AFL-CIO Goes After 6 Verizon Directors
Friday, April 20, 2007
NEW YORK, April 19 -- The AFL-CIO has launched a campaign to unseat six members of Verizon Communications' compensation committee, saying they rewarded chief executive Ivan G. Seidenberg with generous pay even as the company's stock languished.
The push to organize a "no" vote at Verizon's annual meeting May 3 is among the first efforts by activist shareholders to unseat board members this year, and corporate governance experts say it is a test case for how much influence shareholders could wield in determining the composition of boards of directors at public companies.
This year, more board members than ever before could be vulnerable, not just because of public pressure over executive pay but also because shareholders have pushed companies to change how directors are elected. It is also the first year companies are disclosing more information on how they compensate top executives under new securities regulations.
"Directors are for the first time in memory having to earn their place on the boards -- it's not just a gift," said Stephen M. Davis, a fellow at Yale University's center for corporate governance. "There's a potential for ouster."
Verizon spokesman Peter Thonis said Thursday that the company had responded to "the desire of our shareholders last year and adopted a majority vote standard which is in our bylaws."
"This year, we have every expectation that all of our directors will receive an overwhelming majority of shareholder votes," Thonis said.
A major proxy advisory firm recommended Thursday that the shareholders support all nominees to the board.
The Verizon vote comes just weeks after shareholders of Toll Brothers registered their dissatisfaction by withholding votes for the director who chairs its compensation committee. The luxury-home builder has yet to release vote tallies, but the Laborers' International Union of North America, which led the protest, said a quarter of shareholders withheld support.
Activist shareholders are also about to launch a campaign against several directors of CVS/Caremark, according to sources in the corporate governance community who spoke on the condition of anonymity because the effort will not be made public until next week. The targets, the sources said, are some of the former members of the Caremark board. CVS and Caremark merged last month and the board of the combined company is comprised of designees from the two companies.
Caremark disclosed last year that it was under investigation for possible backdating of stock options; the company later said the options were granted properly. Caremark also came under shareholder criticism for not considering a higher offer by a rival bidder.
One reason the vote at Verizon is being watched closely is that the company is among those to agree that their directors will be elected by a majority vote of shareholders, replacing a plurality system long used by most U.S. companies.
In plurality elections, shareholders can only withhold votes from directors, not vote against them. In theory, a management-anointed nominee could win a seat even if she or he received just one vote.
Activist shareholders in 2004 began filing proposals to require companies to implement majority voting, which quickly won support from investors. As of February, 28 percent of companies in the Standard & Poor's 500-stock index had adopted majority voting in director elections; 25 percent have changed rules to require directors to offer their resignations if a majority of votes are withheld, according to Claudia H. Allen, a partner at Neal Gerber & Eisenberg in Chicago who studies majority voting.
The effort by the AFL-CIO to remove directors, however, was dealt a blow Thursday when a major proxy advisory firm recommended that Verizon shareholders support all nominees to the board.
Institutional Shareholder Services of Rockville said Verizon should "provide a more comprehensive framework around the design of the short-term and long-term incentive programs," but that voting against directors is not "warranted at this time." ISS also said that Verizon's total shareholder returns outperformed the S&P 500 over a three-year period and that Seidenberg's $21 million pay package for 2006 was not "excessively out of line with the peer companies."
One of the AFL-CIO's chief complaints is that the company's stock performance has lagged over five years even as its chief executive took home millions of dollars. Verizon, in an e-mail to employees last week, disputed the AFL-CIO's claims that Seidenberg is overpaid and that the company's performance has been inadequate.
Yesterday, the AFL-CIO wrote a letter to the Securities and Exchange Commission, requesting that it investigate whether the e-mail was meant to sway shareholder employees and therefore should have been filed with the agency. Thonis said it was not a solicitation for votes. An official with the AFL-CIO said union-sponsored pension funds hold about $283 million worth of Verizon shares. The company has a market capitalization of $109 billion.
In addition to the campaign against the directors, Verizon faces a resolution from shareholders who want to be allowed to cast nonbinding votes on its corporate pay practices. That measure is being pursued at dozens of companies this year and is the subject of a House vote today.