Big Labor Makes Its Wishes Known

The 2007 proxy season should mark another milestone for investor activism. The media are already poised to pounce on new compensation disclosures in this year’s proxies, and hedge funds are homing in on governance vulnerabilities. More boards than ever will find themselves the center of unwanted attention, and directors must be ready to respond to shareholder campaigns.

Pension funds, especially labor union funds, will again lead the way in activism. In 2006, labor-related funds submitted 44 percent of the 693 governance-oriented shareholder proposals tracked by Institutional Shareholder Services, and labor funds accounted for three-quarters of all those filed by institutional investors. In 2007, activist investors are again concentrating on two issues: director accountability and executive compensation.

In the first category, the campaign to make majority voting the standard practice will clearly be in the forefront. As of late February, ISS is tracking 140 shareholder proposals seeking majority-vote director elections, of which more than 80 have been neither omitted nor withdrawn because the companies took some responsive action. More than 30 top companies have established majority vote standards for director elections in the last couple of years, and an additional 100 or more have opted for a so-called Pfizer policy, under which a director who fails to receive majority support is expected to offer to resign.

Robust investor support for majority vote proposals has undoubtedly contributed to the spread of the practice. In 2006, average support for 94 majority-vote proposals that came to a vote reached a substantial 48.5 percent. Advocates, led by the United Brotherhood of Carpenters & Joiners, joined by the Sheet Metal Workers, the American Federation of State, County and Municipal Employees (AFSCME) and a growing number of individuals, are determined to capitalize on that success with even stronger campaigns this year. The Carpenters have filed the proposal in binding form at a few companies where the board failed to take action after the resolution came to a vote twice and received at least 45 percent support. AFSCME is also filing binding proposals, and both proponents are targeting companies that have adopted a majority vote policy rather than enacting a bylaw change—a solution the funds consider “inadequate.” (All citations of resolutions filed at specific companies are based on information from proponents.)

Majority voting for directors is the election standard in most countries outside the U.S., and many majority vote proposals may be withdrawn this year as issuers adopt it voluntarily. As this article is prepared, ISS is aware of at least 48 that have been withdrawn because the board either changed the bylaws or will seek shareholder approval to do so in 2007.

The other hot button in the director accountability movement is proxy access—the Securities and Exchange Commission’s erstwhile proposal to give substantial shareholders the right to nominate up to three directors in certain circumstances. The commission changed course in early 2006, when SEC staff ruled that American International Group (AIG) could omit an “equal access” shareholder proposal submitted by AFSCME. But when the U.S. Court of Appeals for the Second Circuit in August decided that the SEC must clarify its rules, AFSCME and several public pension funds filed the same proposal for Hewlett-Packard’s March 14, 2007, meeting. The commission has postponed rulemaking on the issue and declined to provide guidance in response to HP’s request for a no-action letter, which would have excluded the proposal.

Some activists continue to focus on board independence by demanding a separation of the chair and CEO roles. Some 33 proposals seeking independent board chairmen are pending for 2007 meetings. Most of these were filed by individual activists and a few by religious-affiliated funds (following the 18.5 percent support for a proposal submitted by Catholic Healthcare West to General Motors last year). Several this year also came from pension funds such as CalPERS (at Sanmina-SCI), the Connecticut Retirement Plans and Trust Fund (Time Warner), IBEW (Verizon) and the Teamsters (Gannett and Tribune). AFSCME submitted a binding bylaw proposal to establish an independent chair at Home Depot, where company bylaws currently require that the chairman also be the CEO.

A Service Employees International Union (SEIU) fund submitted one of this year’s novel proposals, at Honeywell, calling for expanded disclosure about any relationships between the company or its managers and a board nominee who qualifies as independent under New York Stock Exchange listing standards. SEIU cites five Honeywell directors with relationships that were deemed “not material” under stock exchange rules, according to the company’s 2006 proxy, due to the low percentage of gross revenues involved. SEIU, however, contends that the company should provide more specifics about the relationships, so that shareholders can determine whether they compromise the directors’ independence.