Risk & Compliance

Two Pension Funds Target 16 Companies

A pair of activist union groups are publicizing their hit lists of companies they are pressing for better corporate governance.
Stephen TaubApril 25, 2005

The Employees Pension Plan for the American Federation of State, County, and Municipal Employees announced that during upcoming annual shareholder meetings, it will withhold votes from certain directors at 11 companies. Those directors have supported excessive executive pay that did not match company performance, have significant conflicts of interest, serve on too many boards, or serve at companies that continue to ignore majority shareholder votes, according to the AFSCME statement.

The companies are Honeywell, Cendant, VF Corp., General Electric, Kohls, Colgate-Palmolive, Union Pacific, Qwest, Hilton Hotels, Home Depot, and Lowes.

AFSCME cited the example of Honeywell chairman and chief executive officer David M. Cote. His pay increased 38 percent in 2004, to $17.4 million, compared with $12.6 million in 2003, even though net income declined 3 percent and Honeywell shares trailed their peers for the year, according to the pension plan. “Based on failure to pay for performance, we will withhold votes from management development and compensation committee chairman John Stafford,” said AFSCME.

Cendant chairman and CEO Henry Silverman received more than $100 million over the last five years despite “sideways” market performance, added the pension plan, which said it is “withholding votes from compensation committee chairman Robert Smith.” AFSCME said it also plans to withhold votes from six members of Colgate-Palmolive’s compensation committee because they don’t link pay to performance.

AFSCME is withholding votes from four VF directors for failing to declassify the board, and from General Electric board member Claudio Gonzalez for serving on too many boards. In addition, the pension plan asserted that 7 of 13 Kohls directors have ties to the company and that its board is non-independent. Added AFSCME, “We will withhold our votes from the non-independent director nominees, in this case retired chairman and CEO William Kellogg and COO Arlene Meier.”

The California Public Employees’ Retirement System named five companies to its “focus list” of poor financial and corporate governance performers: American International Group, AT&T, Delphi, Novell, and Weyerhaeuser. “We will press for needed reforms to restore long-term profitability and investor confidence,” promised Rob Feckner, president of the CalPERS board, in a statement.

According to CalPERS, its Focus List is selected from the pension fund’s investments in more than 1,800 U.S. corporations, and is based on the companies’ long-term stock performance, corporate governance practices, and an economic-value-added evaluation. The pension fund added that it tries to identify companies where poor market performance is due to underlying financial performance problems as opposed to industry or extraneous factors alone.

AIG made the list after its share price dropped more than 21 percent in the year ending March 31, 2005, and investigations began into accounting misstatements, bid-rigging, and the use of questionable insurance products, CalPERS stated. AT&T made the list because executives could receive at least $41 million on the immediate vesting of stock options and restricted stock after change-in-control agreements were approved.

Novell wound up on the list after its share price fell 47 percent during the year ending March 31, and after the company failed to design what CalPERS deemed a true performance-based executive compensation plan, despite what the pension fund described as months of negotiations.

Delphi and Weyerhaeuser made the list because of their poor response to a number of proposals that have been approved by shareholders but not implemented by their boards, according to CalPERS. Delphi was also singled out because it overstated cash flow from operations by $200 million in 2000 and pretax-income by $61 million in 2001, there has been significant executive turnover, and it is the focus of investigations by the Securities and Exchange Commission and Federal Bureau of Investigation, the pension fund added.