Shareholders Flex Muscles

Proxy Measures Pushing Corporate Accountability Gain Support

Activist shareholders have scored resounding successes this proxy season with proposals to make corporate directors more accountable to shareholders, and efforts to tie executive pay more closely to company performance also are gathering steam.

Shareholders at 15 companies approved proposals asking boards to make it easier for future shareholder proposals to pass by removing requirements that they receive more than a simple majority, according to Institutional Shareholder Services Inc., which tracks proxy issues for pension funds and mutual funds. Shareholders also gave majority support to 70 proposals that make it easier to get rid of directors, Rockville-based ISS said.

"There's a new corporate governance paradigm emerging. . . . It's a sign of boards becoming more responsive to shareholders and less captive to the CEO," said Patrick McGurn, ISS executive vice president.

Proposals asking for annual election of directors -- rather than staggered multi-year terms -- won majority support at 38 companies. By the end of this year, more than half of the nation's 500 biggest publicly traded companies will hold annual elections, up from 45 percent two years ago, McGurn said.

Ballot proposals that directors be elected by a majority of shares voted got majority support at 32 companies, and more than 100 other firms have adopted some kind of majority-vote standard without putting the question to shareholders.

About 145 companies in the Standard & Poor's 500-stock index now elect directors by majority vote or require them to tender their resignations if a majority of shareholders withhold their support, said Claudia H. Allen, a Chicago lawyer who studies the issue. Fewer than 30 companies had such policies in place at the start of 2005, and eight more have announced plans to adopt similar standards.

Labor unions and religious groups remain the most active proponents of shareholder resolutions, but they are drawing increasing support from profit-oriented institutional investors such as mutual funds and hedge funds, which argue that good corporate governance leads to better returns.

"We've had more majority votes [in favor of our proposals] than ever in our memory," said Richard Metcalf, director of corporate affairs for the Laborers' International Union of North America. "We've had more companies contact us and engage in meaningful discussions."

On executive compensation issues, relatively few proposals won a majority of votes. Still, even many of those that failed drew support topping 30 or 40 percent, more than the 15 to 20 percent many pay-related proposals attracted in past proxy seasons.

Shareholders at four companies -- J.P. Morgan Chase & Co., Lucent Technologies Inc., Novellus Systems Inc. and Pulte Homes Inc. -- gave majority support to proposals that tied executive pay more closely to corporate performance. Shareholders at seven other companies -- including Morgan Stanley, McDonald's Corp. and the Ryland Group Inc. -- voted for limits on severance pay.

A proposal from the American Federation of State, County and Municipal Employees asking four companies to hold shareholder referendums on chief executive pay won the support of 36 to 43 percent of shareholders.

"This has been the most effective season in the history of our program," said Richard Ferlauto, AFSCME's director of pension and benefit policy. "I thought 15 percent [on the pay referendum issue] would be a good start. Shareholders have really found their voice."