Trouble at the Top-Shareholder Rights
Friday, March 21, 2008PAUL KANGAS: The shareholder rights movement has been building strength for the past several years. And now, shareholder activists are going beyond proxy fights at individual firms, with their sights set on making major reforms in the American system of corporate governance. Correspondent Stephanie Dhue reports on the progress they've made so far and what items are next on their list of priorities.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The collapse of Enron in late 2001 raised questions about that company's board and why the directors didn't act sooner. It also galvanized shareholder activists to fight for a greater say about who is elected to corporate boards. Congress responded by passing the Sarbanes-Oxley law, requiring public companies have more independent directors. But lately shareholder activists have been less successful in efforts to gain access to the corporate proxy. Last August, the Securities and Exchange Commission refused to require companies to send shareholders information on non-company board nominees. That makes it expensive for board challengers to get elected. In the meantime, shareholder activist Nell Minow says investors are not standing still.
NELL MINOW, CO-FOUNDER, THE CORPORATE LIBRARY: There's a new category of proposal that is another sort of end-run around that proxy access issue and that is called reimbursement. And what that means is, instead of saying you have to put my candidates on the company's proxy, access to the company's proxy, they say, OK, I'll run my own proxy; I'll pay for everything, but if I'm successful, you have to pay me back.
DHUE: John Castellani heads the Business Roundtable, an association of the nation's top CEOs. He says the idea of reimbursement for proxy costs may not be in the interest of all shareholders.
JOHN CASTELLANI, PRESIDENT, BUSINESS ROUNDTABLE: This is not just all about corporate governance; it could be about a hostile takeover. Under that scenario, would shareholders be required to pay for their own hostile takeover of their own company? You could construct it that way. It's an interesting concept.
DHUE: In some cases corporate boards have already made changes, including nominating more independent directors and adopting majority vote proposals, which require a board nominee to get an actual majority of votes to sit on the board. Castellani says these measures are enough to resolve concerns about board openness.
CASTELLANI: With shareholder access, you have to ask the question: given this record of reform, will opening the process up to special interests help shareholder value or will politicizing the process hurt shareholder value? We think it will hurt.
DHUE: But shareholder activists see a golden opportunity to push another hot-button issue: CEO pay. Congress recently hauled the CEOs of Countrywide and former CEOs of Citigroup and Merrill Lynch to explain their hefty pay packages in light of their firms' recent losses. Also called to testify were the chairmen of the companies' compensation committees. Damon Silvers oversees labor's interest in corporate governance issues for the AFL-CIO. He says pay and proxy issues underlie a broader question.
DAMON SILVERS, ASSOCIATE GENERAL COUNSEL, AFL-CIO: The question of whether the totality of corporate governance is really promoting a long- term strategic point of view on the part of company management or whether essentially what we are getting is people running various kinds of ponzi schemes in alliance with various kind of short-term players in the market to the disadvantage of long-term investors.
DHUE: Last year, the House passed a bill that would give shareholders an annual non-binding advisory vote on executive pay packages. Senator Barack Oobama sponsored the companion bill, but the Senate has yet to act. Pat McGurn of RiskMetrics Group advises both shareholders and companies on corporate governance issues.
PAT MCGURN, SPECIAL COUNSEL, RISKMETRICS GROUP: Congress is the fear factor. If boards and shareholders and executives don't get their act together, a vacuum is created. And nature may abhor a vacuum, but Washington DC loves one and Congress will fill that vacuum every time.
DHUE: McGurn expects Congress to take up some sort of shareholder rights legislation after the election. How far lawmakers go may depend on how far companies go this proxy season to address shareholder demands. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
