A year ago, with the governance reform movement in full swing, the nation's executives tended to keep their grumbling about the changes being imposed to themselves. Investor confidence was at an all-time low, multibillion-dollar restatements of accounts were all too common, and images of handcuffed executives being carted off to courthouses flooded the media. The need for additional oversight was everywhere apparent, and it was only the rare executive who spoke up to argue otherwise.
Today the reform drumbeat is as loud as ever, and shareholders are, if anything, more insistent in their demands. But something has changed: Some executives and directors are digging in their heels as the fight over who really holds corporate power enters a new phase. With the Securities & Exchange Commission poised to consider a new rule giving shareholders far more say in choosing directors, management and boards are fighting back.
There's little doubt that two years of changes have dramatically improved governance at hundreds of companies, from Walt Disney (DIS) to General Electric. But the threat of a major shift in the balance of power, which would favor shareholders over current management, is raising the stakes. And that has made holdouts in the governance revolution more obstinate than ever. They're publicly complaining about the existing reforms, standing up to shareholder activists who are pushing additional changes, and mounting an all-out effort against the proposed change in SEC rules. "Nobody's saying [the system] didn't need fixing," says David A. Nadler, chairman of Mercer Delta Consulting LLC, which advises CEOs and boards. "But there's an increased view that the fixing is getting as onerous as the problems they were intended to remedy."
A Deaf Ear
Sensing an opportunity, managers are increasingly pushing back. In recent weeks, the Business Roundtable has criticized the California Public Employees' Retirement System for its sweeping campaign to withhold support from directors at 2,400 companies where auditors do consulting work because they view such ties as a potential conflict. On May 27, John A. Thain, CEO of the New York Stock Exchange, told the Economic Club of New York that reform had "gone far enough." And Herbert A. Allen, a director at Coca-Cola Co. (KO), penned an article in The Wall Street Journal ridiculing a campaign to withhold support for fellow director Warren E. Buffett at the company's annual meeting.
In some cases, though, directors are doing more than just complaining. Even as boards generally have become more responsive to shareholders, some have turned a deaf ear to them. With shareholders at many companies sounding the alarm over massive options grants, dozens of companies responded by scaling back. But both Yahoo! Inc. and eBay Inc. gave huge grants to their CEOs this year. In March, Yahoo's Terry S. Semel received a grant worth an estimated $92 million, and eBay's Margaret C. "Meg" Whitman was awarded a grant worth some $25 million. Yahoo says Semel's grant was in exchange for meeting performance goals. EBay notes that the 600,000 options Whitman received in March is a far cry from the 1.1 million she received last year.
Other companies continue to fight against expensing stock options, although a majority of their shareholders have urged them to. Even as the tech industry is lobbying for an anti-expensing bill that is making progress in the House of Representatives, for example, both Intel Corp. (INTC), and Hewlett-Packard Co. (HPQ) have refused to begin expensing options despite winning shareholder resolutions at both companies urging them to do so. Intel says it is premature to change its expensing policy before federal expensing rules take effect and HP says its board will "carefully deliberate on this matter." And it's not just tech. At Sears (S), Gillette (G), and Federated Department Stores (FD), boards ignored several shareholder resolutions calling for an end to staggered board elections. All three companies argue that staggered board elections protect shareholders in a takeover attempt.
Yet nowhere is the backlash against reform more apparent than in the business community's response to the SEC's director election proposal. Despite widespread support among shareholders, corporate interests are mounting an unprecedented campaign to kill the reform, which they say would allow labor and other interests to push their agenda. They're unlikely to succeed in killing the measure outright, but the lobbying may succeed in watering it down. The Business Roundtable, for instance, wants to require a majority vote by shareholders against a sitting director before shareholders can nominate their own board candidates. Says Sarah Teslik, executive director of the Council of Institutional Investors: "The business community has accurately figured out that this rule is a significant shift in the balance of power."
Another reason for the backlash is money. The Sarbanes-Oxley Act is turning out to be much more expensive and time-consuming than was originally thought. According to AMR Research Inc., compliance spending will reach $5.5 billion in 2004 and will probably grow again in 2005 -- forcing companies to divert cash from information-technology and other projects to pay for it. Critics say the reforms have already taken a toll: The number of new foreign companies listed on the NYSE each year has dropped by half. And according to the law firm of Foley & Lardner LLP, a fifth of U.S. companies are considering going private to escape the requirements.
Such complaints are just one sign of creeping reform fatigue. For two years, companies have had to revamp board composition, change the way they pay auditors, certify financial statements, and make dozens of other changes. The demands on directors -- longer, more frequent meetings, and increased legal exposure -- are considerable. And unlike a year or two ago, there's a growing cadre of managers and directors willing to argue publicly that reforms are ineffective or unnecessary. Two-thirds of the 115 small public companies surveyed by Foley & Lardner said the new governance reforms are "too strict," up from 55% the year before. "We needed to fix problems, and it looks like we fixed them," says Barbara H. Franklin, a longtime director at Dow Chemical Co. (DOW) and Aetna Inc. (AET). "But let's not pile on more."
The griping may simply prove that all the efforts that have been made by regulators and Congress to rein in the excesses of Corporate America are working exactly as intended. Yet many shareholder activists worry that the pushback on various fronts may make it harder to continue to win needed changes. "When there's more than one stick poking at the bear," says governance watchdog Nell Minow, editor of the Corporate Library Web site, "you get a very angry bear."
No doubt. But by picking their battles carefully, shareholder activists can still accomplish a great deal. The distrust created in the aftermath of the scandals is still part of the landscape. Like it or not, shareholders have a seat at the table, and they're not going away.
By Louis LavelleWith Ronald Grover in Los Angeles and Amy Borrus in Washington