This Proxy Season, Expect A Brawl

With Robert Nardelli's resignation from Home Depot (HD ) on Jan. 3, the shareholder activist community lost one of its favorite targets: the man who had become a poster child for sky-high executive pay, corporate arrogance, and board coziness. His low popularity was one reason Home Depot Inc. was high on the list of companies expected to bear the brunt of investor ire come this year's proxy season.

But Nardelli's exit hardly means it will be a quiet year. Add up shareholder anger over the backdating scandal, a slate of new rules on executive pay disclosure, increasing pressure from activist hedge funds, and more companies requiring directors to be elected by a majority shareholder vote, and a tempestuous proxy period lies ahead. "It's going to be very ugly," says Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "The elements are all in place for a highly divisive season."

The biggest squall is going to come from the new pay disclosure rules, adopted by the SEC in July, which for the first time require companies to disclose the true size of their top executives' pay packages. They make companies reveal previously buried details, such as accumulated pension benefits, deferred compensation, and perks that exceed more than $10,000 in total value. Corporations will also have to provide a plain-English table that summarizes executives' various forms of compensation. "That's going to be a shocking number for a lot of people," says Shekhar Purohit, a principal in the Chicago office of James F. Reda & Associates, an executive compensation and corporate governance consulting firm.

Despite the SEC's Dec. 22 decision to change the way stock option grants are measured in the summary tables--seen by shareholder groups as a Christmas gift to Big Business--the new rules are expected to bring about plenty of additional fury over outsized pay. Some of the biggest reactions may come from revelations about change-in-control agreements, which dictate what executives will receive in mergers or acquisitions, and from the terms of executives' retirement or severance packages. "The biggest holy-cow number now is likely to be that severance number," says Patrick McGurn, executive vice-president at proxy adviser Institutional Shareholder Services Inc.

While most of the outrage over company-paid country club dues and rich retirement bankrolls is likely to be focused on CEOs, some governance experts expect greater heat on compensation committee board members, too. "I believe the theme of this proxy season is going to be individual directors," says Nell Minow, editor and co-founder of governance adviser The Corporate Library. "I would not be surprised to see no votes for the members of [Home Depot's] compensation committee." Some large pension funds are already sounding the alarm. "We're going to hold compensation committees accountable for giving away the shareholders' money in a way that provides no benefit to us," says Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County & Municipal Employees (AFSCME).

Even entrenched family owners who control voting shares in their companies are feeling pressure. While there are no signs that New York Times Co. (NYT ) Chairman Arthur Sulzberger Jr. will be ousted--his family controls the bulk of Class B shares--he and his media empire, whose stock is down 50% since mid-2002, face pressure as a leading investor, Morgan Stanley Investment Management (MS ), pushes for a shareholder vote on the dual class structure and a separation of the chairman and publisher jobs, both held by Sulzberger. Following last year's annual meeting, when the holders of more than a quarter of the company's common shares withheld votes for the directors, the Times faced rumors it could be a takeover target. In December, CEO Janet L. Robinson said: "The Ochs Sulzberger family…has no intention of opening our doors to the kind of action that is tearing at the heart of some of the other great journalistic institutions in our country." A spokeswoman declined to comment further on possible proxy fights.

Restaurants, too, continue to be a magnet for institutional shareholder agitation, particularly in the wake of the activist victory at Wendy's International (WEN ), which recently spun off its Tim Hortons Inc. (THI ) donut chain and shed underperforming assets. Former SEC Chairman Richard C. Breeden is using his hedge fund's 5% stake in Applebee's International Inc. (APPB ) to drive improvements at the underperforming casual eatery chain. He's demanding greater franchising, divestitures, and that cash be returned to shareholders. Vexed that Applebee's amended its bylaws to thwart his director nominations, Breeden publicly wrote to the board in December. "The company's dismal performance record shows that the time is past for `more of the same,'" he said, "and we believe the board needs fresh thinking, financial discipline, and new leadership." Applebee's declined to comment.

Home Depot may have battles ahead, too. Relational Investors, a shareholder that recently pushed for changes at Home Depot, still wants to see a broad shift in corporate strategy and capital expenditures and is demanding face time with management. Governance advisers are waiting to hear what Nardelli's successor, Vice-Chairman Frank Blake, will be paid before deciding if the board has changed its tune on executive pay. And despite praise from some insititutional investors over Nardelli's resignation, others are still outraged by his roughly $210 million severance package. "I wouldn't even say golden parachute," says AFSCME's Ferlauto. "I would say platinum helicopter."

By Jena McGregor, with Roben Farzad and Tom Lowry in New York and Eamon Javers in Washington

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