In recent years, union and public pension funds have filed torrents of shareholder resolutions to prod Corporate America into good governance. Now, the reformers are getting personal. Instead of simply targeting management as a whole, labor and other activist institutional investors are putting individual board directors on the spot. The most contentious move is a spate of vote-no campaigns to toss out key directors as they come up for reelection in the spring annual meeting season. The goal: to break up the cozy club atmosphere that permeates many boards and hold directors personally accountable for exorbitant executive pay, board conflicts of interest, and other unsavory practices.
Labor has been gearing up for months to single out directors, but the effort suddenly gained momentum after shareholders' unprecedented vote of no confidence in Walt Disney Co. (DIS) CEO Michael D. Eisner at the company's Mar. 3 annual meeting. Sources tell BusinessWeek that labor plans campaigns against up to 18 individual directors in the 2004 proxy season. "Investors want assurance that directors are looking after their interests and not simply rubber-stamping management," says Carol Bowie, director of governance research at the Investor Responsibility Research Center (IRRC) in Washington.
The stakes are high. The Securities & Exchange Commission is now mulling a rule that would allow shareholders to run insurgent candidates against directors on the proxy in some circumstances. One of the proposed triggers, a no-vote of 35% or more against a director, seemed an almost insurmountable hurdle before the Eisner showdown. No more. Labor's new campaign sets the stage for contested director battles in 2005, when the new SEC rule is likely to take effect. "We are going to [vote no] more than we did in the past, now that it [could be] more meaningful," says Peter C. Clapman, senior vice-president at TIAA-CREF, the $307 billion teachers' retirement fund.
All this has companies edgy. The Business Roundtable says that putting individuals on the hot seat will disrupt boards and can mask a separate agenda. "In many cases, labor unions and other interest groups are trying to exercise influence on board selection and ultimately on how companies are run," says BRT President John J. Castellani.
Still, the AFL-CIO plans to ask other shareholders to withhold votes for Comcast Corp. (CMCSK) CEO Brian L. Roberts, arguing that as a company insider he should step down from the board's nominating committee. It also opposes director Decker Anstrom, saying his ties to a company that sells programming to Comcast undercut his status as an outside director. A Comcast executive says both men's roles are in compliance with SEC and NASDAQ rules.
THE FAT PAYOUT PATROL
In April, labor plans to roll out similar attacks on up to a dozen directors who sit on compensation committees that have lavished fat payouts to execs. Among the current targets: three board members at United Rentals Inc. (URI), an equipment-leasing company that has offered big severance packages for top management -- including the three directors themselves. A lawyer for United Rentals says the company expects to slash severance deals from the levels that sparked the AFL-CIO's concern.
Labor's tough new stance has been getting results. In December, the pension plan of the American Federation of State, County & Municipal Employees (AFSCME) and three public pension funds submitted a resolution at Marsh & McLennan to nominate directors if the SEC adopts its shareholder-access rule. The company was expected to announce on Mar. 18 that it was adding former U.S. Attorney Zachary W. Carter to its slate of board nominees, a candidate with strong backing from AFSCME. In return, the union and funds would pull their proposal.
Similarly, to head off an embarrassing showdown at its Apr. 28 annual meeting, General Electric Co. (GE) quietly agreed to take Kenneth G. Langone off its compensation committee after the AFL-CIO threatened to withhold votes from the controversial director. As ex-chairman of the New York Stock Exchange's compensation committee, Langone approved former Big Board CEO Richard A. Grasso's $140 million payout. If unions and other activists keep up the pressure, more directors may find that board posts aren't quite the cozy perch they once were. By Amy Borrus, with Aaron Bernstein, in Washington