Delta Air Lines (DAL) pilot Michael H. Messmore was incensed at the $28 million golden parachute handed to former Delta Chief Executive Ronald W. Allen when he resigned in 1997. To stop such excesses, Messmore, with the backing of the Air Line Pilots Assn., submitted a proxy resolution in 2000 demanding shareholder approval of such deals. The initiative was rejected three years in a row. But at Delta's annual meeting on Apr. 25, widespread shareholder anger over revelations of bankruptcy-proof retirement packages for current executives put Messmore's resolution over the top, with a 54% majority. Another pilot-sponsored proposal calling for the cost of stock options to be deducted from earnings racked up a 60% majority. "Executive compensation is out of whack," says Messmore.
Call it the revenge of the battered shareholder. Across Corporate America, proxy resolutions aimed at curbing CEO pay are winning unprecedented victories. Most are sponsored by union and public pension funds, which are capitalizing on investor ire over fat pay packages at poorly performing companies. So far, they've scored more than two dozen majority votes on issues such as golden parachutes and expensing stock options, vs. two last year. "Shareholders are saying, 'I'm mad as hell and I'm not going to take it anymore,"' says shareholder activist Nell Minow.
But will companies get the message? Shareholder resolutions, after all, aren't binding, leaving management free to ignore them. Still, the current spate of shareholder votes is likely to spur a fair amount of reform. For example, both companies that lost proxy battles over executive pay last year, Bank of America (BAC) and Norfolk Southern (NSC) Corp., eventually adopted the measures. "Everyone's a lot more sensitive to majority votes now," says Rosanna Landis Weaver, an analyst at the Investor Responsibility Research Center in Washington.
What's really making a difference, experts say, is a new willingness by mutual funds and other institutional investors to vote against management. At Fluor (FLR) Corp., for example, labor racked up a stunning 78% majority for an option-expensing resolution. "There's been a sea change in attitude" among such private money managers, says Patrick McGurn, a vice-president at Institutional Shareholder Services Inc., which advises pension and mutual funds on how to vote their proxies.
Indeed, the pressure on management is so great this season that some companies have caved in without a vote. This happened at both General Electric (GE) Co. and Coca-Cola (KO) Co., which revamped special executive pension benefits in exchange for a promise by the AFL-CIO to withdraw resolutions on the issue. And just days before the Apr. 29 annual meeting at Exelon (EXC) Corp., labor withdrew a similar resolution after the electric company pledged to stop giving executives pension credit for more years than they have worked. "It is better for us to be viewed as proactive," says an Exelon executive. "It became clear that a number of shareholders were interested in changing the policy."
Labor activists are far from done. The AFL-CIO, which has spearheaded dozens of resolutions, now plans to press companies where reforms won majorities to lay out concrete plans for implementing the policies. If management refuses, union pension funds will try to unseat key board members, warns William B. Patterson, head of the AFL-CIO's Office of Investment. That's no idle threat, either: The Securities & Exchange Commission is likely to institute rule changes that could make it easier for shareholders to nominate their own directors.
Labor hasn't won over other shareholders on all its ideas. It has scored 30% or less on proposals to link executive options to the company's share-price performance, for example. But those tallies are the exception to what's shaping up as a red-hot shareholder backlash against high executive pay. By Amy Borrus in Washington, with Michael Arndt in Chicago