No Letup from Proxy-Access Advocates
By Louis Lavelle
Labor groups, institutional investors, and shareholder activists have been of one mind lately. They want the Securities & Exchange Commission to approve a new rule that would allow shareholders to nominate candidates for corporate boards through the company proxy.
But after a burst of initial momentum, the rule appears to be on the SEC's back burner, and its post-election future is iffy. A new report from Ralph Nader's Public Citizen charges that the Bush Administration has been trying to kill it. Democrat John Kerry, however, supports the rule.
With Election Day less than a week away, supporters of the so-called proxy-access rule have taken a new tack -- they're launching identical proposals at shareholder meetings of some of the nation's most troubled companies.
On Oct. 27, two of the biggest public pension funds targeted oil-services and construction giant Halliburton (HAL ) -- Vice-President Dick Cheney's old stomping ground as the CEO from 1995 to 2000. The American Federation of State, County & Municipal Employees (AFSCME) Pension Fund and the Connecticut Retirement Plans & Trust Funds (CRPTF) announced they plan to launch a resolution at the company's 2005 annual meeting that, if successful, might give shareholders the right to nominate at least two director candidates in 2006.
Their task is daunting. Even if the resolution is approved, it would be nonbinding, and Halliburton would still have to agree to implement it. Then the funds -- which combined own less than 1% of Halliburton -- would need to create a coalition of shareholders that own at least 5% of the shares in order to nominate director candidates. To oust an incumbent director, the shareholder nominees would need to win a plurality of the votes cast at the annual meeting.
In many ways, the Halliburton board is an odd target of pension-fund wrath. The 11-member board includes just one insider, Chairman and Chief Executive David Lesar. It's populated by top-level executive talent, including Robert Crandall, former CEO of American Airlines (AMR ), and Kenneth Derr, the former long-time CEO of Chevron.
"ASLEEP AT THE SWITCH."
But the pension funds say the Halliburton board has done a poor job of monitoring management. The Kellogg, Brown & Root subsidiary faces charges that it overbilled the Defense Dept. in Iraq. The Justice Dept. and the SEC are investigating payments made by a Halliburton affiliate to a consultant with ties to the Nigerian government. And a grand jury in Houston is investigating allegations that Halliburton used a Cayman Islands subsidiary to do business in Iran, which is prohibited by U.S. law. (see BW Online, 10/26/04, "What Cheney Did at Halliburton".)
What's more, Halliburton has dramatically underperformed its industry, racking up total returns of less than 7% for the five years ended Oct. 22, vs. 74% for the Standard & Poor's energy index.
Richard Ferlauto, director of pension and investment policy for AFSCME, says the board is to blame. Says Ferlauto: "We're focusing on boards that have clearly failed in management oversight, and Halliburton really stands out. None of them had the ability to focus on the internal-management problems and to make sure the company was just managed appropriately. I think it was really asleep at the switch."
A spokeswoman for Halliburton declined to comment for this story, saying the company has not had a chance to review the proposal.
The hope, says CRPTF Treasurer Denise L. Nappier, is that getting shareholder-nominated directors on the board will prevent such problems in the future. Says Nappier in a statement: "We have seen too many board members at too many companies that have failed to adequately fulfill their responsibilities and have not been acting in the best interests of shareholders. Access to the company's proxy ballot is the best mechanism to change that."
Advocates are already pushing for proxy access at two other companies, Marsh & McLennan (MMC ), where CEO Jeffrey Greenberg resigned amid allegations of bid-rigging this week, and Walt Disney (DIS ). AFSCE, in the wake of an earlier scandal at Marsh Mac, negotiated to nominate to the board ex-federal prosecutor Zachary Carter, who was elected in May. AFSCME says Carter played a key role in negotiations with New York Attorney General Eliot Spitzer to avoid a criminal indictment of Marsh Mac.
At Disney, shareholders have submitted a resolution for the 2005 annual meeting similar to the one at Halliburton. Negotiations with Disney have ended, but the resolution's supporters hope the company will agree to allow as many as three shareholder-nominated candidates on the ballot, making the resolution unnecessary.
Ferlauto says AFSCME plans to push for proxy-access resolutions on the 2005 ballots at two companies in coming weeks, and possibly more, but he won't disclose which ones. "We're looking for companies where there have been serial-management problems" -- and that can most benefit from an infusion of shareholder-friendly directors, he says. The question shareholders may be asking: Why stop at just two?
Lavelle is Management editor for BusinessWeek in New York