HP Fight Forecasts Stormy Proxy Season

Companies are battling proxy initiatives across the country. Now, shareholders are lashing out with lawsuits, such as the two against Hewlett-Packard

by Lorraine Woellert

In what promises to be one of this proxy season's fiercest debates, investor groups led by unions have filed two lawsuits against Hewlett-Packard (HPQ) to force the company to include a resolution on director elections in its 2007 proxy statement.

On Jan. 23, the American Federation of State, County & Municipal Employees (AFSCME) and the Connecticut Retirement Plans & Trust Funds sued the computer giant in U.S. District Court in Connecticut. The lawsuit asks the court to force HP to include in this year's proxy a proposed change to company bylaws that would make it easier for shareholder groups to run their own candidates for board elections.

Test Case

The groups also took their case to the U.S. Court of Appeals for the Second Circuit, asking judges there to grant summary judgment to block HP from omitting the election proposal, which was put forth by AFSCME and the State of Connecticut. "It's simple. We just want the resolution that would allow shareholders to nominate directors on HP's proxy," says Richard Ferlauto, AFSCME director of pension and benefit policy.

The plaintiffs might be getting a step ahead of themselves, however. HP hasn't explicitly said that it will exclude the proposal. The company tried—and failed—to win the Securities & Exchange Commission's blessing to omit the proposed bylaw change from its proxy, which is due at the printer within the next two weeks. Hewlett-Packard spokesman Ryan Donovan declined to comment on the litigation, but says that, in the past, HP typically has included shareholder proposals in proxies along with HP's positions.

Shareholder groups intend to make Hewlett-Packard—which is still licking the wounds left by last year's boardroom spying scandal and the indictment of former HP Chairman Patricia Dunn—this year's big proxy access test case. But other companies are likely to be targeted with similar resolutions in the coming weeks.

Showdowns with Shareholders

The lawsuits set the stage for a dramatic clash between corporations and their shareholders in what promises to be an exceptionally tumultuous proxy season. Familiar resolutions on majority voting to elect directors, poison pills, and disclosure of political contributions to trade groups are being filed in far greater numbers this season.

In addition, there are sure to be headline-grabbing fights over executive compensation, as companies comply for the first time with new federal rules on pay disclosure. Investor outcries over CEO pay reached a new level in the past year, as Lee Raymond left ExxonMobil with a $400 million retirement package and Robert Nardelli departed Home Depot with a $210 million retirement package (see BusinessWeek.com, 1/4/07, "Out at Home Depot").

The proxy-access fight has come to the fore as investor groups take advantage of a September ruling from the Second Circuit. In that case, AFSCME had sued American International Group (AIG) over the insurance giant's refusal to allow a similar proposal on its proxy. The proposal, which sought to change company bylaws in a way that would make it easier for shareholders to run their own director candidates, was illegal, AIG argued, because SEC rules required the investor submitting the proposal to bear the burden of printing and mailing it to every shareholder—an expensive process that could take months.

SEC Delay

The court disagreed. Noting that the SEC had given conflicting policy guidance over the years, the court ruled in AFSCME's favor and called upon the SEC to clarify its rules. AIG didn't appeal, choosing instead to work with shareholders on new appointments to the company's board following CEO Hank Greenberg's departure.

Despite promises from Chairman Christopher Cox, the SEC so far has failed to act on the Second Circuit ruling because commissioners remain hopelessly split. In a written statement, Cox said "the very small number of inquiries" the agency has received have come from companies outside the Second Circuit, which encompasses New York, Vermont, and Connecticut. "The Commission is taking advantage of this opportunity to consider more fully the questions raised by the court decision in their broader context, and to work on crafting a carefully considered proposal that will ensure there is one, clear rule to protect investors' interests in all jurisdictions during the next proxy season."

That has business worried. Shareholders "are exploiting the court decision to broadly reopen the issue," says Thomas Lehner, director of public policy for the Business Roundtable, a Washington lobbying group. "The fundamental issue here is 'Who decides how corporations are governed?' The choice is between special-interest shareholder groups that have agendas, or preserving the right of boards to make management decisions."

Woellert is a correspondent in BusinessWeek's Washington bureau.