April 2010 Archives

SEC Not Swayed by Companies' Post-Apache Arguments

By Ted Allen on April 30, 2010 3:47 PM

Since Apache Corp. prevailed in a closely watched court fight with activist John Chevedden in March, several companies have raised similar proof-of-ownership arguments to exclude shareholder proposals, but they have not persuaded the staff of the SEC's Corporation Finance Division.

Devon Energy and Union Pacific both cited the Apache v. Chevedden decision in their no-action petitions against proposals filed by Chevedden that ask the firms to repeal their supermajority requirements. Staples made similar arguments in a request filed before the Apache ruling in an attempt to omit a written consent proposal filed by investor William Steiner, who is affiliated with Chevedden. 

At issue in the Apache case and the three other challenges is the interpretation of SEC Rule 14a-8 (b)(2), which requires investors (who are not registered holders with a company) to provide a statement from a "record" holder that verifies that they held at least $2,000 in stock for one year. The SEC has said that a "record" holder can be a "broker or a bank," and in a 2008 no-action dispute involving Hain Celestial, the staff ruled that the proof-of-ownership requirements could be satisfied by a statement from an "introducing broker-dealer."

The Apache case arose from a supermajority proposal that Chevedden filed. Rather than submit a no-action petition and ask the SEC to reconsider its Hain Celestial precedent, Apache decided to sue Chevedden in federal court in Houston, the energy company's hometown, where it had previously prevailed in a 2008 lawsuit with New York City's pension funds. Chevedden originally argued that Rule 14a-8(b)(2) was satisfied by a letter from RAM Trust Services (RTS), his "introducing broker," while Apache asserted that Chevedden was required to obtain a confirming letter from the Depository Trust & Clearing Corp. (DTC), a nationwide clearing entity that holds shares on behalf of most U.S. investors. Chevedden subsequently submitted a supporting letter from Northern Trust, which acts as a DTC participant for RTS.

In a March 10 decision, U.S. District Judge Lee Rosenthal ruled that Apache could omit Chevedden's proposal after concluding that his RTS letter was not sufficient. Rosenthal noted that RTS was not a DTC member and said there was inconsistent information in the record about whether RTS was a broker. The judge did not address the sufficiency of the Northern Trust letter because it was submitted after the 14-day deadline for responding to Apache's deficiency notice.

However, shareholder activists were encouraged by the court's decision, because the judge did not agree with Apache's interpretation that a supporting letter from DTC or its nominee, Cede & Co., was required. The court also rejected Apache's argument that the SEC staff's position in Hain Celestial was a "rogue" ruling that was inconsistent with other no-action decisions.  In their no-action requests, Devon, Union Pacific, and Staples all argued that the investors' ownership statements were insufficient. Chevedden submitted supporting letters from RTS, while Steiner sent a letter from DJF Discount Brokers. Citing Judge Rosenthal's ruling, Devon and Union Pacific both argued that RTS did not qualify as an introducing broker, while Staples asked the staff to reverse its position in Hain Celestial. The staff rejected all three petitions in separate one-page rulings.  

It appears that the SEC may address Rule 14a-8(b)(2) as part of a new staff legal bulletin before the 2011 proxy season. Meredith Cross, director of the Corporation Finance Division, has said that proof of ownership is one of the issues the staff is looking at as it reviews this season's no-action rulings.

While these disputes over broker letters may appear arcane, they are an example of the increasing number of technical objections that companies are raising to keep shareholder resolutions off their ballots. So far this year, issuers have successfully invoked the ownership requirements of Rule 14a-8(b) to omit 23 proposals; 10 resolutions were excluded on other procedural grounds.

American Express Receives 37% Percent Dissent on Pay

By Ted Allen on April 28, 2010 11:11 AM

On Monday, there was 37.5 percent investor opposition (based on votes “for” and “against”) during an advisory vote on American Express’ pay practices, according to investors. The vote is the first significant display of investor dissent on a management-sponsored pay vote this season.  

The American Federation of State, County, and Municipal Employees urged shareholders to vote against the credit-card company’s pay practices. AFSCME argued that the firm’s executive bonuses are based largely on the discretionary judgment of the compensation committee. According to the labor pension fund, the New York-based company also offers excessive perks, payouts for below median performance, and excessive option grants. 
This proxy season is the first where activist investors have tried to use advisory votes as a means to express opposition to a company’s pay practices.
The dissent would have been higher but for the inclusion of discretionary broker votes, which typically are cast for management. While brokers may not cast uninstructed votes in uncontested director elections and on equity plans, they still can vote those shares during management-sponsored advisory votes on compensation. John Keenan, a strategic analyst with AFSCME, estimates that the dissent percentage would have been 41.4 percent without about 95 million broker votes.
AFSCME also opposed the compensation practices at Wells Fargo, which received 27 percent dissent during its advisory vote at Tuesday's annual meeting, according to Keenan. The opposition would have been 33 percent without broker votes, he said.   
The labor fund argued that Wells Fargo’s compensation was not consistent with pay-for-performance principles. The CEO's base pay was increased by 537 percent to $5.6 million (which included $900,000 in cash and $4.7 million in stock) in 2009 while the San Francisco-based banking firm was under the incentive compensation restrictions of the U.S. government's Troubled Asset Relief Program. In February, the CEO's base pay was lowered to $2.8 million for 2010, but all of that will be paid in cash.

Senate Republicans Vote to Block Financial Reform Bill

By Ted Allen on April 26, 2010 5:03 PM

In a procedural vote today, Senate Democrats failed to muster enough votes to clear the way for consideration of Senator Christopher Dodd's financial reform bill, which includes provisions to mandate "say on pay" advisory votes and majority voting in board elections and to authorize the SEC to adopt a proxy access rule.

The Senate voted 57-41 to open debate on the bill, three short of the 60 votes needed to avert a Republican filibuster. Democratic Senator Ben Nelson of Nebraska joined the Republicans in voting to block the legislation after expressing concern about the impact on "Main Street."

Prior to today's vote, Dodd continued to hold negotiations with Senator Richard Shelby, the ranking Republican on the Banking Committee, to try to reach consensus on the 1,410-page bill, which would also boost the resources for the SEC and tighten regulation of derivatives.  

During floor debate before the procedural vote, Dodd said he and Shelby "were very close on some issues," but he said that their failure to reach an agreement on all matters was no reason to block debate on the bill. 

The Republicans argued that today's vote was premature, and said they wanted their concerns to be addressed before the bill reached the floor.  

Nelson also is seeking the restoration of an exemption for existing derivatives contract holders from new collateral requirements. This exemption is supported  by billionaire investor Warren Buffett, whose company, Berkshire Hathaway, is based in Omaha. This exemption was in the derivatives bill passed by the Senate Agricultural Committee last week, but it was removed over the weekend when that measure was added to Dodd's bill.  

House Panel Debates Governance Reforms

By Ted Allen on April 23, 2010 12:08 PM

This week, the House Subcommittee on Capital Markets, Insurance, and Government-Sponsored Enterprises heard from various investors and issuer advocates during a hearing on corporate governance and shareholder empowerment. The House of Representatives passed a reform bill in December that includes an annual "say on pay" mandate and authorization for the SEC to issue a proxy access rule, but that measure doesn't require majority voting. 

The April 21 hearing focused on three bills--H.R. 2861, H.R. 3272, and H.R. 3351--which were introduced last year by Reps. Gary Peters of Michigan, Keith Ellison of Minnesota, and Mary Jo Kilroy of Ohio, respectively. 

Peters' bill, H.R. 2861, the "Shareholder Empowerment Act of 2009," includes provisions to mandate a majority voting standard in uncontested elections and independent board chairs. Ellison's bill, H.R. 3272, the "Corporate Governance Reform Act of 2009," calls for independent board chairs and risk management committees, and would direct the SEC to study whether corporate directors should be certified by the commission. Kilroy's bill calls for shareholder votes on annual pay practices and severance pay, and would require large institutional investment managers to disclose their votes on those agenda items.
 
The subcommittee has not scheduled a mark-up on any of the bills, but the House may eventually have to decide whether to support majority voting and other governance provisions that were not in the House bill if the Senate approves Senator Christopher Dodd's financial reform legislation.

In discussing his bill, Peters stressed the role that governance failures played in the financial crisis. "The balance of power must change," Peters said. "Shareholders should have the power to hold management and corporate boards accountable." 

The Republicans on the panel disagreed. Rep. Scott Garrett of New Jersey said he wasn't convinced that the reforms in Peters' bill would have prevented the financial crisis or would be a "net positive" in the future. Garrett said he didn't want to overturn 150 years of state law precedent, and asked why new governance rules should be imposed on non-financial firms.  

Likewise, Rep. Jeb Hensarling of Texas said, "I'm not sure the federal government is qualified to determine the best practices of corporate governance," recalling the collapse of Fannie Mae, a federally chartered mortgage firm.

In response, Peters said: "It's not about a federal government takeover. It's about empowering the people who actually own these companies."     

Three of the investor representatives at the hearing--Brandon Rees, deputy director of the AFL-CIO's Office of Investment; Gregory Smith, general counsel of the Public Employees' Retirement Association of Colorado; and James Allen, head of capital markets policy at the CFA Institute--all endorsed proxy access, majority voting, and greater disclosure of proxy voting. However, Allen said the CFA Institute didn't support a requirement for independent board chairs, saying "such matters should be left to the boards to decide."    

Republican lawmakers and corporate advocates also opposed a mandate for companies to appoint a independent chairman. Garrett recalled that Warren Buffett, Bill Gates, and Sam Walton all held both the CEO and chairman titles. Buffett continues to hold both roles at Berkshire Hathaway, Gates now serves as Microsoft'schairman, and a Walton family member chairs the board at Wal-Mart Stores.      

Rees responded by noting that most CEOs are "no Bill Gates." Smith observed that Gates, as a CEO, would have worked well with an independent board chair, and said, "nothing would have tied his hands" while running Microsoft.

Rep. Paul Kanjorski, the Pennsylvania Democrat who chairs the subcommittee, said an independent board chair "is an appealing idea," but said, "we must explore the impact on small companies."

Rep. John Campbell, a Republican from California, said he supported proxy access and majority voting and observed that they would eliminate the need to mandate other reforms. However, Campbell said he objected to the provisions in the House and Senate bills that would let the SEC set the ownership thresholds for nominating directors. He said the thresholds (1, 3, or 5 percent, depending on a firm's market cap) in the SEC's draft rule are too low and should be raised to 5, 10, and 20 percent. Smith responded by noting that the 10 largest U.S. public pension funds collectively own less than 1 percent of most companies, with their largest stake amounting to just 2.6 percent.

Most Democrats voiced support for the concept of majority voting, but  Rep. Melissa Bean of Illinois expressed concern about imposing a mandate on investors who voted against shareholder proposals seeking that reform. In response, Rees said majority voting will make elections "more meaningful," and said minimum federal standards are needed because of supermajority requirements, dual-class structures, and other barriers to shareholder action that some firms have.

Alexander Cutler, CEO and chairman of Eaton Corp., and Robert E. Smith, deputy general counsel at NiSource, both testified against the bills. Cutler and Smith said there had been a "sea change" among boards, and that the perception that most directors are docile and don't question management is no longer accurate. They also noted the various governance reforms--such as majority voting--that many issuers had adopted voluntarily.    

Gregory Smith of Colorado PERA said the fact that some companies have adopted reforms shouldn't be used to "shield" those firms that haven't acted. "To suggest that this relieves the need for federal legislation would be a travesty," he said. 

Lilly's Supermajority Rules Stymie Reform Again

By Ted Allen on April 20, 2010 1:27 PM

For the fourth consecutive year, Eli Lilly's  supermajority requirements have blocked passage of reforms backed by management and most investors. The company’s struggle to enact these measures illustrates how high supermajority voting thresholds can enable a single large shareholder to thwart the will of other investors.

At Lilly’s April 19 annual meeting, a management proposal to eliminate the pharmaceutical giant’s supermajority rules received support from 74 percent of its outstanding shares (84.8 percent of votes cast), which fell short of the 80 percent of outstanding required for approval. A separate management proposal to declassify the board was supported by 75 percent of the firm’s outstanding shares (85.4 percent of votes cast). In 2007, 2008, and 2009, management-backed declassification proposals failed to pass despite receiving support from 75 percent, 77 percent, and 77 percent of the shares outstanding, respectively. Management presented these proposals after shareholders gave wide support to investor resolutions seeking these changes. 
This year, it appears that the Lilly Endowment, the company’s largest shareholder with an 11.8 percent stake, opposed the proposals. The endowment has voted against declassification measures in the past. It appears that the endowment is concerned that removing takeover defenses might expose the company to a hostile acquisition and cause Lilly to leave its hometown of Indianapolis. The private foundation, which is independent of the company, was founded in 1937 by Lilly family members and has a separate board.

House Panel to Hold April 21 Hearing on Corporate Governance

By Ted Allen on April 19, 2010 10:35 AM

Rep. Paul Kanjorski, who chairs the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, plans to hold an April 21 hearing on corporate governance and shareholder empowerment.  

“In the wake of the financial crisis, we must explore how we can make corporate governance more democratic and give shareholders a greater say in a company’s operations,” Kanjorski, a Pennsylvania Democrat, said in a press release.  
 
This hearing will focus on three bills--H.R. 2861, H.R. 3272, and H.R. 3351--which were introduced last year by Reps. Gary Peters, Keith Ellison, and Mary Jo Kilroy, respectively. H.R. 2861, the "Shareholder Empowerment Act of 2009,” includes provisions to mandate a majority voting standard in board elections and independent board chairs. H.R. 3272, the “Corporate Governance Reform Act of 2009,” calls for independent board chairs and risk management committees, and would direct the SEC to study whether corporate directors should be certified by the commission. 
 
“These three thoughtful pieces of legislation aim to enhance transparency, increase shareholder power, improve management accountability, and enhance corporate governance,” Kanjorski said.
 
The House of Representatives approved legislation in December than includes a “say on pay” mandate and authorization for the SEC to propose a proxy access rule.  
 

Labor Investors Criticize Bank Pay

By Ted Allen on April 16, 2010 12:58 PM

The AFL-CIO is calling on investors to vote against the pay practices of six large financial firms--Bank of America, Citigroup, Wells Fargo, Morgan Stanley, JPMorgan Chase, andGoldman Sachs--when the companies hold advisory votes on executive compensation later this month and in May.

Labor federation officials say they plan to stage protests at the banks' annual meetings and may oppose compensation committee members. The AFL-CIO also is planning an April 29 rally on Wall Street, and labor officials say they expect more than 10,000 demonstrators. 

"Hard-working Americans are angry and will not take it anymore," AFL-CIO President Richard Trumka said at an April 13 press conference. "They will not be [the banks'] ATM anymore." 

The AFL-CIO is highlighting its concerns on the "Executive PayWatch" page on its Web site, which has been updated with details on the six banks' 2009 compensation and their lobbying efforts against financial regulatory reform. The Web site includes details on how retail investors can use management-sponsored advisory votes to express their views on the banks' pay practices. The labor federation also is urging voters to support Senator Christopher Dodd's financial reform legislation, which includes a mandate for U.S. public companies to hold annual pay votes.

The labor investor effort, which will be spearheaded by the American Federation of State, County, and Municipal Employees, is the first time that shareholder activists have organized a campaign that focuses on generating opposition to management "say on pay" proposals. Last year, four of the six banks (except Bank of America and Citigroup) received more than 90 percent support for their pay practices when they held mandatory votes while participating in the U.S. government's Troubled Asset Relief Program.  All six firms have agreed to conduct voluntary pay votes since exiting TARP. 

"I expect that shareholders will be withholding [support from the management advisory votes] in greater numbers this year," Brandon Rees of the AFL-CIO said at the press conference.

If this campaign is successful, other U.S. activists may start to use advisory votes as another tool to press for pay reforms, as investors have done in the United Kingdom, Australia, and other markets. During the 2009 U.S. proxy season--the first year with advisory votes at TARP firms--the average support level was about 90 percent for corporate pay practices. Pay vote proponents have attributed the lack of widespread opposition last season to the novelty of advisory votes, the fact that most financial CEOs received less pay in 2008 amid the global financial crisis, and broker votes cast for management. In the U.K., investors rejected one remuneration report in 2003--the first year they had a right to non-binding pay votes--while six reports failed to win majority support in 2009.

Trumka said the labor federation's campaign is a response to the large banks'  "return to business as usual" after receiving federal support. "Bank executives who took massive bailouts are now pouring money into lobbying on financial reform. It's time for Congress to enact real regulatory reform and make Wall Street pay for the jobs they destroyed," Trumka said.

Citigroup's annual meeting is set for April 20, followed by Wells Fargo (April 27), and Bank of America (April 28). The other three banks have May meetings: Goldman Sachs (May 7), Morgan Stanley (May 18), and JPMorgan (May 19).

AFSCME also plans to vote against the pay practices at American Express (April 26) and SunTrustBanks (April 27) when those firms hold their advisory votes. 

U.K. Labour Party Outlines Governance Agenda

By Subodh Mishra on April 15, 2010 1:03 PM

The party of incumbent British Prime Minister Gordon Brown is calling for a number of governance reforms ahead of May 6 general elections, including the mandatory disclosure of institutional investors' votes. Though Brown's Labour Party is trailing its Conservative rivals in pre-election polls, the proposed reforms may stick as right-leaning politicians seek to capitalize on popular anger over bonuses and bailouts at many of the country's top financial services companies.

Continue reading U.K. Labour Party Outlines Governance Agenda.

Early Vote Shows Significant Majorities Backing BP

By Subodh Mishra on April 15, 2010 11:45 AM

Shareholders have backed BP management on two items--oil sands and executive pay--deemed controversial in the run up to the energy giant's April 15 annual meeting.

A management-opposed shareholder proposal calling for the company to review risks arising from its Sunrise oil sands project in Canada was rejected by more than 90 percent of shareholders voting ahead of this week's meeting. The company is expected to disclose a final vote tally within a few days, though the preliminary numbers assure rejection of the proposal by at least 60 percent of votes cast, a company spokeswoman told The Wall Street Journal.

The proposal's lead organizer, FairPensions, called for BP's audit or risk committee to review and report on assumptions made by the company "in deciding to proceed with the Sunrise Project regarding future carbon prices, oil price volatility, demand for oil, anticipated regulation of greenhouse gas emissions and legal and reputational risks arising from local environmental damage and impairment of traditional livelihoods."

Supporters of the proposal contend that oil sands extraction cause significant environmental harm and utilize far more energy than traditional extractive methods, hence questioning the financial viability of the company's focus on oil sands.

At the meeting, BP Chairman Carl-Henric Svanberg said the company has already disclosed much of the information requested in the resolution, and that Sunrise "will be sanctioned, like any other project, using BP's rigorous evaluation criteria," the Journal reported.

Still, advocates say they will press forward with the campaign. "The vote today is only one outcome of a wider process," said Catherine Howarth, chief executive of FairPensions. "The task for investors now is to make the most of the disclosures made to date, and continue to robustly engage with BP into the future."

Separately, the company also saw majority backing for its yearly non-binding proposal to approve the remuneration report, despite protests from some investors over a disconnect between bonus awards and key performance hurdles, as well as a 40 percent pay raise for CEO Tony Hayward as profits fell.

Directors Receive Majority Opposition Without Broker Votes

By Ted Allen on April 14, 2010 12:53 PM

While it’s early in the 2010 proxy season, the ban on broker votes in uncontested board elections already is having an impact.

On March 16, four compensation committee members at The Pantry, a North Carolina-based convenience-store chain, received more than 53 percent opposition. Investors withheld more than 9.17 million votes (out of the 17.8 million cast) from each of the four directors, according to a recent company 8-K filing. Had all of the 2.04 million broker votes been cast for the management nominees, they would not have received majority dissent.
 
The negative votes appeared to stem from the compensation paid to former CEO Peter Sodini, who left the firm in September. Sodini received a 67 percent increase in total compensation in 2009, while the company posted a negative 26 percent one-year shareholder return and a 34.7 percent negative return over three years.

Despite this investor opposition, the company reported that the four directors were duly elected. The Pantry, like many of its Russell 3,000 index peers, does not have a majority voting bylaw or a resignation policy.

Meanwhile, a director resigned at Herley Industries, a small-cap defense firm in Pennsylvania, after receiving 65 percent opposition at the company’s March 23 annual meeting. The director in question, Edward K. Walker Jr., served on the compensation committee, even though he had a $75,000 consulting contract with the company.  Broker votes were not decisive at this meeting; Walker received 7.7 million withhold votes out of 11.8 million cast, and there were 1.2 million broker votes.  

According to a company filing, the remaining members of Herley’s board met on March 31 and decided unanimously to accept Walker’s resignation and to terminate the consulting arrangement. Unlike Herley, most other boards have declined to accept director resignations after majority withhold votes triggered their resignation policies.  Also at this year’s meeting, Herley presented a management proposal to declassify the board, which shareholders approved overwhelmingly. 

More than 90 directors at U.S. companies failed to win majority support in 2009, and there may be a significant increase in high withhold votes this season. As of Jan. 1, New York Stock Exchange-regulated brokerage firms may no longer cast uninstructed votes in favor of management nominees in uncontested board elections. In the past, broker-cast votes have accounted for between 15 to 20 percent of the vote in director elections at many companies. The absence of broker votes likely will have a greater impact on those small- and mid-cap firms that have a greater percentage of retail investors.  

A Fight Over "Say on Pay"

By Ted Allen on April 6, 2010 4:40 PM

At Waddell & Reed Financial's annual meeting on Wednesday, investors will consider a shareholder proposal that seeks an annual advisory vote on executive compensation.

The Kansas-based investment services company has taken the unusual step of including a special solicitation with its proxy statement to oppose the proposal. The resolution is sponsored by Boston Common Asset Management, the California State Teachers' Retirement System, and Calvert Asset Management. In a March 5 letter to shareholders, CEO Henry Herrmann warned that adoption of this reform would put the company "at a serious competitive disadvantage and could erode the value of your investment."

While more than 60 U.S. issuers, including JPMorgan Chase, Wells Fargo, and Goldman Sachs, have agreed to hold voluntary pay votes, Waddell & Reed argued that advisory votes would lead to a "loss of executive talent" and would not result in "meaningful dialogue with shareholders."

Last year, the company initially reported that a "say on pay" proposal received majority support; the company later petitioned a Delaware judge for permission to count additional votes, which pushed the support level below 50 percent. Pay vote proponents have been surprised by the company's efforts to oppose this resolution.

"Waddell & Reed is one of the outliers in its aggressive campaign against this important reform, and that concerns us as shareowners," said Dawn Wolfe, associate director of ESG Research at Boston Common.

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