Shareholders angry about executive pay are targeting the people
By Kaja Whitehouse
The Wall Street Journal
Monday, April 9, 2007
Shareholders irked with executive pay are increasingly taking it
out on directors.
The method is simple: If they disagree with an aspect of an
executive's compensation and feel their complaints aren't being
heard, they "withhold" their votes to re-elect the board members
responsible for doling out the pay package.
Because withhold votes are generally nonbinding and thus carry
no real power, the effectiveness of the tactic varies by
company. But a recent study shows greater rates of executive
turnover at companies where boards were targeted by such
campaigns, and some firms -- including Home Depot Inc., Ryland
Group Inc. and UnitedHealth Group Inc. -- changed their pay
practices after certain board members suffered sizable withhold
votes last year.
While the companies generally say their boards make changes for
a variety of reasons -- not just because of withhold votes --
people with access to boardrooms say the tactic is having an
"Shareholder pressures are making it into the boardroom," says
Ira Kay, global director of compensation consulting for Watson
Wyatt Worldwide Inc. in New York. "They are changing the
dialogue and changing the answers, and withhold votes are a big
part of that."
Embarrassing directors into paying attention has been the main
reason for waging no-vote campaigns. "Directors are highly
sensitive to public criticism," says Joseph Grundfest, a
professor of law and business at Stanford Law School and a
former Securities and Exchange Commission commissioner, who in a
1990 speech urged institutional shareholders to "Just Vote No."
At that time, companies were just being required to disclose
voting tallies. "It was obvious to me then, and remains obvious
to me now, that a large number of directors don't do it for the
money," says Mr. Grundfest, who also is codirector of the Rock
Center for Corporate Governance at Stanford and a former Oracle
Withhold votes are especially effective when drummed up as part
of a campaign organized by a specific shareholder or group of
A study conducted by Diane Del Guercio, a business professor at
the University of Oregon, and colleagues at the University of
Tennessee found that about a quarter of companies targeted by
withhold campaigns forced out their CEOs in the 12 months
following the campaign, compared with 8.4% of companies with
comparable performances that weren't targeted by withhold
votes. The study was published last year.
Consider the case of home-improvement retailer Home Depot, where
shareholders last May waged one of the most closely watched
no-vote campaigns in recent years. Shareholders were unhappy
with payments made to Chief Executive Robert Nardelli, including
guaranteed bonuses and the forgiveness of a $10 million loan.
One large pension fund sent letters urging investors to withhold
their votes for directors on the compensation committee. Union
funds organized protests at the annual meeting. Ultimately,
shareholders withheld at least 30% of votes cast from 10 of the
11 directors up for re-election, including Mr. Nardelli.
The pressure didn't stop there. In late June, the director of
the compensation committee, Bonnie G. Hill, received a letter
from the AFL-CIO, urging her, among other things, to request the
resignation of one of her fellow directors because of the pay
brouhaha, which also involved revelations of backdated stock
By September, Ms. Hill announced that the board was discussing
major changes to its executive-compensation programs. In
January, Mr. Nardelli was replaced by Vice Chairman and
Executive Vice President Frank Blake.
Ms. Hill and other Home Depot officials declined to be
interviewed about whether the no-vote campaign played a role in
the board's actions. In an e-mailed statement, the Atlanta
company said: "During proxy season, 'withhold vote' campaigns
are one way that shareholders sometimes choose to express
themselves in a broad way about particular issues. Members of
the board and company management meet with shareholders
throughout the year and are actively engaged in discussions on a
wide range of issues."
But people close to the situation say the withhold votes, and
the threat of more this proxy season, played a role in the
changes at Home Depot. Mr. Nardelli was fighting the board's
effort to revise his compensation, says Daniel Pedrotty,
director of the AFL-CIO's Office of Investments. "Things came
to a head, and the board basically said it's him or us," Mr.
Directors have received withhold votes of as much as 20% to 30%
even without an organized campaign because institutional
shareholders often follow in-house policies or
proxy-advisory-firm formulas that call for withhold votes when a
pay package meets certain criteria -- for example, it exceeds
the compensation awarded to executives at peer companies that
have performed better.
This type of withhold vote can be less effective than an
organized effort because there are no leaders pushing
shareholders to keep up pressure on the board, governance
experts say. ExpressJet Holdings Inc., a jet-charter company in
Houston, maintained its compensation practices last year despite
a withhold vote by shareholders protesting an increase in stock
compensation for CEO James B. Ream to $229,150 from $126,600 the
year before. The board felt the votes were misguided because
the increase in stock-based pay followed reductions in Mr.
Ream's cash compensation made for competitive reasons. But
there was no lead shareholder with whom the company could
present its case, general counsel Scott R. Peterson says.
He adds that company officials also didn't pursue negotiations
with investors because they knew that the targeted director,
compensation committee chairwoman Janet M. Clarke, would be
re-elected, and figured the one-time payment wouldn't spark
another protest vote this year.
Several ExpressJet shareholders say they won't know how they
will vote this year until the company mails its proxy
materials. Institutional Shareholder Services, which advised
shareholders to withhold votes from Ms. Clarke last year, also
is waiting for the proxy to make its recommendation.
Some companies are starting to give withhold votes teeth by
adopting "majority voting" policies that require directors up
for re-election to garner a majority of votes cast. Those that
(who) don't must either step down or submit their resignation to
the board, which can decide whether to accept it.
At the start of February, 52% of companies in the Standard &
Poor's 500-stock index had adopted majority voting, up from 16%
a year earlier, according to a report from Claudia Allen,
chairwoman of the corporate-governance practice with law firm
Neal, Gerber & Eisenberg LLP in Chicago.
The average percentage of withhold votes -- which rose to almost
15% in 2000-03 from about 6% in the 1990s, according to Ms. Del
Guercio -- could go higher next year when rules kick in
prohibiting brokerage firms from voting in director elections on
behalf of clients unless they receive specific instructions on
how to vote. Currently, brokerage firms can vote for clients on
certain issues, and they tend to automatically cast their votes
"The repercussions of not being in tune with shareholders' views
could be more serious as majority voting plays into this," says
Peter Gleason, chief operating officer at the National
Association of Corporate Directors, a nonprofit group in
In mid-February, Jennifer O'Dell drafted a letter to Toll
Brothers Inc. shareholders, urging them to withhold votes for
Carl B. Marbach, chairman of the board's compensation
committee. Chief Executive Robert I. Toll pocketed $29 million
in fiscal 2006 at a time when the home builder's performance was
lagging, Ms. O'Dell's letter said. She is a representative of
construction workers' union Laborers' International, which owns
70,000 Toll Brothers shares.
At the March 14 annual meeting, company officials said investors
withheld 25% of votes cast for the re-election of Mr. Marbach,
according to Ms. O'Dell, who was present at the gathering. Mr.
Marbach and other company officials declined to comment or
confirm the numbers.
Toll Brothers doesn't have a majority-voting policy, but Ms.
O'Dell hailed the vote as a victory anyway. "We think we got
the company's attention," she says.
--Ms. Whitehouse is a reporter for Dow Jones Newswires in
Jersey City, N.J.
Write to Kaja Whitehouse at