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Proxy Battles Heating Up

One solicitor predicts that more than 400 shareholder resolutions will be launched this year; executive compensation and majority votes top the list of concerns.
Marie Leone, CFO.com | US
January 19, 2006

The 2006 proxy season opened with a bang. On January 10, a group of General Electric Co. investors claimed victory and withdrew a shareholder resolution that they had doggedly pursued for at least five years.

The shareholders, a group of 26 religious organizations called the Tri-State Coalition for Responsible Investment, had requested information on General Electric expenditures regarding the class of pollutants known as polychlorinated biphenyls (PCBs). Over the years, GE had released bits and pieces of the information, but on December 9, the company released all the requested data to the Securities and Exchange Commission and to the coalition itself.

The company's disclosure covered 15 years' worth of payouts for the investigation and remediation of PCB-contaminated sites — and for a public relations and lobbying campaign against the coalition's effort to have GE dredge the Hudson River.

In deciding to make the disclosure, GE management determined that the proxy fight was no longer a "productive discussion," according to a senior GE press official. The official confirmed that last year, the shareholder resolution garnered 27.4 percent approval from voting investors; in previous years, the resolution mustered only about 10 percent.

The GE shareholder resolution is likely to be the first in a long line of proposals introduced this year. Bruce Goldfarb, senior managing director at proxy solicitation firm Georgeson Shareholder, believes that the trend of 400-plus proposals annually will continue.

Georgeson's "Annual Corporate Governance Review," published late last year, found that shareholder proposals rose from a total of 241 in 2001 and 273 the next year to 427 in 2003 — in the wake of company scandals and the passage of Sarbanes-Oxley, notes Goldfarb. Shareholder proposals totaled 414 in 2004 and 375 last year, according to the Georgeson data.

Fully 133 of last year's shareholder resolutions focused on executive compensation. Goldfarb expects that this year, resolutions against the use of stock options and golden parachutes will take center stage. The Georgeson report also predicts that majority voting will feature prominently on this year's roster of resolutions.

Under this standard, directors must receive a majority of votes casts to win or hold their seats. Self-evident, it would seem, but in fact most U.S. board elections follow a plurality model. Shareholders can vote "for" a director, or they can withhold their votes, but there is no "against" option. Thus, in theory, a director nominee could be elected to the board with a single affirmative vote, even though all the other votes were withheld.

Support for majority voting is growing stronger, says Goldfarb. In 2004, the first resolutions advocating the practice appeared in 12 proxy statements and received an average of 12 percent support from voting shareholders, according to the Georgeson report. Last year, 79 companies received majority-voting resolutions, 24 of which were withdrawn for various reasons. The remaining 55 proposals averaged 43 percent approval from voting shareholders; 13 of them captured 51 percent or more of the vote.

Although all these proposals were nonbinding, a number of companies adopted some form of a majority-vote policy, according to proxy research firm Institutional Shareholder Services. They include Walt Disney, Office Depot, Pfizer, Best Buy, Hasbro, Hercules, and Lockheed Martin.

Even nonbinding proposals, of course, put a certain amount of pressure on companies that may need shareholder support for other purposes — say, in response to a tender offer. The big question for 2006, says Goldfarb, is whether the movement to install majority voting will prompt executives and directors to settle other proposals before they show up on proxy ballots.

Corporate boards and executives may also hear more from hedge-fund investors in 2006, especially if an abundance of mergers is in the offing. Goldfarb noted that last year several funds, in search of short-term gains, pushed target companies to demand higher bid prices. Such was the case with targets including Providian Financial (bought by Washington Mutual Inc.), MCI (Verizon), and ShopKo Stores Inc. (Sun Capital Partners.)

In other cases, hedge-fund investors may block acquiring companies from buying targets when the proposed deal would deplete cash or dilute stock. Even if the CFO and the investor-relations manager could demonstrate that the acquisition would produce long-term strategic gains, says Goldfarb, hedge-fund investors may balk because of their short-term focus.

Who else is likely to file shareholder resolutions in 2006? If last year is any indication, labor unions will be quite active; they sponsored 44 percent of resolutions in 2005. Individual shareholders (42 percent) were a close second, followed by religious organizations (6 percent), public pensions (4 percent), and other shareholder groups (4 percent).




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