Shareholders Spurn Execs in Proxy Votes

Angered by two years of bear market losses in stocks and a surge in corporate scandals, investors are voting in favor of shareholder-sponsored resolutions at a record pace this year.

The nonbinding resolutions, which give shareholders a chance to sound off on such issues as stock option plans, executive severance packages and the separation of auditing and consulting contracts, have gotten a majority of votes cast in 39% of this year’s elections at annual meetings, according to a proxy advisory service that tracks the measures.

Though this year’s tally isn’t complete, the results so far exceed the previous record 25% approval rate of two years ago.

The voting suggests a significant shift in the relationship between big investors and corporate managers. Many investors in the past have been reluctant to buck corporate management when it comes to proxy voting. Unhappy investors said they were more likely to sell their shares than lodge a protest vote.

But in the post-Enron Corp. era, more investors appear eager to send a message to managers about undesirable practices.

The vote survey by the Investor Responsibility Research Center in Washington covers resolutions related to corporate governance issues at 2,000 of the largest U.S. companies but excludes those focusing on so-called social issues such as sweatshop wages, which can generate strong debate but almost never get a majority vote of shareowners.

The IRRC so far has tallied results of 122 resolutions, of which 48 have gotten a majority of votes cast. In nearly all of the cases, management asked shareholders to vote no on the measures.

The group still is gathering data or awaiting votes on 161 other resolutions. Most shareholder votes are taken at companies’ springtime annual meetings.

Consultants and activist shareholders say the biggest surprise has been the success of first-time resolutions, such as one sponsored by pension giant TIAA-CREF that urged software maker Mentor Graphics Corp. to require shareholder approval of future employee stock option plans. Historically, resolutions have needed years of repeated campaigning to gain traction with shareholders.

Mentor stock owners approved the measure with 57% of the vote.

Resolutions calling for annual, rather than staggered, elections of directors and measures opposing anti-takeover plans known as “poison pills” have been popular with shareholders for several years. But this year, resolutions covering topics such as auditor independence and executive “golden parachutes” also have met with success.

“This year is shaping up to be quite extraordinary,” said Ann Yerger, research director at the Council of Institutional Investors, a Washington group that represents large pension funds.

“The trend for several years has been that an increasing number of resolutions are passing, but this season is unusual in that a number of victories have come in less-traditional provinces,” Yerger said.

“No one would have predicted that a golden-parachute proposal at Bank of America Corp. would be successful, for example, or that a pay-related proposal would get a majority vote at UAL Corp., which is predominantly owned by its employees,” she said. “The Mentor Graphics vote was remarkable for a first-ever proposal.”

At BofA, a majority of investors requested that management support limiting exit pay to double an executive’s annual salary, and UAL investors voted to urge the company to separate the chairman and chief executive positions, to link executive pay with rebuilding the downsized airline and to require shareholder approval of future acquisitions.

Many big investors such as mutual funds and pension funds view staggered boards and poison pills as protecting entrenched board members and corporate management at the expense of most shareholders.

In addition to resolutions on poison pills and staggered boards, the most common proposals this year have sought to increase board or board-committee independence and to bar auditors from also doing consulting work for the firm, said Carol Bowie, director of governance research at the IRRC.

Much of this year’s discontent can be attributed to the stock market downturn that began in spring 2000, activists said.

“Activism by dissident shareholders becomes proportionally easier the deeper the bear market,” said Robert Chapman, who runs the activist hedge fund Chap-Cap Partners in Los Angeles. “In a bull market, you could have Mr. Magoo as CEO supported by the Seven Dwarfs as directors, and the shareholders would back them. But in a bear market, everybody is looking for a savior, and that’s where the activist comes in.”

Corporate arrogance and scandal symbolized by the fall of energy trader Enron also have been key factors in rousing shareholders, activists said.

“Money managers are being much more careful” in voting, said Damon Silvers, associate general counsel at the AFL-CIO. “Enron and some of the other disasters have created a well of skepticism about corporate management.”

Though proxy votes are almost always nonbinding and usually “less than a handful” are followed by management, according to Yerger, several big companies have taken steps this year to address shareholder concerns--in some cases preemptively rendering resolutions moot.

Walt Disney Co., Motorola Inc. and Bristol-Myers Squibb Co. took steps this spring to bar their auditors from also performing consulting work, an overlapping practice that critics say creates a conflict of interest.

Also, Mattel Inc., still smarting from criticism of former CEO Jill Barad’s $50-million send-off in early 2000, revised its policy on exit packages, promising to consider the effect of such deals on worker morale.

Despite the victories, activists still are meeting with mixed results in pushing for corporate change.

At computer maker Gateway Inc., a proposal by the California Public Employees’ Retirement System for annual elections of directors was rejected.

At data storage leader EMC Corp., investors backed a proposal calling for a more independent board but spurned one calling for more ethnic and gender diversity among its directors.

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Times wire services were used in compiling this report.