In one sense, insurance giant Aflac Inc. made governance history last week, with the surprise news that it will give shareholders an advisory vote on executive compensation starting in 2009—the first major company to do so.
Then again, Aflac simply read the mood among shareholder activists, and ran to the popular side. Nothing new about that.
Cutting deals, caving in, “listening to the voice of the shareholders”—whatever you call it, embracing popular shareholder resolutions rather than fighting them is a time-honored move in Corporate America. And often, it is the wisest move, too.
“In general, companies are much more open to engaging with investors in a dialogue about best practices for corporate governance than five years ago,” says Bruce Goldfarb, senior managing director for Georgeson Shareholder, which advises companies. “This is a big change from a few years ago.”
In most cases, deals are the result of talks or negotiations with sponsors of shareholder resolutions. The company adopts the change the investor wants, and the investor drops the initiative in question. This annual backroom haggling is especially popular just before companies draw up their proxy statements, as they try to figure out a way to avoid the issue coming to a vote, even though in most cases the measures are not binding.
“It’s like two distinct cycles,” says Claudia Allen, partner at the law firm Neal Gerber Eisenberg. “It builds up into proxy season, and then dies down.”
“This year, we got a lot more calls directly from companies asking how they can be helpful and if we want to meet,” says Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees. AFSCME is a leading activist in the governance world, long pushing for majority election for corporate directors and now targeting shareholder access to the proxy statement.
Gozan
Julie Gozan, director of corporate governance for Amalgamated Bank, is a bit more guarded in her optimism. Some companies are very responsive, she says, while some won’t speak with activist shareholders at all. For example, companies are more open to discussing proposals calling on them to declassify their boards or to seek shareholder approval for “golden parachutes” that exceed certain thresholds, she says.
“It depends on the company, issue and the moment,” Gozan says.
The issue and the moment converged on Aflac in recent weeks, according to Ken Janke, head of investor relations for the $14 billion company. The company decided to adopt a “say on pay” policy—widely considered to be the issue in this year’s upcoming proxy season—in response to a proposal from Boston Common Asset Management. “I don’t know how fully aware we were of the issue when we received the proposal last fall,” Janke says.
After receiving the proposal, Janke says, Aflac executives discussed the issue internally and established a dialogue with the investor. “They tried to reassure us that they were not picking on us,” adds Janke, stressing that this is the first time the company received a shareholder proposal and that its earlier decision to adopt majority voting for directors was not in response to any proposal.
In any case, Aflac management conferred with its largest shareholders, outside experts, and its board members, including the corporate governance and compensation committees. Janke says he spent more time assessing this issue than any other in more than 20 years on the job.
Then, Janke as well as the corporate secretary and a representative from Aflac’s compensation consultant, Mercer, spoke with Boston Common over the phone. In the past few weeks there was a lot of back and forth with the investor, and eventually the corporate-governance committee recommended adopting the policy. In a press release, Boston Common praised Aflac, saying the say-on-pay police “evolved from an open and constructive dialogue.”
Negotiation vs. Confrontation
Ed Durkin, spokesman for the United Brotherhood of Carpenters, says he is more likely to discuss an issue with a company in several detailed conference calls rather than face-to-face meetings—assuming that the company is willing to talk. Typically the company includes its human-resources chief, the corporate secretary, a director, and sometimes a representative from the legal department. After several discussions, Durkin’s group will then decide whether to withdraw the proposal, depending upon the company’s reaction.
The issue in question also can make a large difference in how talks proceed. Durkin says he has seen an increase in settlements over measures calling for majority election to a company’s board of directors; half of the 72 proposals he submitted for 2007 have been settled. One major reason: there is little middle-ground on this issue, he says.
Durkin says virtually every company his union spoke with about majority voting for directors settled the issue in advance. “It was clear what we wanted,” he says. “People we don’t hear from are not intending to do it.”
Compromise on pay-related issues is a different story. This year, Durkin says, only seven or eight out of 27 companies targeted by the Carpenters’ Union have agreed to implement proposals designed to limit the amount of money executives can earn from supplemental executive retirement plans.
Durkin says companies don’t have to meet all of his demands to get him to withdraw a proposal; sometimes he is content just to get a better sense of the company’s philosophy on a particular issue. “We get a good look at the board process, and feel the company is in good hands,” he says.
Goldfarb echoes those comments, stressing the importance of open communication channels. “We counsel our clients that communication is a very important part of the ongoing dialogue with shareholders and key to a good investor relations program,” he says. “There is no normal. Every situation is unique. But, companies must be willing to have a dialogue.”
No comments yet