Shareholder advisory committees.
US firms may give shareholders more say on board nominees
Apr 13, 2007
In an effort to tame activist investors' increasingly aggressive bids for board seats, some companies are exploring ways to give shareholders more say when new directors are nominated.
If shareholders could influence the choice of board nominees, the theory goes, they would be less likely to wage war against their elections down the road. Such thinking has emerged as fights for board seats have become more frequent and more heated, and as shareholders agitate for the right to list competing candidates on company voting materials.
"There are some very detailed discussions going on about how to find the middle ground," said C. Warren Neel, a director at public companies including Saks Inc.
Boards are looking for ways to balance investors' growing appetite for board representation while still preserving their ability to have final say on who gets nominated, said Neel, who is also executive director of the University of Tennessee's Corporate Governance Center in Knoxville.
Strategies - still in their infancy - include posting "help-wanted" ads on companies' Web sites when board seats open up and disclosing what became of shareholders' recommendations.
One of the more daring options that boards are exploring, according to some shareholders and governance professionals, involves establishing advisory committees that would give large, long-term shareholders a formal platform for vetting candidates and raising issues with boards' nominating committees.
UnitedHealth Group Inc. formed such a committee late last year as part of a broader effort to regain shareholders' trust following a stock-options backdating scandal. The committee, consisting of four shareholder representatives and one medical expert, will help the board search for five new directors over the next three years.
"It's an opportunity to more tightly align the board's interests with (those of) long-term shareholders," said John Penshorn, senior vice president of investor relations at UnitedHealth. Penshorn wouldn't say which investors are serving on the committee, as they have asked to remain anonymous.
Home Depot Inc.'s board, still recovering from a raucous battle with shareholders over former Chief Executive Robert Nardelli's huge pay packages, is in talks with investors to do something similar, according to people familiar with the situation.
Home Depot officials wouldn't say whether such discussions are going on. "Listening to our shareholders and maintaining an ongoing dialogue with them is a top priority for the Home Depot," the company said in a written statement.
Even if Home Depot doesn't create an advisory committee or other formal channel, the board's nominating committee has been meeting actively with large investors - including unions and public pension funds - to hear their concerns as it searches for candidates to fill four seats before next year's annual meeting. The company promised in February that the board would seek input from shareholders in identifying candidates.
Most boards have some formal method in place for gathering shareholder input on director candidates. But the current processes are ineffective, say shareholders and governance experts. The most common method - usually described in a paragraph in companies' proxy materials - is for shareholders to mail nominations to the company's corporate secretary by a certain date.
"It's a letter that gets summarily rejected, usually," said Richard Ferlauto, director of pension and benefit policy for union shareholder American Federation of State, County & Municipal Employees. And for good reason, too, as shareholders are forced to make recommendations without a clue as to the qualifications the board is seeking, said Ferlauto.
A number of improvements to existing procedures are being discussed. Peter Gleason, director of research at nonprofit group National Association of Corporate Directors, thinks boards should disclose in their proxy materials how they have handled the requests they receive.
Shareholders are reluctant to submit recommendations under the current process because they don't know if they will be taken seriously, said Gleason, who has been talking with boards about adopting changes. "You're always skeptical of something that doesn't tell you what happens next."
Some companies are also considering posting information on their Web sites to inform shareholders about the characteristics and qualifications they are looking for when board seats open up, said Neel. This could result in more usable suggestions. Also, it allows boards to reject candidates who don't meet their needs without seeming to dismiss shareholders' nominees out of hand, said Neel, who will be talking about this with directors from 15 companies next week.
House bill gives shareholders advisory vote on executive pay
04/20/2007 09:26:52 AM PDT
WASHINGTON - The House voted Friday to give shareholders at public corporations a voice in executive pay packages that typically equal 500 times the salaries of workers at those companies.
The shareholder vote under the bill would be advisory only. But Democratic backers of this provision said that investors need a say when companies losing money or laying off workers are paying executives eight- and nine-figure salaries and retirement packages.
"This is not an aberration, and there is a hue and a cry from the American people across the American landscape that is saying something must be done," said Rep. David Scott, D-Ga.
The bill, which passed 269-134 and now goes to the Senate, was opposed by the White House and most Republicans. They argued that the Securities and Exchange Commission has recently taken steps to make corporate pay packages more transparent and that Congress should stay out of corporate affairs.
President Bush earlier this year questioned the extravagant pay of some company managers and directors, but said it was not a matter for government involvement.
"There is no justification for many of these pay packages," said Rep. Spencer Bachus, R-Ala., top Republican on the House Financial Services Committee. But "this is Congress beginning to intrude on corporations."
The bill, sponsored by committee chairman Barney Frank, D-Mass., establishes an annual nonbinding vote on executive pay packages and calls for an advisory vote if a company awards a new golden parachute package while simultaneously negotiating the purchase or sale of the company.
Frank noted that the SEC had recently required corporations to include a chart of compensation for top officials but had said it did not have the power to compel a vote on executive pay. He said the bill requires corporations "simply to add to that a box that says 'I approve/I disapprove."'
Investor advocates, union pension funds and shareholder groups have supported the legislation, but GOP opponents expressed concerns it would give such groups an inroad to change a company's policies.
"It greatly worries me that this bill could set a precedent of giving activist institutional investors, who may have their own political and social agendas unrelated to the financial wealth of the companies, more influence," said Rep. Mike Castle, R-Del.
Republicans unsuccessfully offered amendments requiring pension funds and other shareholder groups to reveal their spending or their votes on compensation issues. Also defeated was a proposal by Rep. Scott Garrett, R-N.J., that would have eliminated the shareholder vote when compensation packages do not exceed averages at comparable companies by more than 10 percent.
Democrats, while stressing that the bill makes no judgment on what is excessive pay, cited studies that the average CEO of a Standard and Poor's 500 company receives $14.78 million in compensation.
Rep. Brad Miller, D-N.C., said that 15 years ago the average CEO made 140 times what a worker at his company earned but that now the difference is 500 times. He said the aggregate compensation of the top five executives is now 10.3 percent of the corporate profits of public corporations.
Shareholder votes on pay have been adopted in Britain, Australia and Sweden, and advocates say that, while pay packages are rarely rejected, the votes help to keep executive compensation in check.
The bill is H.R. 1257
AI
