Shareholders Flex Muscles

Shareholders at a couple of companies also unleashed their outrage at directors over huge compensation packages. At Home Depot Inc.'s annual meeting, which the board did not attend, at least 30 percent of shareholders withheld their votes from 10 of the 11 directors. The exception was a new member of the board. Shareholders were protesting premium pay for chief executive Robert L. Nardelli while the company's stock languished. Pfizer Inc. shareholders withheld up to 22 percent of their votes from directors to protest a $83 million retirement package for chief executive Hank McKinnell.

While most shareholder resolutions are nonbinding, a study by the Council of Institutional Investors suggests boards are taking them more seriously. The study found that 61 of the 97 companies -- 63 percent -- whose shareholder proposals received a majority vote in 2005 had done something along the lines of what was requested, up from 28 percent the previous year.

"Directors are starting to sit up and take notice," said Theodore L. Dysart, who heads the boards of directors practice for the executive search firm Heidrick & Struggles. He attributes the change to the Sarbanes-Oxley corporate accountability law passed in 2002 in the wake of several financial scandals. "Boards always had this responsibility . . . but now they take it much more seriously."

The growing importance of shareholder votes has sparked concern about the voting process.

Under current New York Stock Exchange rules, brokers may vote shares they hold for their customers on "routine" matters -- including the election of directors -- if the customer fails to vote. But that tradition has come under criticism. The NYSE's enforcement arm has fined four major Wall Street firms, three of them this week, for failing to keep proper track of shares in their custody and in some cases voting more shares than they were entitled to. One of the firms, UBS Securities LLC, "over-voted in numerous instances" in part because it voted shares that it had out on loan, which is illegal, the NYSE alleged.

"Shareholder voting even on routine matters is one of the principles that goes along with stock ownership," NYSE enforcement chief Susan L. Merrill said in an interview. "We are concerned that firms are putting shareholders at risk of having their votes thrown out."

Separately, an NYSE committee led by California lawyer Larry Sonsini has been examining whether brokers should even be voting their clients' shares -- estimated at 10 to 20 percent of the total, depending on the company -- in director elections. Brokers currently do not vote their clients' shares on bottom-line issues such as mergers and acquisitions, and Sonsini said his committee now believes the vote on directors should fall into that category.

"The whole elevation of corporate governance in this country has been a very sound movement, and a lot of the focus has been on the boardroom," Sonsini said. "To classify the election of directors as routine really is inconsistent with that."

If approved by the NYSE board and the Securities and Exchange Commission, the policy change would give additional momentum to shareholder activists because brokers have traditionally voted with management.