When shareholders speak, more and more companies are apparently listening — especially when it comes to improving their corporate governance.
In just the past week alone, at least two companies announced changes that would ostensibly remove barriers to outsiders launching an unsolicited takeover.
Wyeth
Last Wednesday, $14.6 billion pharmaceutical company Wyeth said its board of directors approved an amendment to the company's shareholder rights "poison pill" plan, which effectively terminates the plan on Dec. 15.
The company acknowledged that shareholders have opposed these kinds of plans, evidenced by the approval of non-binding resolutions seeking a shareholder vote or termination of Wyeth's plan at its last two shareholder meetings.
Lucent
Also last week, $8.5 billion Lucent Technologies proposed that its entire board of directors be elected in the same year, thus eliminating its controversial staggered board of directors.
In its preliminary proxy filed with the Securities and Exchange Commission, the embattled tech company proposed declassifying its 11-member board to allow election of the entire group every year to one-year terms, starting with the 2005 annual shareholders meeting. Currently, the board is elected in three staggered terms, an approach adopted in 1996 prior to its spinoff from AT&T Corp.
The move also would allow shareholders to remove a board member with or without cause, the company said.
Lucent acknowledged that since 1998, some shareholders have submitted proposals to support the elimination of the staggered board. Since 2001, such a proposal had received the support of more than 50 percent of the votes cast.
The company even pointed out that critics charge the staggered board reduced board accountability to shareholders. "The board is committed to principles of corporate democracy," the company said in the filing. The board said its goal is to "maximize management accountability to shareowners."
The proposal, which must be supported by at least 80 percent of Lucent's outstanding shares, would not change the present number of directors, according to the filing.
Allstate
Meanwhile, a few weeks ago, Allstate Corp. announced it voted to terminate its poison pill adopted in 1999. "The board's vote to redeem the rights plan is further evidence of Allstate's commitment to strong and responsive corporate governance," said Edward M. Liddy, Allstate president, chairman and CEO, in a statement at the time.
Allstate also said the decision was made in response to shareholder concerns about the rights plan voiced in 2002.
A Growing Trend?
Wyeth, Lucent and Allstate all acknowledged what governance experts claim is now a growing trend. Companies are changing their governance practices in response to shareholder resolutions.
TOP PROXY VOTES
Company
Proposal
Vote
J.C. Penney
Adopt Sexual Orientation Non-discrimination Policy
98%
Dover Corp.
Adopt Sexual Orientation Non-discrimintion Policy
42.81%
Gentex Corp.
Improve Board Diversity
39.2%
Yum Brands
Prepare Sustainability Report
38.98%
Centerpoint Energy
Adopt Sexual Orientation Non-discrimintion Policy
32.21%
Source: ISS
"This appears to be a record year for responsiveness to majority vote resolutions," insists Carol Bowie, director of governance research at the Investor Responsibility Research Center (IRRC).
For years, shareholders have been putting forth resolutions calling for changes relating to social issues as well as eliminating or scaling back what are deemed by many to be anti-takeover measures, like the poison pill and staggered boards of directors.
In fact, in 2003 shareholders filed more than 1,000 proposals on both corporate governance and social and environmental concerns, according to the Institutional Shareholder Services.
Now, many of them are receiving majority votes.
For example, more than 40 shareholder resolutions targeting executive pay alone have received majority support, compared with only three in 2002, according to ISS.
Indeed, in the most recently completed proxy season, more than 60 percent of proposals related to eliminating poison pills or repealing classified (staggered) boards gained majority support, according to the IRRC's Bowie.
Meanwhile, 30 resolutions calling for the expensing of stock options, a resolution allowed onto proxy ballots by the SEC for the first time this year, have received majority support. In previous years, companies were allowed to exclude such resolutions from their proxy materials using the SEC's "ordinary business" exception, ISS points out.
Majority Vote Vs. Mandate
Now, keep in mind that a majority vote does not necessarily constitute a mandate. Companies voluntarily adopt changes. But, as the Lucent, Wyeth and Allstate cases demonstrate, companies are making changes in response to their shareholders' wishes.
This, in turn, could put additional pressure on companies that until now have thought it was in their best interests to spurn their investors' and ignore their non-binding majority resolutions.
In fact, in 2003 at least 22 companies asked their shareholders to repeal their classified boards, up from only five companies in 2002, according to the IRRC. And 21 of the proposals passed.
Among the companies that instituted these changes: Sprint, Dell, Dow Jones and Bristol-Myers Squibb.
Now, keep in mind that although companies don't need shareholder approval to rescind the pills, they generally do need a shareholder vote if they want to declassify their board since it constitutes a change in their by-laws. And in most cases, they need a super-majority vote to declassify.
For this reason, the proposal did not pass at Bausch & Lomb, which "only" received 76.5% of the votes, according to IRRC. "The company opposed the declassification and urged shareholders to vote against this proposal," IRRC noted in a report.
Varied Reasons
Why are companies becoming more responsive to shareholder wishes?
Obviously, one reason is the intense scrutiny of corporate governance practices since the Enron bankruptcy touched off a wave of accounting and fraud scandals two years ago. "Absence of the scandals, you wouldn't see the activity you see today," Bowie insists.
In addition, companies were anticipating that an impending new rule from the SEC, which would make it easier for dissidents to launch proxy fights, would include non-responsiveness to shareholder resolutions as one of the triggers that would allow the dissidents to move ahead with their campaign. As it turns out, the SEC did not include the non-responsiveness issue in its proposals, which are currently accepting comments.
Even so, Bowie concedes, "Companies are very sensitive about the majority votes and how responsive they appear."
Also, she says companies in general are just now getting "religion" about the importance of good governance, which has become a lightening rod for shareholder activism.
And, although there are no studies out there that suggest that companies with responsive governance enjoy higher stock market valuations than their unresponsive peers, experts believe that companies with lousy governance are in fact being penalized. "I would like to think there is positive correlation, but there is definitely correlation between poorly governed companies and problems with their stock prices," insists Cheryl Gustitus, SVP Communications for ISS.
Perhaps most importantly, governance could wind up becoming the key issue that could cost top executives and directors their jobs.
On one hand, rescinding policies designed to entrench management makes it more likely that a hostile suitor will come in and take over their company and throw them out of their jobs. However, a growing number of top executives are apparently realizing that if they don't improve their governance, shareholder activists will raise this issue as a reason for throwing out incumbent management.
"Investors are far more vocal and active today and the regulatory agencies are more vocal about bringing about reform," says Gustitus. "And directors are paying more attention because they can be ousted by shareholders."
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