Is Outsourcing, Tied To Compensation, The Next Activist Issue?

The boom in offshore outsourcing is not only a lightening rod for policy makers and unions — it is also becoming a corporate governance issue at this year’s annual meetings.

As more and more companies send software design, call centers and other functions to cheap labor markets like India and China, a number of companies will be asked to defend these policies, or at least hear the complaints from some shareholders.

An outsourcing-related shareholder resolution will likely appear on the proxies of at least three major companies — IBM, General Electric and Sprint.

All of the resolutions are being sponsored, in part, by The Communications Workers of America (CWA), which has trotted out two different types of non-binding shareholder resolutions.

Big Blue Resolutions

IBM shareholders are expected to be asked to vote on a proposal that would require a review of how executive compensation policies could affect decisions to move jobs overseas to cheaper locations, according to a published report.

Big Blue has said it will move about 3,000 jobs to developing nations, but altogether plans to add about 15,000 jobs to its workforce in 2004, about 4,500 of which would be in the United States.

According to The Wall Street Journal, documents prepared in November and December 2003 show IBM executives saying they expected to save $168 million per year starting in 2006 by moving "several thousand" programming jobs to China, India and Brazil.

The shareholder proposal, which is reportedly coming from IBM employee James Mangi, a member of Alliance@IBM — an affiliate of the Communications Workers of America that has tried to organize IBM employees — calls for a review of executive compensation policies to determine whether they create "an undue incentive to make shortsighted decisions, by linking the compensation of senior executives to measures of performance that include net earnings, cash flow and earnings-per-share."

Alliance@IBM is also planning a rally outside of IBM’s annual meeting in Providence, RI.

The shareholder resolution also reportedly asserts that some compensation policies create an enormous temptation for executives to cut costs in the short-term by exporting American jobs to cheaper locations overseas without regard for the long-term effect on the company or employees.

Alarm Bells Sounding?

Meanwhile, the Securities and Exchange Commission has reportedly approved the inclusion of proposals, sponsored by the CWA, on the proxy statements of Sprint and General Electric. Shareholders will vote on whether to investigate the impact of offshore outsourcing upon the companies' brand names and reputations.

"The alarm bell has clearly been sounded and there is a very real potential for a backlash against those companies like Sprint that are moving jobs out of the country," said Jimmy Gurganus, CWA vice president for Telecommunications. "This ruling by the SEC recognizes the right of shareholders to be fully informed of a management decision that has the potential of placing shareholder value at risk and I applaud that decision."

CWA's statement of support for the Sprint proposal cites a link between the layoffs of 3,000 customer service representatives and Sprint's decision to contract with a company in India to provide customer service for Sprint PCS. Making the case that company reputations affect consumer purchases, it quotes a Wall Street Journal article pointing out that, "reputation, once lost, is extremely difficult to reclaim, no matter how much time and money companies invest in an image makeover."

Gurganus said that a large contingent of CWA members will mobilize to support the measure at the company's annual meeting April 20 in Overland Park, Kan.

GE's shareholders will address the same issue, raised in a resolution sponsored by the IUE-CWA pension fund, at GE's annual meeting April 28 in Louisville, Ky.

Compensation Connection

These are apparently the first outsourcing-related resolutions to appear on proxies, according to the Investor Responsibility Research Center (IRRC). “Three is significant,” says Meg Voorhes, director of social issues service at the IRRC.

Is this the beginning of a new source of shareholder proposals? Possibly.

However, Voorhes concedes that during this year’s presidential election, global trade in general and job losses in the U.S. are among the hot business issues. But, she adds, “I wonder how these resolutions resonate with shareholders. I don’t know.”

In fact, she’s skeptical whether these resolutions will even fare well. She thinks a majority of shareholders will simply say they trust the company to determine their global strategy. “Proposals on social issues don’t typically get majority support,” she concedes.

In fact, last year resolutions on global labor standards in general only received support from 11 percent of shareholders. However, this is up from 8 percent in each of the two prior years.

IBM’s proposal, however, is more of a compensation issue. And this is an area that has been gaining a lot of support from top securities-related officials.

In fact, last week William McDonough, the chairman of the Public Company Accounting Oversight Board, warned that he wouldn't be surprised if the U.S. government intervened to control executive compensation if company managers continued the practice of paying themselves huge sums of money (download speech).

"If the anger of the American people continues and business leaders do not wake up soon, I predict that there will be legislation," McDonough reportedly told a gathering at the Economic Club of Chicago.

He said it would be "good riddance" if a chief executive quit because his or her pay was being cut. "I would turn to the directors and point out that there are lots of fine people in America, many of them in this room, who would be happy to be CEOs at more rational levels of income," McDonough said.

And back in August, Securities and Exchange Commission chairman William Donaldson told a National Press Club audience, “One of the great, as-yet-unsolved problems in the country today is executive compensation and how it is determined.”

In fact, probably with this groundswell of criticism in mind, last week IBM announced plans to change the way it doles out stock options to top executives so that recipients are not guaranteed an immediate profit. The strike price for these options will be set at 10 percent above the market price on the day they're granted.

The new premium option plan, which applies to chairman and chief executive officer Samuel Palmisano and the top 300 IBM executives worldwide, takes effect immediately. IBM reportedly wants to expand the program to include all 5,000 executive-level employees in the next year or so.

According to Carol Bowie, the director of governance research at the IRRC, last year just 21 of more than 1,400 companies reported they granted at least one premium price option. And although a 10 percent gain is not much to expect over a 10-year period—the typical life of an executive stock option—Bowie adds, “Investors welcome any performance conditions on options.”