In the first "post-Enron" annual meeting season, shareholders have been sending three loud and clear messages to corporations: Put more independent directors on boards, let shareholders vote on executives’ pay and severance packages, and don’t allow a company’s auditor to do consulting work with the firm.
The potent combination of Enron’s meltdown, accounting and securities analysts scandals, and persistent market doldrums has galvanized unprecedented support for several corporate governance issues at the 2,000 leading public companies where the Investor Responsibility Research Center tracks votes. At the same time, rising concerns over global warming have led to a doubling of support for shareholder resolutions asking companies how they will respond to this pressing environmental issue.
Extraordinary votes for some novel governance proposals
The much publicized "auditor conflict" resolution, which asks companies not to hire the same accounting firm to perform external audit services and non-audit services, has been garnering remarkable support. Union pension funds drafted and submitted this first-time proposal, and the average level of support for 12 resolutions with early vote tallies is an astounding 29.8 percent. The highest vote so far was at PG&E46.5 percent of the votes cast. A similar vote at Walt Disney earlier in the year garnered support from 41.2 percent of the votes cast and prompted several companiesincluding Apple Computer, Bristol-Myers Squibb and Johnson & Johnsonto negotiate with proponents to withdraw their proposals in exchange for the company’s commitment to prohibit or severely restrict consulting by auditors.
In another astonishing result, Mentor Graphics investors approvedby a margin of 57 percenta resolution asking the company to put all stock plans with material dilution to a shareholder vote. "That result may be the highest tally ever for a first-time proposal," says IRRC’s Director of Governance Research Carol Bowie. The gist of the proposal, which was filed by TIAA-CREF in its continuing campaign to compel companies to limit dilution from employee stock plans, is incorporated in new listing rules proposed by the New York Stock Ex-change.
Another governance proposal introduced in 2002 asks for a report on directors’ role in formulating corporate strategy. Union pension funds filed a total of 23 such resolutions, eight of which will come to a vote. Four resolutions that IRRC has tallies for so far received support from an average of 8.5 percent of votes cast, a significant level for a novel proposal. The remaining 15 were withdrawn after negotiation.
Golden parachutes getting thumbs down
CEO pay, especially reports of fat separation packages for disgraced executives, also has attracted shareholders’ ire this year. The most prevalent executive pay-related proposal is aimed at curbing severance, specifically asking companies to allow shareholders to vote on future "golden parachute" agreements with senior executives. Results for the first 13 of a total of 19 proposals being voted on this year show average support of 39.6 percent of the votes cast. That figure is up substantially from an average support of 31.8 percent of the votes cast in 2001, when IRRC tracked a total of 13 golden parachute proposals that came to a vote.
The headline-grabbing vote on this issue occurred at Bank of America, where support from 50.7 percent of the votes cast prompted BOA’s CEO Ken Lewis to publicly commit to act on the proposal. In 2001, an almost identical proposal submitted by the same proponent, the Teamsters, received just 40.7 percent of votes cast. Norfolk Southern shareholders also gave majority support to this proposal, with 55.8 percent of votes favoring it.
Similar proposals submitted by the Amalgamated Bank’s LongView Collective Investment Fund also picked up strong support. LongView says its proposal at Sprint received 50 percent of the votes cast, while one at Citigroup garnered 47.7 percent and another at General Electric received 47 percent of the votes cast.
Director independence and takeover defenses also rile shareholders
In the post-Enron era, shareholders also are throwing substantial support behind proposals asking for more independence on boards. Average voting results for seven proposals asking to increase board independence stands at 29 percent, with a high of 56 percent recorded for the proposal submitted by Walden Asset Management to EMC. In 2001, average support for a total of seven proposals that came to a vote was just 22.5 percent, and the highest support was 31.9 percent (at American International Group).
The majority of shareholders voting on proposals addressing antitakeover devices such as poison pills and classified boards already support these proposals, and their numbers continue to rise. Results for 25 proposals obtained to date that ask companies to repeal their classified boards, for example, average 63 percent of votes cast. That is a significant increase from the average of 52.4 percent for a total of 46 such proposals voted on last year. So far in 2002, the highest level of support for a board declassification proposal was at Airborne, where a Teamsters-sponsored resolution received 84.5 percent of the votes castand all but two of the 25 resolutions received majority support.
Proposals asking companies to redeem their existing poison pills and/or allow shareholder votes on future pills also look to break records this year. Voting results obtained for 38 poison pill proposals show that average support stands at 60.1 percent, compared with an average of 57 percent support for a total of 22 pill proposals that came to a vote last year. The highest vote recorded so far in 2002 was again at Airborne, where a proposal submitted by longtime activist John Chevedden garnered 91.4 percent of votes cast, according to preliminary results. Thirty poison pill proposals have attracted majority support so far.
Social proposals attain new highs
The 2002 proxy season at U.S. companies has been notable for the number of social issues proposals gaining particularly high supportat or exceeding 15 percent of the shares voted. Historically, relatively few social issues proposals have met or cleared this threshold; just 13 to 14 of the 150-plus social issues proposals that came to votes in each of the last two years did. Yet this year, with preliminary or final vote results available for about 100 proposals so far, 17 already have cleared this threshold, and by far larger amounts than high-scoring proposals in past years. "High vote-getters focused on human rights, equal employment and global warming," said IRRC’s Director of Social Issues Research Meg Voorhes.
In an intriguing development, the six proposals this year asking for reports on greenhouse gas emissions obtained an average support level of 18.3 percent, nearly double the 9.3 percent average achieved last year. Two of this year’s greenhouse gas proposalsat Eastman Chemical and American Standardbeat by several percentage points the previous record set for a global warming resolution, back in 1994, when a first-year proposal at Niagara Mohawk Power garnered 19.4 percent. A related proposal this year at ExxonMobil, asking it to develop renewable energy alternatives, earned 20.3 percent support in a highly publicized shareholder campaign.
The second highest social issues vote of the season was the LongView Fund’s second-year proposal at Unocal asking it to support the core conventions of the International Labor Organization. A key concern of the proposal’s supporters is Unocal’s extensive operations in Burma, or Myanmar, a country where forced labor is widely used. The Longview proposal also was one of the top scorers of the 2001 social issues season, with 23.4 percent, but it gained an additional nine percentage points of support this year. One factor may have been a campaign by the UK’s Trade Union Congress to contact over 100 pension funds to solicit their support. A major UK investor, the Cooperative Insurance Society, announced that it was voting its shares in support. In the United States, the proposal had the support of major public pension funds, including CalPERS, the New York State Common Retirement Fund and New York City funds.
Several of the high votes occurred on repeat proposals, but often represented a doubling or more of the support the resolution had received in 2001. The most significant percentage point gain occurred at Household International, where a proposal filed by North Star Asset Management asking the company to link executive pay to measures to prevent predatory lending gained 22 percentage points of support over the previous year. One factor in the increased support may have been that between the 2001 and 2002 annual meetings, Household International became the target of three class-action lawsuits filed by the American Association of Retired People and the Association of Community Organizations for Reform Now, or Acorn, over practices the plaintiffs say constitute predatory lending.
"The highest vote so far this season on a social policy proposal, at Idacorp, was perhaps the most surprising," notes Voorhes, "because it was for a first-year proposal on an issue that hadn’t before come to shareholders’ attention at other companies." The proponent, Trillium Asset Management, won 34 percent support for its re-quest that the company review the relicensing process of its Hells Canyon hydroelectric complex and the likely impact on shareholder value of any remedial capital spending required to secure relicensing. Trillium expressed concern that Idacorp’s ability to secure relicensing for the dam complex would be impaired because the company hadn’t fully undertaken the environmental measures stipulated under the initial license.