Risk & Compliance

For Shareholders, It’s Subprime Time

Activists, sick and tired and determined not to take it anymore, aim a fusillade of demands at all parties involved in the mortgage meltdown.
Alix StuartApril 1, 2008

Already reeling from the subprime-mortgage meltdown, big banks, mortgage lenders, credit-rating agencies, and home builders are now the prime targets of shareholder activism as the 2008 proxy season begins. “The credit crunch will clearly affect the types of issues voted on this season,” says Patrick McGurn, special counsel to proxy advisory firm RiskMetrics Group. The Laborers’ International Union of North America, for example, filed resolutions at Bear Stearns, Washington Mutual, and Beazer Homes asking for better disclosure of their mortgage holdings and sales, even requesting the identity of secondary market purchasers. Others have asked such companies to spell out CEO succession plans and to form board committees to oversee lending compliance. Another labor union, Change to Win, plans to launch “Vote No” campaigns against directors at companies they deem to have failed in preventing subprime losses.

Across all industries, more shareholders are looking to influence board decisions on executive compensation. So-called say-on-pay initiatives, which typically call for a shareholder advisory vote on executive compensation, remain the most popular approach, with proposals filed at 76 companies so far, according to RiskMetrics; linking pay to superior performance comes in a close second (see “What’s Hot This Spring?” at the end of this article). The American Federation of State, County, and Municipal Employees, for example, is asking companies including Safeway and SanDisk to tighten regulations on 10b5-1 plans for executive stock trades, while CVS Caremark is under pressure to eliminate tax gross-ups to executives.

The call for companies to fully disclose political contributions is echoing loudly in this Presidential election year, with more than 50 companies, including Wal-Mart and Halliburton, confronting such resolutions.

What will stick? As in recent years, many companies are addressing shareholder concerns in advance of the annual meeting. The Laborers’ Union announced in early 2008 that it would withdraw formal proposals at Meritage Homes and The Ryland Group after they agreed to enhance disclosure about CEO succession plans and exposure to different types of mortgages, respectively. The Center for Political Accountability identifies 43 companies that have already agreed to disclose political spending.

Say-on-pay, however, isn’t likely to gain much traction, largely because most proposals are too vague, says Paul Hodgson, an analyst with The Corporate Library (see “Keeping It to Themselves”). And thanks to the Securities and Exchange Commission’s rejection of proxy access last year, companies continue to eliminate proxy proposals they don’t like through no-action letters. “Some of the more interesting issues haven’t made it onto the ballot,” says McGurn, noting Toll Brothers’s and Bank of America’s omission of union requests for succession-planning detail. “It’s a major disappointment.”

Common issues being voted on in the 2008 proxy season.