Shareholder Strength

Shareholders are making themselves heard on the issue of executive compensation, and the battle looks like it will continue.

Wednesday, May 3, 2006
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The issue of "excessive" executive compensation is not new (indeed, a decade ago a shareholder revolt on the same issue sent the company's CEO packing). But the issue is on the front burner again at many large firms, and top executives are getting an earful from angry investors.

* At the annual meeting for pharmaceutical giant Pfizer, shareholders had hard questions for CEO Henry McKinnell, after learning he'd received a 72 percent pay increase, despite a stock-price drop of 44 percent since 2001.

* An expected merger with BellSouth, and the resulting increase in stock value, has not cooled the anger of some AT&T investor groups, whose members are still pushing for elections on new board directors.

* CitiGroup shareholders staged a parliamentary maneuver at the company's most recent meeting, removing the "supermajority" provision from the company bylaws, making it easier for shareholders to force changes in the way the company is run.

* Several members of UnitedHealth Group's management team are facing tough questions from shareholders about the timing of stock-option awards they received.

* Shareholders at Morgan Stanley's annual meeting mustered enough votes to pass a resolution asking management to consult with shareholders regarding "golden parachutes," where departing executives may reap huge rewards, regardless of the nature of their departure.

* Although all of General Electric's directors were re-elected at the company's most recent annual meeting, it wasn't easy: Chairman and CEO Jeffrey Immelt had to deal with six different hostile shareholder resolutions.

* At Merrill Lynch, where CEO Stanley Lynch's $32.1 million pay package was just one of the issues under discussion, two shareholder proposals seeking more transparency in the pay and perks of executives and directors were narrowly defeated.

Meanwhile, Exxon-Mobil has been busy in recent weeks defending a $400 million farewell to departing Chairman Lee Raymond, and institutional investors recently questioned the pay packages of top executives at The New York Times.

Robert McCormick, vice president for proxy research and operations at Glass, Lewis & Co., a San Francisco-based investment research and proxy advisory firm, says shareholder revolts have caused some companies to reform their executive-compensation policies. It's "still a perennial issue," but, he adds, such cases are the exception, not the rule.

"Overall, the proposals have gotten more reasonable," he says. "More companies understand there should be no increases in pay for executives during layoffs, and that golden parachutes should be put before the shareholders for approval. Hidden packages are getting rarer."

Transparency is Key

"We still aren't seeing proposals that would transparently align clear business goals with compensation," says Julie Gozan, director of corporate governance for New York-based Amalgamated Bank, "or, if we are seeing them, we're not seeing these measures pass."

Gozan says one area in which progress has been made is that of the excessive "golden parachute."

"We are seeing some success there, but the issue of executive compensation continues to be the lightning rod, and compensation levels continue to skyrocket. We have not seen a leveling off. I'm hopeful that, with the level of scrutiny as high as it is, more companies will begin to see the value in creating clear, transparent alignment between pay and performance."

"Now is actually a pivotal moment," says Brandon Rees, assistant director of the AFL-CIO's Office of Investment in Washington. "Some things have started to change, but there are further reforms that are needed."

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Rees notes the Securities and Exchange Commission is proposing new regulations to update the current compensation-reporting rules?changes he says reflect the effort unions and other activists have been seeking for some time. "We've been trying to get companies to disclose the actual performance targets that have been set; rather than offer the broad, boilerplate niceties that companies generally use."

Rees says while there has been little change in the size of executive-compensation packages, there have been alterations in the form such compensation takes. "The use of stock options has decreased, and that's a good thing. [Options] can reward share-price volatility, and encourage a short focus and excessive risk-taking."

Instead, Rees says, activists have been pushing for "performance-vesting shares" that are awarded for narrowly defined accomplishments. "The hope is that this will encourage executives to continue to hold those shares for the long term."


And there other changes he'd like to see: "We need to change the way directors are elected," he says. "Shareholders have to be able to trust the board and know they are independent."

Rees advises HR executives who've been asked by the board for their input on compensation matters to "make clear to the directors how much attention these issues are getting, and to develop a way to get honest input from major stakeholders."

Gozan agrees: "A board will buy itself a lot of good will with moves such as these," she says. "And they just might hear some good ideas. Institutional shareholders have a lot of expertise to bring to the table."

According to McCormick, that message is being heard. "Tie increases to specific performance measurements," he says. "Then blow away the targets and you won't hear a peep."

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