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Commentary: Voting Power For Investors? Boards Are Paying Attention


At Georgia-Pacific's (GP) 2003 annual meeting back in May, shareholders overwhelmingly approved a resolution calling on the company to expense stock options. The Teamsters, which had offered the proposal, argued that not doing so encourages excessive use of options and obscures their true cost. The company opposed the measure, saying there was plenty of disclosure in the footnotes. After the votes were tallied, the board did what most companies do in similar situations: nothing. Until November, that is, when it suddenly agreed to expense options.

Why the change of heart? The company says it's being responsive to shareholders. But Carin R. Zelenko, the Teamsters' director for corporate affairs, says it might have something to do with a new rule under review by the Securities & Exchange Commission that could give big investors unprecedented power to oust incumbent directors. The union has deluged the SEC with more than 100 letters in support of the rule. Georgia-Pacific's flip-flop may be an attempt to avoid becoming a target. Says Zelenko: "Maybe corporations are finally starting to get the message."

If so, it's a compelling reason for the SEC to approve the so-called proxy-access rule, which would allow big investors to run opposition board candidates on the proxy under certain limited circumstances. The idea is to spur good governance, not takeovers. While a Georgia-Pacific spokesman says the rule had nothing to do with the board's decision, the prospect of a future where investors can dump asleep-at-the-switch directors clearly has many companies worried. In recent months, three dozen have done similar about-faces, agreeing to abandon staggered board elections, ditch poison-pill takeover defenses, and put outsize executive severance packages to a shareholder vote. In fact, companies have made big enough concessions that shareholders have withdrawn more than 120 other proposed resolutions. "There's a whole new level of seriousness," says William B. Patterson, director of the AFL-CIO's office of investment.

It's hard to overstate the shift in attitude. For years, shareholders have been all but powerless. Boards are not legally obliged to act on most shareholder resolutions -- and they rarely do. Even when the resolutions win, only about 20% move boards to act, according to the Investor Responsibility Research Center. And ousting an incumbent director isn't an option. Most shareholders don't have a choice of candidates and can show their dissatisfaction only by casting a "withhold" vote for candidates nominated by the board.

The new rule would give committed, long-term shareholders another way. As drafted, it lets a company's shareholders start the process by adopting a resolution authorizing a proxy contest, or if 35% of shareholders voting at the annual meeting cast withhold votes for a director candidate. A third trigger under consideration would be if the board takes no action in response to a winning shareholder resolution. In each case, shareholders or groups of shareholders owning at least 5% of the shares for two years would be permitted to add up to three nominees to the proxy the following year. So in effect, angering or ignoring shareholders could have unpleasant consequences for directors.

Even though the rule is far from final, it may explain why many companies suddenly seem intent on kissing up to investors. Lucent Technologies (LU) is asking shareholders to scrap its staggered board elections, a takeover defense despised by governance gurus. Allstate Corp. (ALL) ditched its poison-pill takeover defense, citing "shareholder sentiment." And Alcoa Inc. (AA) is putting "golden parachute" payments to a shareholder vote. In each case, the (AA) action followed a majority shareholder vote at the last annual meeting. Says Patrick McGurn, special counsel at proxy adviser Institutional Shareholder Services: "The only way you can explain the difference in behavior is the threat that proxy access may be available."

OUSTER CAMPAIGNS. In coming months, the concessions may go well beyond changes in governance practices to include committee shakeups or resignations of controversial directors. At Marsh & McLennan (MMC), four big public pension funds have petitioned the company to place a resolution authorizing a 2005 proxy contest on the ballot for its annual meeting in May, citing the board's "gross failure" in preventing the Putnam mutual-fund scandal. And Big Labor has mounted campaigns to oust a number of directors, including Kenneth Langone at the New York Stock Exchange and General Electric (GE), Frank Savage at Lockheed Martin (LMT), and William Tauscher at Safeway (SWY). If the rule wins approval, a 35% withhold vote for any one of them in 2004 would set the stage for a 2005 proxy contest.

In the six months since the SEC first floated the idea of "shareholder democracy," business interests have begun to howl. Last month, the Business Roundtable called on the SEC to water down the rule, which President John J. Castellani says could have harmful consequences, from special-interest directors to divided and distracted boards. "It's too big a hammer," Castellani says, "and too broad a brush." Maybe so, but by raising the stakes for boards that ignore shareholders, the rule has already accomplished what previous reforms have not: It has given owners a seat at the table. By Louis Lavelle


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