Revolt of the Shareholders
Associated Press
The annual-meeting season is here, and one thing seems certain: companies are going to have to meet with some very disgruntled investors.

HE annual-meeting season is here, and one thing seems certain from a glance at the resolutions shareholders have filed: the persistent bear market and recent corporate scandals have taken as great a toll on trust in management as they have on investors' wallets.

State pension funds, unions and other investors, big and small, are clamoring for their say on executive compensation packages, board elections, even choosing where companies are incorporated. They want General Electric to trim severance packages, Citigroup to eliminate golden parachutes, Sprint to stop repricing the stock options granted to management and Delta Air Lines to charge stock options against earnings. They want Qwest Communications to link options to performance, Wal-Mart to split the job of chairman and chief executive into two posts and General Motors to protect the environment.

In New York, William C. Thompson Jr., the city comptroller, acting on behalf of the New York City Police and Fire Department Pension Funds, has submitted resolutions to G.E., Halliburton and ConocoPhillips asking for a board review of their offshore operations in terms of "potential financial and reputational risks" arising from conducting business with terrorist-linked countries like Iran.

It's going to be a raucous few months. Companies as disparate as Cendant and Eastman Kodak, Exxon Mobil and AOL Time Warner, Coca-Cola and Bank of America, Bristol-Myers Squibb and SBC Communications are going to have to meet with very disgruntled shareholders. Angry investors have already filed a record number of resolutions for inclusion in the proxy statements sent each year to all investors.

The deadline for filing proxy resolutions at most companies comes in the fall, months before the annual meeting, and few shareholders recognized in the autumn of 2001 exactly how bad corporate behavior had become; Enron, scene of the first big scandal, did not begin its spiral into bankruptcy until that November. But investors have now had more than a year to stew over their helplessness as news of other accounting and insider-trading scandals has piled up.

The Investor Responsibility Research Center, a nonprofit group in Washington that advises institutions on proxy issues, has already counted 893 resolutions this year through Friday, compared with 802 for all of 2002's proxies. Most are related to corporate governance issues — 653 so far, versus 529 in 2002.

Apparently, shareholders do not believe that the new laws, rules and policies spewing from Washington and Wall Street will safeguard their investments. "It surprises a lot of our clients, but the Sarbanes-Oxley bill is simply not warding off a record number of shareholder resolutions," said David Drake, a managing director of Georgeson Shareholder Communications, a proxy solicitation firm.

IMMUNITY has not been granted to companies whose names have not been linked to corporate evil-doing. Kodak, for one, faces six resolutions, up from two last year and three the year before. They touch on stock options, environmental reporting, board elections — none of them areas in which the company has been castigated of late. G.E., whose annual meetings were once seen as virtual love-ins, has been bombarded with 25 shareholder proposals, the most in corporate America, questioning everything from compensation plans to nuclear power plant safety.

"Investors are seeking a new gold standard for corporate governance, and they are putting a lot of companies onto their post-Enron punch list," said Patrick S. McGurn, senior vice president of Institutional Shareholder Services, which advises institutions on proxy matters.

Shareholders, it seems, have come to recognize the potentially sinister implications of seemingly benign corporate policies. Years ago, they endorsed the spread of stock options in the belief that options aligned executive interests with their own; then they saw executives manipulate earnings reports to pump up their options. Shareholders enjoyed the tax savings that companies like Tyco International and Ingersoll-Rand received for incorporating in Bermuda — until they discovered that it does not allow aggrieved shareholders to sue.

On their own, shareholder resolutions are unlikely to bring fundamental management change. Few ever garner a majority vote. More important, the vast majority of them are "precatory," or nonbinding, so management can ignore them even if they are voted in. The New York City Pension Fund System has actually filed resolutions at several companies, including Pacific Healthcare, Gillette, Goodyear and Hasbro, to require them to take action on any resolutions that win a majority — but that, too, is nonbinding.

Still, the resolutions are not futile exercises. They are a highly public way for shareholders to register anger with management — and potentially a public relations nightmare.

Last year, "we saw record-breaking votes for resolutions on auditor conflicts, golden parachutes, all sorts of issues that used to attract just modest support," said Carol Bowie, director for governance research at the Investor Responsibility Research Center.

This year, labor in particular is flexing its muscles. According to the A.F.L.-C.I.O., union funds have filed 380 resolutions this year, up from just about 200 last year and about 170 in 2001. "The conduct of companies has simply called for a greater response from us," said Michael Zucker, director for corporate affairs at the American Federation of State, County and Municipal Employees, which has filed 22 resolutions, triple its usual number.

Companies that are not yet listing stock options as an expense, or tying them to performance, are in for a particularly bumpy ride. According to the research center, pay issues, especially those related to options, have wrested the spotlight from the way auditing firms are paid, last year's hot subject. In 2002, just 19 percent of the governance resolutions dealt with pay packages. This year, 44 percent do.

Revolt of the Shareholders
Associated Press
The annual-meeting season is here, and one thing seems certain: companies are going to have to meet with some very disgruntled investors.

(Page 2 of 2)

"Compensation hasn't traditionally been a top theme in shareholder resolutions, but the controversies surrounding option plans may be changing that," said Jannice L. Koors, a managing director of Pearl Meyer & Partners, the compensation consulting firm.

The timing is not coincidental. The Financial Accounting Standards Board, the Securities and Exchange Commission and the stock exchanges are all considering new rules or policies that could force companies to list options as expenses and that would eliminate tax disincentives for linking options to performance. But shareholders are not confident that the rules will be carried out. Besides, the proposed rules do not cover how long executives must hold onto options, how compensation will be set in a takeover situation or other pay issues that have raised shareholder ire.

"We've always pushed companies on executive compensation, but we are really putting a bigger effort into it now," said Ted White, director for corporate governance at the California Public Employees' Retirement System, known as Calpers.

Not all the resolutions will make it to a vote. For example, the S.E.C. has consistently allowed companies to omit resolutions that would let shareholders list their candidates for directors in the proxy. The state and municipal employees union nonetheless proposed six resolutions asking for exactly that — at AOL Time Warner, Bank of New York, Citigroup, Kodak, Exxon Mobil and Sears, Roebuck. But Mr. Zucker acknowledged that it is facing "huge corporate resistance" to that.

TO avoid bad publicity, companies sometimes capitulate to a shareholder's demands in discussions before the shareholder files a resolution. Late last year, both Bank of America and Norfolk Southern, for example, agreed to allow shareholders to vote on golden parachutes, fending off proposed resolutions. The A.F.L.-C.I.O. scuttled planned resolutions dealing with supplemental retirement plans at both G.E. and Coca-Cola a few months ago, after they agreed to phase out parts of the plans that the union found objectionable.

When Dow Chemical recently said it would split the job of chairman and chief executive, the A.F.L.-C.I.O. quietly scrapped a resolution demanding that Dow do so. For three years running, Airborne Express did nothing when its shareholders voted yes to a resolution asking that it eliminate staggered elections for its board; Airborne changed its policy a few months ago after shareholders proposed a resolution that would bind management to comply.

"Even the threat of a shareholder proposal is a ticking time bomb that serves as a real bargaining chip," said Nell Minow, a founder of the Corporate Library, a research group that follows boards.

Indeed, some shareholders — TIAA-CREF, the huge pension and mutual fund manager, is a notable example — have become experts at using the specter of negative publicity as leverage. Peter C. Clapman, TIAA-CREF's chief counsel, said he wrote 30 "pleasant letters" to companies "saying we have issues with their compensation plans," and hinting that he would file resolutions if they did not "open a dialogue." He was satisfied with responses from 20 of them. He filed resolutions against 10, but withdrew four after they modified their plans. He said he was still talking to an additional five and would not identify them until he was certain that they would refuse to budge.

Mr. Clapman offered details on just one resolution — a request for a significant revamping of the stock option plan at SBC Communications. SBC tried — unsuccessfully — to obtain the S.E.C.'s permission to ignore the resolution, thus making secrecy a moot point.

ALL told, enough shareholder resolutions will undoubtedly survive to turn some annual meetings into brawls. No one realistically expects Halliburton, G.E. and Conoco to ward off resolutions by backpedaling on Middle East operations. (However, Wendy Hall, a spokeswoman for Halliburton, said that the company is "opening a discussion" with the shareholders who submitted the proposal.)

Tyco, which is registered in Bermuda, has made it clear that it will battle efforts to force it to incorporate in the United States, and few experts expect Ingersoll-Rand, McDermott International, Nabors Industries or other companies incorporated in Bermuda or Panama to cave in on that issue either. And the 18 shareholder resolutions filed to Exxon Mobil — second in number only to G.E. — include several longstanding environment-related ones that the company fights routinely.

G.E. certainly will not dispense with all 25 resolutions it faces. The company has been hit with resolutions from disparate sources — the A.F.L.-C.I.O., the Sisters of Saint Dominic of Caldwell, N.J., perennial individual shareholder activists like Evelyn Y. Davis and John Chevedden, and one of its own pensioners, Helen Quirini, 82, who heads a group called the G.E. Retirees Justice Fund.

G.E. is heading some off at the pass. Andrew Sigler, a former chief executive of Champion International who is G.E.'s newly named presiding director, just agreed to a March 13 meeting with several union and pension fund leaders to discuss executive compensation issues that are the subject of resolutions.

Last week, after G.E. agreed to determine the pay of senior executives without counting income from its pension fund, the Communications Workers of America and the Connecticut Retirement Plans and Trust Funds withdrew their proposed pay-related resolutions. And "there is a good chance a lot more of these issues will be resolved," said Meredith Miller, assistant treasurer for policy for Connecticut.

Still, Gary Sheffer, a spokesman for G.E., estimates that anywhere from 12 to 15 resolutions will make it to the proxy, a hefty increase from 8 last year, 7 in 2001 and 11 in 2000.

"Shareholders are no longer just interested in the numbers," he said. "They want to participate in the nuts and bolts of how companies run."

For that reason alone, meetings could be long and loud. Governance experts say shareholders are unlikely to be content to simply badger management by proxy this year.

"They are going to ask a lot of questions at annual meetings this year," predicted Ms. Minow of the Corporate Library. "If they don't like the answers, they won't wait until next fall to propose the next year's resolutions."