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Corporate Governance:  New Respect for an Old Ritual
Maybe the annual meeting isn't so pointless, after all
By Karen Blumenthal
The Wall Street Journal
Monday, October 9, 2006

The lowly annual meeting got a big boost this year from the Home Depot Inc. board of directors.

Not that the directors meant to do any such thing.  But at the company's annual gathering in May, Bob Nardelli, chairman and chief executive, was the only director to show up.  Shareholders and corporate-governance watchdogs were outraged.

It was also the best thing to happen to annual meetings in years.

The snub shed new light on an old tradition.  Yes, many agree, the annual meeting can be terribly boring.  Yes, the speeches are often long-winded and overly upbeat.  Yes, some shareholders ask pointless questions.

But the disappearing act of nearly all the Home Depot directors drove home the significance of the once-a-year affair.  In an age where corporate governance is a front-and-center issue, the meetings represent true shareholder democracy, the one opportunity a year where all shareholders can see management face to face and ask questions.  If nothing else, they say, these gatherings should be protected.  In fact, they might even be worth improving.

On Second Thought

Consider the views of Richard H. Koppes.  A dozen years ago, when he was general counsel of the California Public Employees' Retirement System, Mr. Koppes and a former Securities and Exchange Commission commissioner co-authored an article calling for most annual meetings to be abolished.

The gatherings had become "a monumental waste of time and money" and "an empty ritual," the authors argued.  Most shareholders couldn't attend, executives almost never said anything new and the biggest shareholders didn't come because they could get an audience with management by themselves.  Small shareholders, they wrote, could have their questions answered by investor-relations departments.  They saw a need for meetings only when a company faced a crucial decision, like a merger.  Then, they proposed, some small percentage of shareholders should be able to require a meeting.

But today, Mr. Koppes feels differently.  "I would not get rid of annual meetings," he says.  "There's a lot to be said for having the CEO and the directors present and facing the shareholders once a year."

What changed his mind?  "Seeing how much corporations hate these events and would like to duck them," he says, and "the Home Depot disaster."

It's hard to imagine that top managers ever relished the shareholder meeting, which dates back to the beginning of the corporation in the 17th century.  Then, British courts ruled, an owner's vote was such a precious responsibility that shareholders were obligated to attend their regular gatherings.  That practice carried over to the U.S., where shareholders routinely challenged management and sometimes executive pay, and elections of directors were contested.  States began to allow voting by proxy in the late 1800s as the number of shareholders boomed and management began to get the upper hand over owners.  For a time, meetings were far less eventful.

The End of Time

After the 1929 stock-market crash, though, shareholders began to ask more questions again, and the first gadflies began to show up regularly at the annual affairs.  Meetings could be raucous.  In 1949, Irving Olds, chairman of U.S. Steel, used his gavel so emphatically to regain order that he hammered his own watch into oblivion.  During the late 1960s and early 1970s, protestors saw annual meetings as a forum for highlighting a company's role in the Vietnam War.  Today, at any given meeting for a decent-size company, shareholders might encounter any of those groups -- environmental activists, professional gadflies, mutual funds with a social mission and small shareholders with offbeat questions.

Companies are required to hold the meetings, but the format is up to the executives.  Some meetings are quick and routine, and over in half an hour.  Others are almost entertainment events.  Wal-Mart Stores Inc. takes over an arena at the University of Arkansas in Fayetteville to hold its roughly 15,000 attendees, and often brings in celebrities.  Starbucks Corp. spends nearly two hours entertaining roughly 5,000 people with videos, speeches and music performances.  By the time the question-and-answer session comes up, many shareholders have gone.  This year, the shareholders quizzed the company's management for exactly 11 minutes.

No wonder, then, that some executives are cynical that anything productive can come out of the events.  "They're all Kabuki plays," says Robert L. Crandall, the former AMR Corp. chairman and chief executive who now is a director of several companies, including Halliburton Co., referring to the highly ritualized Japanese performances.  "I've never been to an annual meeting where I thought there was a substantial exchange of information."

But Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County and Municipal Employees, says his statements and questions sometimes get the attention of key directors and lead to better negotiations.  A few years ago, he protested executive compensation at the annual meeting of a retailer.  The CEO wasn't receptive, but the chairman of the board's compensation committee approached him afterward.  That meeting led to later discussions and some agreement between the company and the union, Mr. Ferlauto says.

At the Home Depot meeting in May, Mr. Ferlauto put Mr. Nardelli on the spot.  The company already had put off shareholders by moving its once-popular meeting to Wilmington, Del., a day's drive from its Atlanta headquarters, and Mr. Nardelli and the board were under fire for Mr. Nardelli's rich compensation package.  The company skipped a business overview and the traditional question-and-answer session, and Mr. Nardelli didn't answer questions about his pay.  In a brief "comment" period during the 30-minute meeting, Mr. Ferlauto asked Mr. Nardelli whether other directors were in attendance and would be introduced.

When Mr. Nardelli said they weren't there, Mr. Ferlauto accused the board of being "too chicken to face shareholders."

Home Depot isn't the only company where directors don't show.  But with Home Depot's pay issues already in the news, the directors' absence made the company a poster child for poor corporate governance.  The day after the May 25 meeting, the company apologized, sort of, saying in an emailed statement that it didn't mean to offend any shareholders or show disrespect for them by trying a different approach.  In a news release a few days later, it promised that directors would return to future meetings, and it would go back to its traditional format, including a business overview and a chance for shareholders to ask questions.

Suggestions for Improvement

Other than requiring directors to show up, how else can companies improve the annual meeting?  Here are recommendations from a cross-section of executives, directors, activists and other investors:

 Welcome the little guy.
 
So what if the small shareholders who come can't influence the election?  So what if they're mostly retirees with a little extra time on their hands?  They still have an investment in your company.  Among other things, that means holding the meeting in an accessible place.

Dick Kovacevich, chairman and chief executive of Wells Fargo & Co., says his banking company has a goal to increase its percentage of small investors.  "They're more loyal, and they don't generally operate as a herd," he says.  Making sure their questions are welcome at the meeting also means accepting the activists as well.  "It's not a lot of fun, but it's part of the democratic process," he says.

 Let the directors mingle -- and even speak sometimes.
 
Both directors and shareholders say they have had worthwhile conversations in the lobby before and after the meeting, exchanging ideas and information.  Directors don't have to present reports, but shareholders who ask executive-pay questions should be able to hear from the compensation-committee chairperson, and they should be able to ask questions of individual directors.  "I don't think it's unrealistic for the chairman of the compensation committee to be willing to defend the work the committee has done," says Beth Young, senior research associate at Corporate Library, an investor advocate and research group in Portland, Maine.

The Catholic Equity Fund this year went a step further, proposing that shareholders at several companies, including Cendant Corp. and Exxon Mobil Corp., vote on directors' pay as well as electing directors.  The proposals fell far short of passing, but the fund may try again next year.  When management helps determine how much the directors make, "how many people are going to stand up to the CEO?" says Daniel J. Steininger, chairman of the fund, in Milwaukee.  "If shareholders could vote on directors' pay, I think directors would feel more accountable to shareholders."

 Offer a question-and-answer session and give people a reasonable amount of time to speak.
 
Both management and shareholders roll their eyes at shareholders who try to take over a meeting with endless questions or polemics, but even that's better than no questions at all.  Shareholders should have three or five minutes to make their points, even if the subjects lack gravitas.  The Exxon Mobil meeting, once an antagonistic affair, was much smoother this year under new Chairman and CEO Rex Tillerson, who let shareholders query him at length.  The meeting also ran just over three hours.

The sessions "should be viewed as a time and event at which governance issues and questions can be raised and discussed openly and directly," says John C. Wilcox, senior vice president and head of corporate governance for TIAA-CREF, a financial-services firm with $380 billion in assets under management.

Still, a routine, boring meeting isn't a bad thing.  It may mean the company is running smoothly and shareholders aren't angry or worried about the company.  Says Ms. Young, "Just because people don't use something frequently doesn't mean it's not valuable."

--Ms. Blumenthal, senior editor of The Journal Report, is based in Dallas. Part of this was adapted from "Grande Expectations: A Year in the Life of Starbucks' Stock," to be published in April 2007.

Write to Karen Blumenthal at karen.blumenthal@wsj.com

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