To protect workers’ capital, workers, their unions and their benefit funds have submitted between 300 and 400 shareholder proposals for the 2003 season of corporate annual meetings—twice the number submitted in 2002. Labor funds accounted for 27 percent of all corporate governance shareholder proposals in 2002, according to The New York Times.
Although support for corporate governance shareholder proposals has been steadily rising, in the past it has been rare for a shareholder proposal to get a 50 percent or more “Yes” vote. In 2002, 76 proposals received majority approval from shareholders (up from 66 in 2001, according to the Investor Responsibility Research Center). And even when proposals receive a majority “Yes” vote, they are usually not legally binding—corporations may choose to ignore the vote result.
However, these reflections of shareholder opinion on corporate governance issues send a powerful message to executives. For example, in February 2002, the Plumbers and Pipe Fitters Standard & Poor’s 500 Index Fund sponsored an auditor independence proposal at Walt Disney that received a 44 percent “Yes” vote. Sensitive to investor concerns regarding accounting issues following the collapse of Enron, Disney executives told shareholders they would act on the proposal and ensure their auditor performed only audit-related tasks in the future.
Below is a sampling of popular shareholder proposals urging corporate governance reform that will be voted on in the 2003 shareholder proxy season. Included are brief explanations of the issues and examples of the language used in proposals currently pending at various corporations.
2003 Shareholder Proposals
Executive Compensation Proposals
Executive pay is out of control. These proposals are designed to reign in executive pay and ensure that executives don’t enrich themselves at the expense of the companies they are supposed to be leading. Learn more about CEO pay at www.paywatch.org.
Stock Option Expensing
The growing use of stock option grants, which increase CEO pay packages, have been diluting companies’ long-term profitability. Stock option expensing proposals advocate the deducting of the estimated cost of stock options from corporate earnings because they are an expense that affects shareholder value. Many companies recently have announced they will voluntarily begin expensing, but many continue to refuse to do so.
Sample Language
Resolved, that the shareholders of [Company Name] (the “Company”) hereby request that the Company’s Board of Directors (the “Board”) establish a policy and practice of expensing in the Company's annual income statement the costs of all future stock options issued to Company executives.
Performance-Based Stock Options
To be effective, stock options should be truly performance based. Performance-based stock option proposals call for companies to award executive stock options based on a company’s performance relative to that of competitors. These proposals are designed to prevent executives from simply enriching themselves by riding the stock market.
Sample Language
Resolved, that the shareholders of [Corporation Name] (the "Company") request that the Board of Directors adopt an executive compensation policy that all future stock option grants to senior executives shall be performance-based. For the purposes of this resolution, a stock option is performance-based if the option exercise price is indexed or linked to an industry peer group stock performance index so that the options have value only to the extent that the Company’s stock price performance exceeds the peer group performance level.
Golden Parachutes
Golden parachutes are generous severance agreements granted to executives that are contingent on a change of control in a company. These employment contracts can reward underperformance leading up to a change in control and are rarely justified in light of the significant compensation already awarded most executives. Golden parachute proposals advocate giving shareholders the right to vote on such packages.
Sample Language
Resolved, that the shareholders of [Corporation Name] (the "Company") urge the Board of Directors to seek shareholder approval for future severance agreements with senior executives that provide benefits in an amount exceeding 2.99 times the sum of the executive’s base salary plus bonus. “Future severance agreements” include employment agreements containing severance provisions; retirement agreements; and agreements renewing, modifying or extending existing such agreements. “Benefits” include lump-sum cash payments and the estimated present value of periodic retirement payments, fringe benefits, perquisites and consulting fees to be paid to the executive.
Corporate Governance Proposals
Independent Board Chair
Independent board chair proposals seek to separate the positions of chief executive officer and board chair. The primary purpose of the board of directors is to oversee management on behalf of shareholders. For this reason, an independent director who does not serve as an executive of the company can best provide the necessary leadership and objectivity as chair.
Sample Language
RESOLVED: The shareholders of [Company Name] (the “Company”) urge the Board of Directors (the “Board”) to adopt a policy that an independent director who has not served as the Chief Executive Officer of the Company serve as Chair of the Board.
Offshore Reincorporation
Offshore reincorporation proposals urge companies headquartered in the United States but incorporated in such offshore tax havens as Bermuda to reincorporate in the United States. Shareholder rights often are harmed by these corporate inversions, and this can lead to reduced management accountability. Moreover, the perception that the offshore company is avoiding its tax obligations can have a negative impact on corporate image and brand name.
Sample Language
RESOLVED: The shareholders of [Company Name] (the “Company) request the Board of Directors to take the measures necessary to change the Company’s jurisdiction of incorporation from Bermuda to the United States.
Auditor Independence
Auditor independence proposals urge companies to bar outside auditors from performing nonaudit consulting work. Although the federal
Sarbanes-Oxley Act of 2002 places restrictions on these conflicts of interest, certain consulting services still are permitted with audit committee approval.
Sample Language
RESOLVED: The shareholders of [Company Name] (the “Company”) urge the Board of Directors (the “Board”) to adopt a policy that in the future the firm that is appointed to be the Company's independent accountants will only provide audit services to the Company and not provide any other services.
