Directors Be Nervous?
Activists are pushing majority-vote rules as a weapon
against unresponsive boards
Business Week, Analysis & Commentary
By Amy Borus,
Thursday, March 6, 2006
Curbs on CEO pay. Checks on board cronyism. Reining in
conflicts of interest. Labor and public pension fund
activists have waged hundreds of proxy battles in recent
years but rarely with much effect on target companies. Now
shareholder activists are attacking the process by which
directors themselves are elected. And there are signs some
boards are listening.
Shareholder resolutions at some 140 companies, from
Hewlett-Packard Inc. to Wells Fargo & Co., would require
directors to garner a majority of votes cast to join the
board. Currently, nominees need to win only a plurality of
votes, although most win a majority anyway because director
elections are usually uncontested. But disgruntled
shareholders rarely vote no, figuring it's a futile
gesture. So activists hope the dynamic will change if a
majority no-vote could actually unseat a director. A
majority-vote standard "would put teeth in board elections,"
says Shirley Westcott, managing director of policy at Proxy
Governance Inc., which advises institutional investors.
Democratizing director elections wouldn't necessarily
revolutionize board politics. Shareholder activists aren't
looking to sweep out whole boards en masse, says Carol
Bowie, director of research at the Investor Responsibility
Research Center Inc. They would be more likely to use
majority voting selectively, to show a disappointing
director the door or as leverage with an unresponsive
board. "The most important benefit won't be the few
instances in which it's exercised. It's the awareness that
shareholders have this power that would make boards more
attentive," says Harvard Law School professor Lucian A.
"EXCESSIVE CEO PAY"
Given widespread frustration with lavish CEO pay, directors
who sit on compensation committees would be especially
vulnerable. Proposals by the Securities & Exchange
Commission to expand disclosure of executive pay will help,
say investor advocates, but they won't get to the root of
the issue. "Excessive CEO pay is a symptom of a board that
lacks accountability to shareholders," says Richard C.
Ferlauto, investment policy director at the American
Federation of State, County & Municipal Employees (AFSCME),
which has filed several majority-vote measures.
One of its prime targets is Denver-based Qwest
Communications International Inc., whose stock price is
down 83% from five years ago. Qwest, without admitting or
denying wrongdoing, paid a $250 million fine in 2004 to
settle securities fraud charges by the SEC but is still
mired in shareholder suits. AFSCME thinks the board has
been too generous to the new CEO, Richard C. Notebaert, who
last year got a grant of one million shares and an increase
in his bonus from 150% to 200% of base salary. A Qwest
spokesman says the company hasn't yet taken a position on
Business groups are wary of changing the current system.
The U.S. Chamber of Commerce opposes majority voting, which
it perceives as the agenda of "activists who want to have
some degree of leverage over companies for political or
other goals," says Chamber Vice-President David Chavern.
The Business Roundtable, an association of big-company CEOs,
isn't fighting the change, although it worries about board
elections turning into political campaigns or destabilizing
companies, says Thomas J. Lehner, the Roundtable's public
Still, more than 30, including Dell Inc. and Supervalu Inc.,
have adopted majority voting this year after heat from
shareholder groups. The campaign also has support from
groups such as Institutional Shareholder Services Inc. Its
proxy recommendations typically swing about 20% of investor
votes, says ISS Executive Vice-President Patrick McGurn.
The result: Directors could wind up in the spotlight more
than many may like