Issues

AFSCME 2007 Proxy Season Review

Season Overview

The AFSCME Employees Pension Plan's (“the Plan”) 2007 shareholder activity was a continuation of our program from previous years.  Shareholder democracy and CEO pay remained the central themes for shareholder proposals.  The Plan’s proposals are intended to address and promote the goals of director accountability and aligning the interests of management with those of shareholders in an effort to improve corporate performance.   The Plan filed 29 shareholder proposals for the first half of the 2007 proxy season.  Through dialogues with companies, eight of the proposals were settled and withdrawn.  Binding majority voting proposals were most successful at producing settlements, as four companies agreed to amend their bylaws to allow for majority voting rather than place the matter to vote.  As to the other settled proposals, SunTrust Banks agreed to place and support a bylaw amendment to declassify its board and Bristol Myers and Tyco agreed to join a working group of institutional investors and companies to study the concept of the an advisory vote on executive compensation (“Say on Pay”) and how it might be implemented in the U.S. market.   Of 20 proposals that came to a vote, three received outright majorities.  Second-year proposals asking for a “Say on Pay” did quite well, averaging nearly 42 percent and receiving a majority vote at Ingersoll Rand. The other two majority votes were for board declassification proposals at Hess and Limited Brands.

Advisory Votes on Executive Pay

In 2006, the Plan imported the U.K. advisory vote model by filing “Say on Pay” shareholder proposals at seven companies, seeking to test the concept with institutional investors and the reaction of board compensation committees.  The proposals averaged more than 41 percent support from shareholders   In 2007, the second year proposal to give shareholders an up or down vote on executive compensation continued its strong momentum among investors. The issue became the signature, hot-button shareholder initiative of this proxy season, coming to a shareholder vote at more than 40 companies. In April 2007, the House of Representatives approved a bill  that would give shareholders an annual advisory vote on executive pay, and a similar bil has been introduced in the Senate.   Morgan Stanley (4/10) – 39.2% (of votes for and against)   Bank of New York (4/10) – 44.8%   Citigroup (4/17) – 46.2%   US Bancorp (4/17) – 42.9%   Wachovia (4/17) – 38.7%   Merrill Lynch (4/27) – 45.6%   Qwest Communications – 23.0%   Ingersoll Rand (6/6) – 56.7% Countrywide Financial (6/14) – 34.7% Bristol-Myers Squibb and Tyco – proposals withdrawn; both companies agreed to join a working group of institutional investors and companies to study the concept of the an advisory vote on executive compensation   Affiliated Computer Services (6/7) – 25.6% (note: Chairman Deason controls 41.6% of the company’s voting power; if Deason's voting block is removed from the results, 52% of unaffiliated shareholders for Say on Pay.)

Vote No at Affiliated Computer Services (ACS)

Additionally, the Plan also launched a campaign to withhold votes from four of the eight directors serving on ACS’s board because of backdating  and issues related to excessive pay for executive officers. Directors Darwin Deason, Frank Rossi, J. Livingston Kosberg and Joseph O’Neill served on the Compensation Committee during the period when backdating occurred, and Kosberg and O’Neill were also targeted for awarding excessive contracts and perquisites and making compensation decisions without regard to performance.  Several days after the shareholder meeting, the ACS board announced a waiver agreement with Chairman Darwin Deason and Cerberus Capital to suspend their exclusive rights to negotiate a deal with the company to take it private and that the board would seek takeover proposals that would compete with the current deal.   All eight ACS directors received about 30% opposition at the annual meeting. However, when Deason's voting block is removed from the results, approximately 56% of unaffiliated shareholders voted against each of the directors.

Proxy Access

The Plan won its appeal on proxy access in a landmark ruling in AFSCME v. AIG in the Second Circuit Court of Appeals.  Proxy access is designed to give shareholders a meaningful voice in board elections by opening up the director nominating process. The ruling has forced the SEC to move to issue proposed proxy rule changes in an effort to have final rules in place before the 2008 U.S. proxy season.   Hewlett Packard (3/14) – 43.0 percent. Other filers were the New York State Common Retirement Fund, the Connecticut Retirement Plans and Trust Funds and the North Carolina Retirement Systems.

Majority Vote Standard (all binding proposals)

All of these binding proposals would amend the company bylaws to require that directors receive the support of a majority of the shareholders present, not simply a plurality.  None came to a vote, as in each case, the company either implemented majority voting or agreed to place it to vote.   Lehman Brothers – proposal withdrawn, company agreed to place bylaw amendment to shareholder vote.   Honeywell – proposal withdrawn, company changed its bylaws (note: a Plan proposal had received a majority in 2006)

Wells Fargo – proposal withdrawn, company changed its bylaws   Genzyme – proposal withdrawn, company agreed to place bylaw amendment to shareholder vote.

Performance-based Measures for Restricted Stock

This proposal asked companies to add performance-based vesting measures to restricted stock.  This proposal is designed to counter the more common practice of awarding executives large amounts of restricted stock based on the length of time they serve, rather than the company’s performance during their tenure.   JP Morgan Chase (5/15) – 42.1%

Classified Boards

These proposals seek the annual election of directors.    Hess (5/2) – 81.7%   Limited Brands (5/21) – 75.5% (from initial company reports)   SunTrust: proposal withdrawn.  Management agreed to place to vote (and support) a bylaw amendment to declassify its board.  A 2006 Plan proposal to declassify had received 56.1 percent in 2006.

Equity Compensation Holding Policy

In an effort to better align management and shareholder interests, these proposals asked for a policy that executives must maintain a percentage of after-tax shares from equity compensation plans, rather than cashing out and being left with little equity stake in the companies they run.   Adobe Systems (5/5) – 28.5%   Boston Scientific (5/8) – 21.9%%   Apple Computers (5/10) – 38.3%   Danaher (5/15) – 21.1%

Solicitation Expenses

Currently, in a proxy contest, management can spend unlimited sums from the corporate treasury, while shareholders who nominate a candidate must bear the cost of a solicitation themselves.  This inhibits shareholders from nominating qualified candidates.  The Plan proposed that in the case of a shareholder who nominates candidates for fewer than half the seats on the board, that shareholder can recoup their solicitation costs so long as one or more candidates wins a seat, shareholders are not allowed to cumulate votes, and the amount reimbursed cannot exceed the amount expended by the corporation.    Apache (5/2) –13.9%

Independent Chairman

It is the board of directors’ responsibility to monitor the Chief Executive Officer.  It is the Chairman’s job to run the board.  If the CEO is also the Chairman, then there is an inherent conflict of interest, as the Chairman is then in effect in charge of the body charged with monitoring his or her own performance as CEO.    Home Depot (5/24) – 33.7%

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Sheila Hill
Local 1319, Maryland

Sheila Hill

"I've worked hard for my pension, and my union works hard to protect it. We want to ensure that our pension investments keep companies and CEOs honest and our retirement secure."