New Breed of Directors Reaches Out to Shareholders
Treading a Fine Line Between Apologist, Sympathetic Ear
By Joann S. Lublin
The Wall Street Journal
Monday, July 21, 2008

Bonnie G. Hill, the longest-serving director at Home Depot Inc., has a new role: "heat shield" against dissatisfied investors.

She and other outside directors were criticized for skipping the retailer's 2006 annual meeting amid shareholder complaints about the pay and performance of then-Chief Executive Robert Nardelli. Mr. Nardelli's January 2007 departure didn't quell the unrest.

Enter Ms. Hill, then chairman of the board's compensation committee. She met with dozens of investors, easing their anger by persuading fellow directors to tie the pay of Frank Blake, Mr. Nardelli's successor, more closely to Home Depot's performance. But she has also fought activists who want an annual vote on executives' pay.

In May, fellow board members named Ms. Hill their lead director, a powerful post she says she will use to widen her involvement with shareholders.

Ms. Hill epitomizes an emerging breed of directors who reach out to shareholders. Independent board members at Pfizer Inc., Hewlett-Packard Co. and UnitedHealth Group Inc., among others, perform similar roles; each of those companies also endured recent shareholder unrest. These directors must tread a fine line between sympathetic listener and management apologist, while taking care not to violate U.S. rules against selective disclosure.

They "offer investors an important channel for airing their grievances about corporate governance and executive pay," deterring confrontations, says Linda E. Rappaport, a partner at New York law firm Shearman & Sterling and corporate board adviser.

Until recently, outside directors rarely met with shareholders, and bans on such meetings persist at some small and midsize companies.

Many executives still think increased dialogue is a bad idea. Board members "run the risk of having discussions that undermine the CEO," cautions Harry M. Jansen Kraemer Jr., a former CEO of Baxter International Inc. who is a director at two other companies.

That view, however, is fading amid intensified shareholder activism and a shifting governance landscape. Most big businesses now require directors to be elected by a majority of shareholders, giving board members incentive to court investor goodwill.

H-P directors Lawrence Babbio and Lucille S. Salhany have met three times with investors to discuss board nominees and executive pay since H-P shareholders rejected a 2007 resolution that would have offered certain investors more clout in choosing directors. Investors didn't resubmit the measure this year.

At Northrop Grumman Corp., compensation committee chairman Lewis Coleman called investors who wanted the company to disclose fees paid to the board's compensation consultant and limit that adviser's possible conflicts of interest. Mr. Coleman agreed to insert a sentence in Northrop's latest proxy stating that the outside consultant won't also work for management. The investors dropped plans for a shareholder resolution.

Ms. Hill, a 66-year-old marketing consultant, previously worked for the Los Angeles Times and a Kaiser Aluminum Corp. unit as well as the California and U.S. governments. She also holds board seats at Yum Brands Inc., AK Steel Holding Corp. and California Water Service Group, but says she hasn't reached out to their investors.

Home Depot board colleagues and investor activists describe her as a deft diplomat during tense negotiations. Patting her plentiful gray hair during an interview, she says, "I earned every one of them."

Ms. Hill adopted her new role following Home Depot's much-criticized 2006 shareholder meeting, when she received a blistering letter from Richard Trumka, an AFL-CIO leader, asking her to tie executive pay more closely to company performance, among other things.

She won permission from executives and directors to confer with dissatisfied investors. At the AFL-CIO's Washington headquarters, she promised that the board "would take a hard look" at Mr. Nardelli's contract, recalls Dan Pedrotty, head of its Office of Investment.

She convinced the board to disband its executive committee, which can crimp board involvement in decision-making when that panel wields too much power.

In March 2007, union pension-fund activists organized a conference call with Ms. Hill to voice complaints about lead director Kenneth Langone, a co-founder who helped craft Mr. Nardelli's generous pay package. That May, Mr. Langone and three other directors met with those activists and proposed a larger "town hall" to air investor concerns.

During the town hall, held last September, Ms. Hill, Mr. Langone and two board colleagues fielded questions from roughly 40 shareholders about everything from their lack of a separate board chairman to their housing-downturn strategy.

Mr. Blake, who didn't attend the meeting, says he sees "real value" in Ms. Hill holding regular town halls. She says the full board must decide their frequency.

Ms. Hill occasionally rebuffs investor demands, such as an annual advisory vote on top officers' compensation. Activists submitted so-called say-on-pay resolutions at more than 90 U.S. companies this year, including Home Depot, up from 73 in 2007.

Ms. Hill criticized say-on-pay at three conferences before Home Depot's annual meeting in May. "I don't believe that a straight up or down vote on compensation without any details makes good sense," particularly when investors can talk with directors, she says.

Support for the resolution at Home Depot slipped this year, to about 42% of votes cast, from about 43% last year. Ms. Hill thinks that is partly because shareholders now have more of a voice electing directors. "If you don't like the job I'm doing," she notes, "you vote me out."

Write to Joann S. Lublin at joann.lublin@wsj.com

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