It’s business as usual on the US proxy circuit with companies gearing up for another frantic season of investor activism. As the shareholder resolutions come flooding in, the big players remain unchanged from last year, and the hot button issues appear to be developing along similar lines. But, according to the Council of Institutional Investor’s Anne Yerger, there’s been something of a wind change. ‘As far as the basic governance issues go, things are continuing as usual – poison pills, staggered boards, all stuff we’ve seen before. But I think we’re going to see more trips to the court this year than ever before.’
She goes on to explain: ‘People are at something of a crossroads. There have been some big strides forward but at many companies very little has changed. I think people are getting frustrated.’
Sandy Nicolai, manager for investment responsibility at the State of Wisconsin Investment Board (Swib) agrees. ‘I think what we’re seeing is that the earlier conceptual best practice issues have been pretty much implemented, certainly at the large companies. The contentious issues now are matters that need to be decided in the courts, and that’s changing the world of corporate governance.’
Going to court
Swib, for example, is taking its opposition to a proposed merger between Medco Research and King Pharmaceuticals (which, it says, is a bad deal for shareholders) to the courts. ‘They were making misleading statements and there was a general lack of disclosure. That’s not the way a merger offer should be made,’ says Nicolai. In February, Swib won a court order asking for an expedited court process. ‘We were very encouraged by the response we got from the courts. These are shareholder rights issues that are very important matters of principle,’ Nicolai adds.
Swib has also filed a lawsuit against PRLS because management adjourned the company’s annual meeting after failing to get approval on its motion. The case isn’t on the docket yet but is scheduled for the summer. Says Nicolai, ‘These issues may seem like minor things but they are hurdles which, if not addressed, could in the long run shut down all our activities.’
And Swib is not the only fund prepared to take companies all the way to court. The Union of Needletrades, Industrial and Textile Employees (Unite) has filed a lawsuit against Chubb Corporation, challenging the company’s refusal to let shareholders vote on a binding bylaw amendment to its poison pill. The saga began last year when Unite submitted a shareholder resolution to amend Chubb’s bylaws in order to require shareholder approval before the company could adopt (or maintain) a poison pill. Despite the fact that the resolution won over 70 percent support from shareholders, Chubb’s chairman Dean O’Hare announced that the bylaw would not be amended. Adding insult to injury, the company adopted a new shareholders rights plan – without seeking shareholder approval – that expires in 2009. Unite was unimpressed. Says Hilary Horn, director of corporate and financial affairs of Unite, ‘We are supporting a binding bylaw proposal to counter the board of directors’ latest attempts to disenfranchise shareholders.’
The Amalgamated Bank of New York’s LongView Collective Investment is another fund going full steam ahead with binding resolutions this year. It has four binding poison pill proposals on the table at Polaroid, Consolidated Natural Gas, Great Lakes Chemical and Hilton Hotels. And, if the companies choose to ignore shareholder support for these resolutions, they could find themselves in court as well.
Meanwhile, Guy Wyser-Pratte, the infamous New York arbitrageur with a strong governance bent, who last year took Fleming Companies to court over a binding resolution, says he’s concentrating most of his efforts abroad at the moment. ‘The poison pill, binding resolution issue has really mushroomed. We were very active a couple of years ago but you now see a lot of the unions taking up the cudgel and attacking on their own on the same principle,’ he says. But although quiet for now, Wyser-Pratte says that won’t last if he sees management trying to entrench themselves. ‘When we see someone using the just say no defense without getting shareholder approval, that’s our call to arms. If they do that we’ll be down their throats.’
Adds Jamie Heard, president of proxy advisor Proxy Monitor, ‘Last year we saw the advent of the binding proposal in the face of frustration with companies for ignoring non-binding resolutions, even when the majority of shareholders supported them. We’re now seeing companies ignore binding resolutions, so pension funds are going to the next level.’
A case of independence
Heard also points to the withholding of votes from directors as a powerful new tactic being used by investors. Calpers decided to withhold its vote from directors at Disney’s February 22 annual meeting because, it believes, they are insufficiently independent.
And Proxy Monitor was advising its clients to do the same. ‘I think people are paying much more attention to the independence issue than before, particularly for directors sitting on key committees like the audit or compensation committee,’ Heard says.
Following its success with this issue last year, TIAA-Cref has a flood of new board independence proposals at companies too. As this magazine went to press, Cref had still not released any actual resolutions on independence. ‘They try wherever possible to negotiate with management behind closed doors. But we know for sure that they’ve sent out a whole pile of letters,’ comments John Purcell, general counsel for proxy solicitors Georgeson Shareholder Communications.
Board independence may be an old issue, but according to Heard, it’s having new life breathed into it this season. ‘Although withholding votes doesn’t actually do much – those are the only directors up for election so they’re going to be voted in whatever happens – it’s an important symbolic action,’ he comments. ‘Institutional investors – and major ones like Calpers and Cref – speaking out on issues like this, means that more and more companies will sit up and pay attention. We’re after heightened awareness on an issue like this rather than anything concrete.’
DF King’s John Cornwell disagrees. ‘I don’t see these vote no campaigns having a material effect on anything. At most it’s a temporary black eye. You get no indication from this about how a company would fare in a proxy battle further down the road.’
Cornwell sees executive compensation as one of the key issues this season. That follows a trend set last year when, according to the Investor Responsibility Research Center (IRRC) in Washington, DC, there were over 100 proposals on the ballot addressing executive pay. As with last year, issues range from proposals calling for corporate reviews of cash-balance pension plans; to proposals calling for the required disclosure of the use and identity of compensation consultants; to a proposal by the non-profit social activist group Responsible Wealth at Disney calling for the establishment of an employee stock ownership fund with stock contributions at least equal to the stock given to corporate officers.
Value for value
According to Cornwell, the big compensation issue this season will be the repricing of options. ‘We saw this on the table last year but, with the incredible performance of the stock market again this year, its got added weight. When you’ve got so many high-flyers in terms of stock price, you’ve got a situation where companies want to reward their executives and there’s sort of the assumption that shareholders will automatically approve stock option rises. That’s just not happening.’
With the help of proxy advisors like Institutional Shareholder Services (ISS) who do rigorous analysis of plans to check for dilution, investors are examining the issues much more closely than companies might like. ‘Value for value’ repricing is one particularly popular method. It means that the diminution in shareholder value is taken into account by pulling back some options. ‘Shareholders are not just looking at the new shares these executives are getting but at the overall value. If it exceeds a certain percentage it’s not going to meet shareholder approval.’
According to Cornwell, many of these repricing plans will not see the light of day in proxy contests because companies will be forced to rethink them behind closed doors. For example, in 1998 Swib offered, or threatened to offer, binding proposals requiring shareholder approval before a repricing at 22 companies. Eighteen of those proposals were dropped after companies changed their policies. ‘What’s interesting about this is that previously, in a market like we’re having today, anything would wash. It would only be if a company was underperforming that it would need to watch its back. Today, companies come under scrutiny regardless of what’s happening in the stock market.’
Writing on the wall
For companies that are underperforming in the greatest bull market the US has ever seen, the writing really is on the wall. ‘Companies doing badly in a market like this stick out like a sore thumb and investors are going after them in a big way,’ says Cornwell. At Ashland’s January 28 annual meeting, for example, investment group Lens won a third of the shareholder vote with a proposal for the company to hire an investment banker ‘to consider value-enhancing alternatives’.
Similarly, in February Schwartz Value Fund had a proposal on the table at Griffon Corporation calling on the company to appoint a special committee of the board to ‘solicit, review and negotiate offers to acquire the company’. And at Simpson Industries, a group of institutions are proposing that the company, which they say has been lagging its competitors for years, should be put up for sale.
Another maverick investor, Mark Latham, has come up with an entirely new proposal this season for underperforming companies. He’s put forward a number of resolutions requiring companies to employ an independent proxy advisor like ISS or Proxy Monitor and to disclose the results in the proxy. ‘There’s a limit to how long companies can ignore signals like these,’ says Cornwell.
The labor unions also promise to be active this season. Last year a record 14 union-sponsored resolutions received a majority of votes. As well as poison pills, another big issue is the declassification of boards.
The Teamsters, for example, have resolutions to declassify at Coca-Cola, Airborne and Anheuser-Busch. Many observers are skeptical of the union’s motives. ‘The unions have a history of abuse of the proxy process,’ comments John Cornwell. ‘They know what the hot button issues are; they know what will guarantee to generate significant stockholder support. And then they use this support – or potential support – as leverage in other negotiations with management.’
Proxy Monitor’s Jamie Heard disagrees with Cornwell on this, however. ‘The unions have an important role to play by bringing a different voice to the table,’ he maintains. Heard also sees the unions becoming more strategic.
In addition to the growth in the strength of labor funds in recent years, social and environmental funds have achieved some success in getting their voices heard during the proxy season. According to the IRRC, there were a total of 232 social and environmental resolutions in 1999 with issues ranging from global warming to equal opportunities. Global warming is a key issue again this season with the Interfaith Center on Corporate Responsibility (ICCR) demanding action from twelve large US corporations (Allegheny Energy, Chevron, CSX, Duke Energy, Eastman Chemical, Exxon, Mobil, Norfolk Southern, Texaco, Goodyear, Cinergy and GM).
A number of proposals requesting the adoption of meaningful international employment standards and labor codes of conduct are also up for vote. And some of these have the support of the big institutional investors as well. According to ISS, for example, all four New York City pension funds plan to ask companies to adopt international labor standard SA 8000 and to ask their suppliers to do the same.
Although most of the social resolutions get very low votes, they do have an impact simply by the fact of being on the ballot and raising new issues, in the opinion of Jamie Heard. ‘They manage to get high enough votes to be able to keep coming back,’ he points out.
This season the hot issue is genetically modified foods. Some investors want companies to label their foods so consumers know if they contain GM products; others want them out of the business altogether.
‘It’s important that issues of this sort get raised,’ believes Heard. ‘That’s part of what the proxy season’s all about.’
