, so they’ve had a chance to benefit from an upturn. We would probably propose resolutions at about ten companies, recommending that they hire an investment bank to seek alternatives to enhance shareholder value – such as merging or selling the company.’
In other words, this gadfly group will join the performance bandwagon. That may broaden its appeal among other investors – with many of whom it has little else in common – and thereby increase its impact.
The labour unions are another group whose impact may be on the increase. There are nearly 100 union-sponsored proposals this year and, judging by the call to arms from AFL-CIO president John Sweeney at the April meeting of the Council of Institutional Investors, that number could be set to grow.
‘We must challenge the two most salient trends in corporate life today,’ he said, naming these as ‘destructive downsizing and the widening gap between some top CEO pay and that of ordinary Americans.
Sweeney later said that the AFL-CIO was developing a database to help union pension funds to monitor corporate boards and to prepare shareholder resolutions.
Such union resolutions have rarely got anywhere in the past, not least because they enjoyed little support from other investors. However, there are some issues on which investment institutions are bound to unite with the unions. If, for instance, an institution’s proxy voting guidelines include an instruction to vote in favour of any resolution to redeem a poison pill, the union will benefit from its support without further ado.
‘The unions use this to help them in their labour disputes,’ according to John Cornwall of D F King. ‘But I think they are going to take this one step further and you’ll see them nominating for directorships. They’ll find independent candidates with only covert ties to the unions. But I hope it is seen for what it is: a means to present their own agenda.’
Cornwall made these comments just a few days before it emerged that two unions – the Teamsters and Unite (the Union of Needletrades Industrial and Textile Employees) – were this year proposing the election of a new director at troubled Kmart Corp, for whom D F King is proxy solicitor. The unions’ suggested new board member, Stephen Hester, is a corporate turnaround strategist and a trustee of the $1.2 bn Northwest Airlines Employee Stock Plan.
Michael Zucker, director of corporate and financial affairs at Unite, described Hester as ‘a first- rate attorney’, adding that through his work designing employee stock ownership plans he ‘has an excellent understanding of the impact employee morale and productivity can have on shareholder value.’
That may sound like a warning bell to issuers but the Kmart offensive is much broader. Unite and the Teamsters have submitted a list of shareholder proposals, covering annual election of directors; elimination of retirement benefits for outside directors (although Kmart maintains that this has already been done); and a request for the Kmart board to examine the prospects for selling or merging the company.
These proposals will be voted on at Kmart’s annual meeting on May 21 in Detroit. Meanwhile, Kmart has written to shareholders, claiming that the unions’ real agenda is ‘to pressure Kmart’s board in an effort to gain concessions on local labour issues’. The letter from Floyd Hall, chairman and chief executive of Kmart, goes on to say: ‘I hope you will concur with me that we should not add a special-interest, union-sponsored director to the board. I also hope you agree that the proxy process is not the proper forum to debate or resolve local disputes that periodically arise between labour and management.’
No doubt most recipients of Hall’s letter will indeed agree with him and will have no desire to help the unions’ cause. Unite and the Teamsters hold less than 1 per cent of Kmart apiece; and both have had disputes with the company over the small number of Kmart employees they represent, since most of its staff are non-union. No-one would seriously question their motivation.
But the unions have had the wit to select as their target a company which, as they point out, has had twelve consecutive quarters of either losses or declining profits, resulting in an ailing stock price. And they will probably benefit from wider institutional support, at least for their proposal on the staggered boards issue.
But the real point of this example of union action is the breadth of its scope. Like the IRAA, the unions are doing all they can to widen their appeal to other shareholders by, ostensibly at least, taking in the more general shareholder concerns about performance and about governance.
The unions have traditionally been a force to be reckoned with by managements. Now board directors are increasingly going to have to watch their backs – for all-encompassing attacks on their effectiveness as an oversight group; and for specifically targeted attacks on them as individuals.
Keeping tabs on directors
If a Ouija board could connect to him, former Teamsters’ boss Jimmy Hoffa would tell chilling stories about the ways some factions of the Brotherhood have of dealing with unsatisfactory performance. But the Teamsters, with pension assets of $48 bn, now has a much better way of eliminating America’s least valuable directors. They can proxy them out.
In a report released at the end of March ‘for debating purposes’, the International Brotherhood of Teamsters posits suggested criteria by which so-called independent directors could be tested for their value to the company.
Bart Naylor, the Teamsters’ national coordinator of corporate affairs, told Investor Relations that the report followed naturally from the union’s participation in other shareholder issues. ‘We’ve had some success with companies like Toys ‘R Us, Compaq and Bell Atlantic, in declassifying boards or eliminating poison pills, as we did at Philip Morris,’ he says. Shareholders, he notes, can’t get rid of CEOs, ‘But the first thing on a proxy form is to elect or oppose the directors.’ After joining Calpers in the Archer Daniels Midland case, the union decided to ask if there was such a thing as a bad director. Was it possible to quantify a director’s value, the Teamsters wondered. ‘So we gave them a score,’ says Naylor.
Using Graef Crystal’s overview of companies with high director pay and low investor returns as a starting point, the union checked out board members’ attendance records, their over-commitment (to other boards, for example), and any consulting conflicts.
Bart Naylor refutes any suggestions of worker bias, noting that the report criticises Vernon Jordan, the former head of the urban league and a friend to labour. He is a director of eleven companies and lawyer for seven of them. ‘He probably brings valuable insights, but he’s on too many boards, and he provides law services for the managements, so there is a conflict if he has to hold their feet to the fire.’
Jordan has one of the worst attendance records. In contrast, former Defence Secretary Frank Carlucci is a paragon in his attendance record. ‘He has a nine to five job, and he attended at least 151 board meetings in one year, out of 250 working days. So we were mightily impressed by his work record,’ says Naylor.
Naylor denies any Teamster-Calpers plot, pointing out that the pension scheme awarded Florida Power & Light an A+ rating, whereas the union ‘found a lot of poor directors’ – including five of the least valuable directors on its 14-strong board.
However, Calpers is unlikely to disagree too much with the Teamster criteria: a limit of five directorships per person; a requirement for companies to put shareholder-nominated candidates on management proxy forms; no selling of legal or consulting services by outside directors to their companies; no provision of pension benefits; an obligation on the part of directors to hold stock in the company; and payment of between a quarter and a half of director remuneration through performance-related stock options.
by Ian Williams
