RICHARD FERLAUTO, DIRECTOR OF PENSION and benefit policy at the American Federation of State, County and Municipal Employees, is one of the architects of organized labor's effort to persuade corporate boards to alter the way they grant compensation to chief executive officers. This year, he targeted Home Depot CEO Robert Nardelli. And he has been at the center of AFSCME's case against AIG, arguing that shareholders have the right to nominate directors whose names appear on a company's proxy. Here are highlights from an interview:
Are you the most active union in terms of pressing for change in the corporate boardroom?
I would say we're among the most active, and some people would say we probably are the most active.
This past proxy season, how many resolutions did you bring before shareholder meetings?
We began with 25 resolutions, and 16 went to a vote. We're focused very tightly on board composition and board accountability issues and the processes that are involved in the creation of an effective corporate board. As an indication of all that, we look very closely at executive compensation to see that it is aligned with performance and with shareholder interests.
Did you withdraw the other 14?
We came to some type of understanding with the board.
What were your most visible wins?
We had agreements with a number of boards where we filed resolutions to hold annual elections for directors, rather than staggered elections. Five of the six companies we had filed resolutions with ultimately agreed that they would hold annual elections. They included 3M, Wachovia and JPMorgan Chase.
Why are annual elections important to you?
It goes directly to the issue of board accountability. The best way to hold board members accountable to shareholders is to have them face shareholders every year in an election. At least at this point, shareholders don't have the power to nominate directors and have them placed on the proxy. One way shareholders can indicate how they feel about a particular board is by withholding votes or voting against a director.
Are you in favor of the concept of majority voting, in which directors would have to get more than 50 percent of shareholder votes, not just a plurality?
Yes, we are. We are aggressively pursuing majority voting. In fact, and I'd label this as an indicator of our success, in companies that have not moved to a majority voting standard, rather than filing the traditional type of precatory, or voluntary, proposal, which companies would be free to accept or reject, our strategy has been to file amendments that are binding in the corporate bylaws. That would then require action. We were successful there at United Technologies, which accepted the language of our proposal and put our language directly in their bylaws without going to a vote. At a number of companies, we did very well in terms of the vote numbers.
How do you use your pension fund to give you leverage?
I wouldn't say it's leverage in any way. We're looking to improve corporate governance practices in general as a way of achieving higher shareholder value and increasing the returns for our funds. We have 1.4 million members. They have their retirement assets invested in the public pension systems across the country. They have over $1 trillion of assets invested there.
Separately, there has been pressure on the defined benefit systems of public funds, claiming that some are not as well funded as they should be. So gaining as high a return as we can is essential for taxpayers and for our members to ensure that they get the benefits they need to retire. Corporate governance is a way of promoting higher and stronger returns on these investments.
Does it also give you an avenue to seek to unionize these corporations?
We have no private-sector members. For us, return is important. AFSCME as an institution has a pension fund, which is fairly modest compared with the public funds that we maintain for our employees. That pension fund has about $800 million in it, as opposed to the $1 trillion of our members' assets. We use our plan as a corporate governance activist fund that seeks to improve corporate governance and therefore shareholder returns broadly through the marketplace.
Was Home Depot your most visible fight of the season?
Yes. Through our AFSCME pension plan, we identified the worst corporate governance performers within the Standard & Poor's 500, and we looked at two issues—board accountability and CEO compensation. We looked at measures that would reform the board in terms of composition, so that it accurately reflects the interests of shareholders.
Were you at the shareholder meeting?
I was the guy who asked where the board members were. [CEO Robert Nardelli] opened up the meeting and made a very brief comment, saying it was time to elect the directors. I said, "Mr. Nardelli, if directors are up for election, I think it would be important to have them introduced." After a minute or so, these two bouncers cut me off.
Did you gain anything from the confrontation? Was that a win?
It's not a win or a loss at this point. We were looking to reform pay practices at that company and to create a board that is much more independent of the CEO. We continue to be engaged with the company. One of the things we've done is file a "books and records" demand under Delaware law. We've requested certain internal documents, and we're negotiating with the company over them.
What do you hope to find?
There are three different types of of documents we've requested. One, we want to see documents related to the backdating of the stock options issue, which has arisen, to see if there were any discussions at the board level about it and who was responsible for it. Two, we want to know if there was any discussion about how the CEO's compensation was determined, given the total disconnect between Mr. Nardelli's pay package and the stock performance of the company over the past six years. Three, we want to know about the decision- making processes.
Mr. Nardelli said it was his decision not to hold the board meeting. It seems to me that that's a good indication of why the role of chairman and CEO should be split. We want to see if other internal decisions had been made in which Nardelli sets the agenda and restricts the board from acting in ways that are more in the interest of shareholders.
Isn't all that confidential, inside information?
It's confidential unless a judge makes a determination that it can be released because shareholders need that information to make informed fiduciary judgments about their investments in the company. Delaware corporate law, Section 220, allows this books and records request for this confidential information.
What were your other important battles of the past season?
The most significant has been CEO compensation. We've been concerned for a number of years about CEO compensation being an indicator of a board that isn't doing its duty to its shareholders. We've been looking for mechanisms to signal that concern. We've historically been successful requiring a cap on golden parachutes, which is severance compensation. We won a majority proposal at Emerson Electric this year on that issue. Another type of resolution would require restricted stock grants to be performance-based. At JPMorgan Chase, we won a majority vote on that issue.
What is your agenda for 2007?
Next year again, our aim is to promote this type of shareholder advisory vote on compensation while looking further at mechanisms to reform the composition of the board itself.
