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Should Directors Be Nervous?
Activists are pushing majority-vote rules as a weapon against unresponsive boards
Business Week, Analysis & Commentary
By Amy Borus,

Thursday, March 6, 2006

Curbs on CEO pay.  Checks on board cronyism.  Reining in conflicts of interest.    Labor and public pension fund activists have waged hundreds of proxy battles in recent years but rarely with much effect on target companies.  Now shareholder activists are attacking the process by which directors themselves are elected.  And there are signs some boards are listening.

Shareholder resolutions at some 140 companies, from Hewlett-Packard Inc. to Wells Fargo & Co., would require directors to garner a majority of votes cast to join the board.  Currently, nominees need to win only a plurality of votes, although most win a majority anyway because director elections are usually uncontested.  But disgruntled shareholders rarely vote no, figuring it's a futile gesture.  So activists hope the dynamic will change if a majority no-vote could actually unseat a director.  A majority-vote standard "would put teeth in board elections," says Shirley Westcott, managing director of policy at Proxy Governance Inc., which advises institutional investors.

Democratizing director elections wouldn't necessarily revolutionize board politics.  Shareholder activists aren't looking to sweep out whole boards en masse, says Carol Bowie, director of research at the Investor Responsibility Research Center Inc.  They would be more likely to use majority voting selectively, to show a disappointing director the door or as leverage with an unresponsive board.  "The most important benefit won't be the few instances in which it's exercised.  It's the awareness that shareholders have this power that would make boards more attentive," says Harvard Law School professor Lucian A. Bebchuk.

Given widespread frustration with lavish CEO pay, directors who sit on compensation committees would be especially vulnerable.  Proposals by the Securities & Exchange Commission to expand disclosure of executive pay will help, say investor advocates, but they won't get to the root of the issue.  "Excessive CEO pay is a symptom of a board that lacks accountability to shareholders," says Richard C. Ferlauto, investment policy director at the American Federation of State, County & Municipal Employees (AFSCME), which has filed several majority-vote measures.

One of its prime targets is Denver-based Qwest Communications International Inc.,  whose stock price is down 83% from five years ago.  Qwest, without admitting or denying wrongdoing, paid a $250 million fine in 2004 to settle securities fraud charges by the SEC but is still mired in shareholder suits.  AFSCME thinks the board has been too generous to the new CEO, Richard C. Notebaert, who last year got a grant of one million shares and an increase in his bonus from 150% to 200% of base salary.  A Qwest spokesman says the company hasn't yet taken a position on AFSCME's resolution.

Business groups are wary of changing the current system.  The U.S. Chamber of Commerce opposes majority voting, which it perceives as the agenda of "activists who want to have some degree of leverage over companies for political or other goals," says Chamber Vice-President David Chavern.  The Business Roundtable, an association of big-company CEOs, isn't fighting the change, although it worries about board elections turning into political campaigns or destabilizing companies, says Thomas J. Lehner, the Roundtable's public policy director.

Still, more than 30, including Dell Inc. and Supervalu Inc., have adopted majority voting this year after heat from shareholder groups.  The campaign also has support from groups such as Institutional Shareholder Services Inc.  Its proxy recommendations typically swing about 20% of investor votes, says ISS Executive Vice-President Patrick McGurn.  The result:  Directors could wind up in the spotlight more than many may like