Governance: Getting the Message
Shareholders have long passed resolutions. Companies have long
ignored them. Until now.
By Jennifer Levitz
The Wall Street Journal
Monday, October 9, 2006
John Chevedden had a nickname for Sempra Energy: serial
For four years beginning in 2001, Mr. Chevedden, a 60-year-old
retiree from Redondo Beach, Calif., whose family owns Sempra
stock, submitted shareholder resolutions calling for the big San
Diego utility to elect its directors annually rather than every
three years in staggered terms. The votes passed with
increasing majorities every year, garnering 67% of the votes
cast in 2005.
Sempra ignored the nonbinding resolutions. But in the 2005
voting, shareholders also withheld nearly 30% of their votes
from the directors up for re-election -- a big proportion by
corporate election standards. And that seemed to wake the
In May, Sempra management introduced a binding resolution for
annual elections, which passed with 95% shareholder approval.
Its board of directors also voted to eliminate a poison pill
anti-takeover provision of its bylaws that shareholders had
voted against in other nonbinding resolutions in 2004 and 2005.
Dennis Arriola, Sempra's vice president of investor relations,
says, "There wasn't a straw that broke the camel's back. But
after looking at trends and talking to shareholders, the board
made the decision that this was the right thing for
Persistence Pays Off
After decades of frustration, shareholder activists like Mr.
Chevedden are beginning to see more company boards take popular
resolutions seriously. In the 12 months following the 2005
proxy season, companies adopted 64, or 53%, of the 121
shareholder resolutions that gained majority support, according
to the Council of Institutional Investors, a Washington-based
organization that represents pension funds. That's up
substantially from an adoption rate of 8.2% back in 2000.
Companies see "which way the wind is blowing," says Elise
Walton, director of corporate governance practices at Mercer
Delta Consulting, a New York firm that advises boards. "There's
always the hope that [resolutions] will go away. That has
worked in the past," she says. But now, she adds, "the folks
writing the resolutions...have more momentum."
One reason companies are bending is the surge in shareholder
resolutions. In 1971, shareholders proposed just five such
resolutions. In 1991, they submitted 350. So far this year,
there are nearly 600.
Another reason is the persistence of activists like Mr.
Chevedden, who keep introducing the same resolution until the
message sinks in. He says annual elections for directors are
common sense: "Why should they go three years without getting a
grade? It's like having employees go three years without having
Directors who skirt shareholders' requests can often expect to
see the contentious issue return -- bigger -- the next year.
And losing repeated votes makes managements look vulnerable.
But some companies are acting on shareholder requests because of
something else shareholders are doing: refusing to cast votes
Once a rare occurrence, large withholding of shareholder votes
has become increasingly common in the post-Enron era. More
investors are now using the protest tactic to address issues
ranging from executive pay to the structure of the board, says
Patrick McGurn, an executive vice president of Institutional
Shareholder Services, a Rockville, Md., firm that advises
"Anything approaching 30%, 40%, or 50% [of withholds] was
unheard of nine years ago; it's fairly commonplace today." says
Mr. McGurn. This year, Institutional Shareholder Services told
shareholders at 26% of the companies it tracks to withhold
Resolutions are typically nonbinding. Shareholders can submit
binding resolutions in some states, but usually choose the
nonbinding route since management often wages protracted legal
battles to stop binding resolutions from reaching the ballot.
At Home Depot Inc., shareholders recently withheld at least 30%
of their votes from 10 of the 11 directors up for re-election in
June, including Chairman and Chief Executive Bob Nardelli.
The vote was widely tied to anger over executive pay. The
Atlanta-based retailer has awarded more than $115 million in
compensation to Mr. Nardelli since he took the helm in 2000,
while the company's shares have declined 12% under him.
The shareholder protest seemed to inspire action from the
company. In August, Home Depot announced that its board had
amended the company's bylaws concerning director elections.
Starting next May, incumbent directors who aren't elected by a
majority of votes cast must offer their resignation to the board
-- which then decides whether to take action.
In an Aug. 28 statement, Mr. Nardelli said the board's decision
came after 56% of voting shareholders had approved a
majority-vote standard at the company's annual meeting in May.
"By adopting a majority-vote standard," he said, "the board of
directors is reinforcing our company's commitment to shareholder
engagement and director accountability."
In May, shareholders voiced their displeasure at UnitedHealth
Group Inc., where the CEO William McGuire and other officers are
under scrutiny for possibly backdating stock options. Analysis
of option awards has shown that some executives benefited from
extraordinary timing, getting grants dated at times when share
prices hit lows. More than 28% of the votes for two outside
directors -- both members of the compensation committee -- who
were up for re-election were withheld. Shareholders withheld 4%
of the votes for Dr. McGuire and another. The four directors
were re-elected to the board, however.
In a May statement, Dr. McGuire said the votes showed the
"seriousness with which we are continuing our efforts to advance
corporate governance and compensation issues."
One of the most famous cases of vote withholding came at
Federated Department Stores Inc. in 2004. After the board
failed to adopt five winning resolutions calling for a repeal of
staggered board terms, shareholders withheld the majority of
their votes for four board members whose terms were up. One
director failed to get support from 61% of votes cast.
When Federated bought out May Department Stores Co. in 2005, the
company sponsored a binding resolution -- which won shareholder
support -- to do away with staggered board elections.
At most companies, withheld votes don't mean that a director
loses a seat. Since most director elections are uncontested, a
director can garner just one "yes" vote and still win.
But in one of the main issues of the 2006 proxy season, more
companies voluntarily adopted rules that require directors to
get more "yes" votes than withheld votes among votes cast in
annual board elections. This essentially turns a withheld vote
into a "no" vote. Under these new rules, the failure can
trigger resignation requirements or involve the whole board.
Pfizer Inc., for instance, last year adopted a policy requiring
board members who fail to garner a majority of "yes" votes to
formally offer to resign. The pharmaceutical company's board
has 90 days to decide whether or not to accept the resignation.
Versions of "majority vote" rules have also been adopted at chip
maker Intel Corp. and telecom-equipment company Motorola Inc.
Faced with scrutiny after a wave of corporate scandals, some
companies "want to be out in front in terms of being regarded as
progressive on corporate governance and responsive to
shareholders," says Shirley Westcott, managing director of
policy at Proxy Governance Inc., a proxy advisory company in
As of last month, 208 publicly traded companies had adopted some
form of majority-vote policy, with 146 of those policies put in
place since Jan. 1, 2005, according to the Council of
Such policies, say shareholder advisers, have prompted boards to
respond more quickly to nonbinding resolutions these days.
"Companies don't adopt these winning recommendations at their
own peril," says Ann Yerger, executive director of the Council
of Institutional Investors.
But as boards start to respond more quickly, says Ms. Walton at
Mercer Delta Consulting, the "hardest thing" for them is to
determine "which shareholders to listen to and which
shareholders are trying to make a fast buck," by pressuring the
company to approve the sale of assets or other measures the
stock owners believe will drive up stock in the short term.
"Those are not the shareholders directors feel as obliged to,"
Baker-Hughes Inc., a Houston-based oil-services company, finally
listened to shareholder Harold Mathis.
Mr. Mathis, a Richmond, Texas, real-estate investor who owns 810
Baker-Hughes shares, submitted four resolutions starting in 2000
asking the company to force its board to be judged annually in
elections. Each year, Mr. Mathis's proposal got stronger
majority support, rising to 90% in 2004.
"As long as it was improving, I was not about to stop," says the
66-year-old Mr. Mathis.
Baker-Hughes saw that he wasn't going away. So in 2005, when
Mr. Mathis submitted his proposal again, he was asked by the
management to withdraw it, he says. It turned out, he recalls,
that the board, citing continued shareholder support for Mr.
Mathis's resolutions, had decided to back a binding resolution
of its own on the same issue.
Mr. Mathis says he's pleased that his suggestion is now policy
at the company. "That was a big break there," he says.
Gary Flaharty, director of investor relations at Baker-Hughes
says, "We listened to our shareholders and responded."
--Ms. Levitz is a staff
reporter in The Wall Street Journal's Boston bureau.
Write to Jennifer Levitz at