Corporate Governance: New Respect for an Old Ritual
Maybe the annual meeting isn't so pointless, after all
By Karen Blumenthal
The Wall Street Journal
Monday, October 9, 2006
The lowly annual meeting got a big boost this year from the Home
Depot Inc. board of directors.
Not that the directors meant to do any such thing. But at the
company's annual gathering in May, Bob Nardelli, chairman and chief
executive, was the only director to show up. Shareholders and
corporate-governance watchdogs were outraged.
It was also the best thing to happen to annual meetings in years.
The snub shed new light on an old tradition. Yes, many agree, the
annual meeting can be terribly boring. Yes, the speeches are often
long-winded and overly upbeat. Yes, some shareholders ask pointless
But the disappearing act of nearly all the Home Depot directors
drove home the significance of the once-a-year affair. In an age
where corporate governance is a front-and-center issue, the meetings
represent true shareholder democracy, the one opportunity a year
where all shareholders can see management face to face and ask
questions. If nothing else, they say, these gatherings should be
protected. In fact, they might even be worth improving.
On Second Thought
Consider the views of Richard H. Koppes. A dozen years ago, when he
was general counsel of the California Public Employees' Retirement
System, Mr. Koppes and a former Securities and Exchange Commission
commissioner co-authored an article calling for most annual meetings
to be abolished.
The gatherings had become "a monumental waste of time and money" and
"an empty ritual," the authors argued. Most shareholders couldn't
attend, executives almost never said anything new and the biggest
shareholders didn't come because they could get an audience with
management by themselves. Small shareholders, they wrote, could
have their questions answered by investor-relations departments.
They saw a need for meetings only when a company faced a crucial
decision, like a merger. Then, they proposed, some small percentage
of shareholders should be able to require a meeting.
But today, Mr. Koppes feels differently. "I would not get rid of
annual meetings," he says. "There's a lot to be said for having the
CEO and the directors present and facing the shareholders once a
What changed his mind? "Seeing how much corporations hate these
events and would like to duck them," he says, and "the Home Depot
It's hard to imagine that top managers ever relished the shareholder
meeting, which dates back to the beginning of the corporation in the
17th century. Then, British courts ruled, an owner's vote was such
a precious responsibility that shareholders were obligated to attend
their regular gatherings. That practice carried over to the U.S.,
where shareholders routinely challenged management and sometimes
executive pay, and elections of directors were contested. States
began to allow voting by proxy in the late 1800s as the number of
shareholders boomed and management began to get the upper hand over
owners. For a time, meetings were far less eventful.
The End of Time
After the 1929 stock-market crash, though, shareholders began to ask
more questions again, and the first gadflies began to show up
regularly at the annual affairs. Meetings could be raucous. In
1949, Irving Olds, chairman of U.S. Steel, used his gavel so
emphatically to regain order that he hammered his own watch into
oblivion. During the late 1960s and early 1970s, protestors saw
annual meetings as a forum for highlighting a company's role in the
Vietnam War. Today, at any given meeting for a decent-size company,
shareholders might encounter any of those groups -- environmental
activists, professional gadflies, mutual funds with a social mission
and small shareholders with offbeat questions.
Companies are required to hold the meetings, but the format is up to
the executives. Some meetings are quick and routine, and over in
half an hour. Others are almost entertainment events. Wal-Mart
Stores Inc. takes over an arena at the University of Arkansas in
Fayetteville to hold its roughly 15,000 attendees, and often brings
in celebrities. Starbucks Corp. spends nearly two hours
entertaining roughly 5,000 people with videos, speeches and music
performances. By the time the question-and-answer session comes up,
many shareholders have gone. This year, the shareholders quizzed
the company's management for exactly 11 minutes.
No wonder, then, that some executives are cynical that anything
productive can come out of the events. "They're all Kabuki plays,"
says Robert L. Crandall, the former AMR Corp. chairman and chief
executive who now is a director of several companies, including
Halliburton Co., referring to the highly ritualized Japanese
performances. "I've never been to an annual meeting where I thought
there was a substantial exchange of information."
But Richard Ferlauto, director of pension and benefit policy for the
American Federation of State, County and Municipal Employees, says
his statements and questions sometimes get the attention of key
directors and lead to better negotiations. A few years ago, he
protested executive compensation at the annual meeting of a
retailer. The CEO wasn't receptive, but the chairman of the board's
compensation committee approached him afterward. That meeting led
to later discussions and some agreement between the company and the
union, Mr. Ferlauto says.
At the Home Depot meeting in May, Mr. Ferlauto put Mr. Nardelli on
the spot. The company already had put off shareholders by moving
its once-popular meeting to Wilmington, Del., a day's drive from its
Atlanta headquarters, and Mr. Nardelli and the board were under fire
for Mr. Nardelli's rich compensation package. The company skipped a
business overview and the traditional question-and-answer session,
and Mr. Nardelli didn't answer questions about his pay. In a brief
"comment" period during the 30-minute meeting, Mr. Ferlauto asked
Mr. Nardelli whether other directors were in attendance and would be
When Mr. Nardelli said they weren't there, Mr. Ferlauto accused the
board of being "too chicken to face shareholders."
Home Depot isn't the only company where directors don't show. But
with Home Depot's pay issues already in the news, the directors'
absence made the company a poster child for poor corporate
governance. The day after the May 25 meeting, the company
apologized, sort of, saying in an emailed statement that it didn't
mean to offend any shareholders or show disrespect for them by
trying a different approach. In a news release a few days later, it
promised that directors would return to future meetings, and it
would go back to its traditional format, including a business
overview and a chance for shareholders to ask questions.
Suggestions for Improvement
Other than requiring directors to show up, how else can companies
improve the annual meeting? Here are recommendations from a
cross-section of executives, directors, activists and other
• Welcome the little guy.
So what if the small shareholders who come can't influence the
election? So what if they're mostly retirees with a little extra
time on their hands? They still have an investment in your
company. Among other things, that means holding the meeting in an
Dick Kovacevich, chairman and chief executive of Wells Fargo & Co.,
says his banking company has a goal to increase its percentage of
small investors. "They're more loyal, and they don't generally
operate as a herd," he says. Making sure their questions are
welcome at the meeting also means accepting the activists as well.
"It's not a lot of fun, but it's part of the democratic process," he
• Let the directors mingle -- and
even speak sometimes.
Both directors and shareholders say they have had worthwhile
conversations in the lobby before and after the meeting, exchanging
ideas and information. Directors don't have to present reports, but
shareholders who ask executive-pay questions should be able to hear
from the compensation-committee chairperson, and they should be able
to ask questions of individual directors. "I don't think it's
unrealistic for the chairman of the compensation committee to be
willing to defend the work the committee has done," says Beth Young,
senior research associate at Corporate Library, an investor advocate
and research group in Portland, Maine.
The Catholic Equity Fund this year went a step further, proposing
that shareholders at several companies, including Cendant Corp. and
Exxon Mobil Corp., vote on directors' pay as well as electing
directors. The proposals fell far short of passing, but the fund
may try again next year. When management helps determine how much
the directors make, "how many people are going to stand up to the
CEO?" says Daniel J. Steininger, chairman of the fund, in
Milwaukee. "If shareholders could vote on directors' pay, I think
directors would feel more accountable to shareholders."
• Offer a question-and-answer
session and give people a reasonable amount of time to speak.
Both management and shareholders roll their eyes at shareholders who
try to take over a meeting with endless questions or polemics, but
even that's better than no questions at all. Shareholders should
have three or five minutes to make their points, even if the
subjects lack gravitas. The Exxon Mobil meeting, once an
antagonistic affair, was much smoother this year under new Chairman
and CEO Rex Tillerson, who let shareholders query him at length.
The meeting also ran just over three hours.
The sessions "should be viewed as a time and event at which
governance issues and questions can be raised and discussed openly
and directly," says John C. Wilcox, senior vice president and head
of corporate governance for TIAA-CREF, a financial-services firm
with $380 billion in assets under management.
Still, a routine, boring meeting isn't a bad thing. It may mean the
company is running smoothly and shareholders aren't angry or worried
about the company. Says Ms. Young, "Just because people don't use
something frequently doesn't mean it's not valuable."
--Ms. Blumenthal, senior editor
of The Journal Report, is based in Dallas. Part of this was adapted
from "Grande Expectations: A Year in the Life of Starbucks' Stock,"
to be published in April 2007.
Write to Karen Blumenthal at