America’s companies are bracing themselves for another rough ride on the frontiers of corporate governance. With the number of shareholder proposals rising steadily in years past, and some observers predicting another record year in 1997, corporate executives are finding themselves on the front-line of the debate, both on and off the proxy stage.
Proponents from pension funds to labor unions are front and center with resolutions. Performance measurements are in flux, and even a high flying performer should look over its shoulders for the next proxy battle, be it over social issues or director compensation. Debates on governance may not be boiling, but they’re simmering steadily, with average votes on tried and true issues like poison pills inching into the majority.
Perhaps the most notable change as companies gear up their proxy machines this season is the dearth of proposals from the usual big guns. The trend undoubtedly continues for influential public pension funds to try to exert pressure behind the scenes, lining up management and even board members for quiet one-on-one diplomacy.
‘The epitaph for the proxy season may be that 1997 was the year individual shareholders upped the ante and began submitting proposals more directly linked to corporate performance and board and management accountability,’ predicts Ken Bertsch of Washington DC-based Investor Responsibility Research Center (IRRC). ‘Individual investors and unions will continue to dominate the filing, while large institutions like TIAA-Cref and Calpers are quieter. The question is the extent to which individuals will win support from institutional investors.’
The most active individual shareholders are members of the Investors’ Rights Association of America (the IRAA), whose chief, Ken Steiner, has been vocal in his criticism of institutional investors’ lack of governance initiative.
The IRAA is showing no signs of slowing down after a 1996 campaign that saw 62 of its proposals coming to a vote. Already, 83 new proposals have been submitted for the 1997 season, including 33 demands that companies study a sale or merger to increase shareholder value.
In fact, the tide of 1997 proposals is rising from all sides. By mid-December, when IRRC held its proxy season preview for companies, some 234 corporate governance proposals were already in its sights. Whether or not the eventual total will top last year’s count of 555 is uncertain, but resolutions were still pouring in.
Bertsch notes that votes on classic corporate governance issues – poison pills, classified boards and director pay – have been rising steadily over the years, along with an increase in the number of resolutions. Proposals to redeem poison pills achieved an average 53.4 percent share of the vote last year, and a total of 23 various corporate governance proposals won majority votes.
While such issues have hogged the spotlight in the past, some experts question whether they’re worth worrying about. ‘Perhaps the debate is over on a lot of governance issues,’ remarks John Cornwell, executive vice president of DF King. ‘The days of arrogance are over, especially when there’s the threat of large institutional holding in a company, and you can’t afford to be at the losing end of a proxy contest.’
‘How long will proponents continuously resubmit the same proposals?’ asks John Wilcox, chairman of Georgeson & Co. ‘Even if they score higher votes, they’re still the same issues over and over, with the same people voting in favour. What’s the real meaning of the process after a while? I’m surprised there haven’t been more innovative proposals brought up.’
Wilcox, at least, isn’t offering proponents any hints on governance Achilles heels and possible new species of proposal. In terms of technique, however, he pegs labor unions’ precatory proposals submitted under Rule 14a-4, a new tactic last year, as probably the hottest issue of the season. ‘The unions did this last year as a way of putting companies into a damned if you do, damned if you don’t situation,’ Wilcox says. ‘I think they’re going to make very aggressive use of it again.’
The Teamsters and the United Food and Commercial Workers Union targeted ten companies under Rule 14a-4 last year and won wide attention but scant voter support. Basically the unions are able to escape all the constraints of traditional proxy Rule 14a-8. Instead, just before the company mails its proxy material, the union charges in and says it intends to present a proposal from the floor at the annual meeting. Then the company must make a choice: whether to include the proposal in the proxy material and on its proxy card, or to ignore it. If it chooses the latter course, the company cannot use discretionary voting power to vote against it at the annual meeting.
Although SEC Commissioner Stephen Wallman has expressed his discontent with Rule 14a-4, rule changes aren’t expected in time to save companies targeted this season. IRRC’s Bertsch expects such precatory proposals – which are passed by shareholders but ignored by companies – to be ‘flashpoints’. In one case, the Teamsters are already headed for the courts against Fleming over a 1997 poison pill proposal.
IRRC notes that the Teamsters’ full 1997 agenda is not yet in focus, although the union has announced some targets. For instance, a resolution at General Electric would require shareholder approval of executive compensation over $1 mn a year ‘regardless of when such compensation is paid.’ The union is aiming to end the practice of deferring compensation to get around tax guidelines that any non-performance based compensation over $1 mn in a given year is not tax deductible.
More union action can be expected from a new quarter: the AFL-CIO. Bill Patterson, who in recent years headed the Teamsters’ aggressive shareholder charge, has jumped ship to head an AFL-CIO office on investment and ownership. Among other hot spots, Patterson plans to develop better gauges of long-term value among companies, pushing out assessment horizons from the all too prevalent quarter-to-quarter view to 7-10 years.
Indeed, measuring performance is rapidly becoming one of the most heavily debated aspects of governance, especially with the ongoing obsession over executive and director compensation. There are a lot of momentum players out there, and there is a lot of tail chasing going on,’ says Carolyn Kay Brancato, director of corporate governance and strategies research at the Conference Board. ‘But are we talking about the intrinsic value of the company when we tie so much to the gyration of the stock price? Let’s look at other drivers of success.’
In terms of executive pay, for instance, Brancato suggests it could be tied to quality improvement as measured by warranty data instead of zig-zags in the stock price. She also says that the movement towards director evaluation is critical.
‘A lot of institutional investors now want one-on-one meetings not only with management but with board members too,’ Brancato says. ‘They’re asking questions like, What is the evaluation process? How does the board get information, relate to management, and set the agenda for meetings? Shareholders want boards to measure their own performance, and boards are looking at ways to measure performance all the way down through the company.’
This ‘triangle’ of performance measurement is working, Brancato believes. ‘The process isn’t always smooth and agreeable, but it struggles on, and I think it’s working,’ she says. ‘Shareholders have been working to change the board, and sometimes the board, kicking and screaming, decides to take a more active oversight role.’
For now, though, performance continues to be measured by stock price. Despite being at opposite ends of the activist spectrum, the Council of Institutional Investors and the IRAA both come out with annual proxy target lists of companies that have underperformed share price indices over five years.
Wilcox points out that as activists zero in on underperforming companies, they’re doing more and more of their own fundamental analysis. But many of these indexed, passive investors are doing analysis after they own the stock – a reversal of the normal market sequence. ‘If you look at public pension funds, voting issues and activism are in the hands of policy people, not financial people,’ he notes. ‘If the ultimate discussion is going to be about how the company is run, then policy and performance have to come closer together and meet under the banner of investor relations.’
Calpers is a recognized leader in such behind-closed-doors discussions that demand more IR in response rather than simple proxy defense. TIAA-Cref is also taking the lead in meeting companies one-on-one instead of targeting a cross-section lifted from performance screens.
‘We are shifting more towards the assessment of individual companies rather than assessing good corporate governance practices,’ says John Biggs, chairman and chief executive officer of TIAA-Cref. ‘We are focusing on visiting companies and asking about independent board members, audit committees, and the quality of the board. We’re finding a lot of surprises.’
Calpers, for its part, has only revealed two proposals so far for 1997 – one at Rollins Environmental Services seeking a majority of independent directors, and another at Fleming which hasn’t been fully disclosed. It looks as though Calpers’ real, most important contribution this proxy season will be its Model US Corporate Board governance standards which it is expected to unveil in April or May.
Calpers’ guidelines will look at board structure, focusing on the roles of different board members; director compensation; director terms; the way in which the board is elected; and the relationship between the board and the chief executive officer. Once it has polished its guidelines, the pension fund plans to evaluate the board practices at 300 companies and grade them according to their strengths and weaknesses.
Recent events highlight just how loudly institutions can be heard without setting foot in the proxy arena.
Following Texaco’s recent debacle in which it paid out $176 mn in a discrimination lawsuit, the City of Philadelphia announced it was divesting its $5.8 mn stake in the oil company. Unlike the torrent of divestiture over South African apartheid in decades past, Philadelphia’s move was directly in response to Texaco’s bottom-line liabilities and not a case of taking the high moral ground. Such moves follow recent announcements by a number of state and municipal governments or their pension funds to divest their tobacco holdings.
Social issues aside, Calpers’ new governance model begs the question whether it will contain anything that hasn’t already played out in the proxy arena. Will it provide the basis for novel proposals to spark new debate?
One recurrent innovator who has been tireless in trying to unleash shareholder value from recalcitrant managements and boards is Guy Wyser-Pratte, the New York arbitrageur who lately waged and almost won a proxy fight at Wallace Computer.
He is now back at center-stage against Rexene, which recently rebuffed several takeover bids from Huntsman. Wyser-Pratte’s proposed slate of directors and an accompanying ‘shareholder rights by-law’ highlight two current trends: the nominees were all recruited on the basis of professionalism, not because of a cosy relationship with the proponents. And the proposed by-law puts a new spin on the old poison pill by limiting its duration unless shareholders approve extending it.
Another high profile fight for board control is replaying at RJR Nabisco, which last year fended off an attack by Bennett LeBow and Carl Icahn to replace the board and spin off the company’s food operations from its ailing tobacco business. This time around, LeBow and Icahn are going their separate ways, and it may turn out to be a case of ‘divide and be conquered.’
Such fights for board control may well attract the most headlines this proxy season. But they should not turn corporate executives’ attention from the steady, long-term pressure for change exerted by individuals and institutions alike.
While the number of shareholder proposals dealing with independence and other board related issues is low compared to classic resolutions on poison pills and the like, many observers see the board as the central focus of the 1997 proxy season. Investor relations professionals can expect to be at the center of a stormy corporate triangle, as Brancato sees it: shareholders, board and management – who’s watching whom, who’s accountable to whom, and who is delivering value back to the owners?
Boardroom Bathing Suit
‘You ought to go back and tell your companies that you’re on the front-lines. This thing could really blow up and become even hotter in the not too distant future.’
Such is the wake-up call to corporate America from retiring congresswoman Patricia Schroeder. ‘This thing’ is corporate governance, and the ‘not too distant future’ may well be this proxy season.
Schroeder has recently landed smack dab in the center of the corporate governance maelstrom. The Teamsters nominated her to the board of trouble-torn Texaco, and Schroeder is showing no reluctance to shake up that board room and others: ‘I really hope I get the opportunity to serve on some corporate boards,’ she declares.
Speaking at a December proxy season briefing for corporate executives held by the Investor Responsibility Research Center, Schroeder unabashedly charged the corporate governance debate with fuel that she says will reignite change at America’s largest companies.
Schroeder’s logic runs as follows: ‘The American people are frustrated with government and think they can’t make a difference there; this is a nation of activists, always looking forward, moving forward, marching forward; they’re getting ready to go into a new millennium, and getting much more interested in their investments. They’re also understanding suddenly that what America’s corporations do has a much bigger impact on them.’
So what’s the bottom-line on the balance sheet? Everybody, and particularly American women who control purchases equal to Japan’s GNP, are going to cast their vote with their consumer dollar. And corporations who don’t toe the line are bound to kick the bucket. Foremost in Schroeder’s sights is the boardroom: ‘This is not a fraternity house, this is not a tree house; it can’t be a golf club, and it shouldn’t be the palace guard.’
Schroeder insists that a CEO’s buddies be ousted from the ruling fraternity and replaced with directors not afraid to ask questions. ‘We all want applause and trained seals,’ she admits. ‘But we’re much stronger if we have good friends, and good friends don’t let good friends take a company off a cliff. We’ve got to find a new way to define what a good friend and a good director is.’
‘This is America, and we believe in checks and balances,’ Schroeder states. ‘The entire reason for a board of directors is to be a check on management. If management selects them all, then it’s like the homecoming queen and her court: if you ask any difficult questions as a board member, you are treated as though you wore a bathing suit to church.’
