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Activists put CEOs in a fishbowl

By G. Jeffrey MacDonaldCorrespondent of The Christian Science Monitor / February 26, 2007

Columbia University freshman Nick Serpe doesn't own any stocks or mutual funds, but that minor point isn't keeping him from becoming a shareholder activist.

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"The tuition we pay is going to the university endowment, so we do consider ourselves shareholders," says Mr. Serpe, who had never heard of shareholder activism six months ago. Together with other students, he's now calling on Columbia to use its clout as a big Chevron stockholder to solicit a report that would address, among other things, pollution caused by nearly three decades of oil drilling in Ecuador.

As winter winds down, activists of varied stripes are gearing up for a new spring season of shareholder meetings by linking up with allies and upgrading their approaches. They're tapping into new networks, formed in the past three years, to rally grass-roots investors behind various causes. They're also reaping the benefits of new disclosure requirements intended to demystify mountains of paperwork and legalese that have traditionally enshrouded the inner workings of corporate boards.

In the big picture, observers say, a multiyear trend toward holding management accountable is to some degree trickling down to strengthen the hand of those who actually own public companies: their shareholders. Corporate scandals in 2002 and 2003 led not only to the Sarbanes-Oxley Act, which tightened financial reporting requirements, but also to today's environment where investors can more easily make their voices heard.

"Sarbanes-Oxley essentially empowered directors" to oversee management more effectively, says Carol Bowie, vice president of governance research services for Institutional Shareholder Services, an advisory firm. "But shareholder empowerment is what's going on right now.... We are seeing directors respond to shareholders, and directors don't like to get low votes [on annual meeting agenda items]. So they respond to that."

Executive pay packages examined

This year, shareholders driven by social and financial concerns alike are targeting executive pay packages. Efforts to rein in compensation formulae have spawned 239 proposals, up from 175 in 2006, according to a mid-February ISS analysis. Nearly 1 in 4 of all 984 proposals filed at public companies this year addresses executive compensation.

Median cash income for CEOs climbed from $1.8 million in 2002 to $2.4 million in 2005, according to the most recent Mercer Human Resource Consulting survey of 350 large public companies. Total compensation packages, which include such long-term incentives as restricted stock, climbed from a median of $6.1 million to $6.8 million over the same three-year period.

From the first meetings in March until the season winds down in late June, shareholders will be debating how to keep the boss from being overpaid. Should CEO compensation be subject to shareholder review before a board gives its approval? Should pay-for-performance incentive programs be restructured to get better results? Proposals vary from firm to firm, but all seem designed at least to blunt a repeat of Home Depot's 2006 payoff. CEO Robert Nardelli, who failed for six years to boost the company's stock price, ultimately resigned with a $200 million severance package.

Besides highlighting such cases, activists should also benefit from new SEC rules, requiring companies to disclose total CEO compensation in one location where it's easy to decipher.

"[It] can cause some real shock reaction," says Ralph Ward, publisher of the online magazine Board Room Insider. "This is giving shareholders a lot more ammunition."

Mr. Ward also expects shareholders to review executive perks – such as private jet travel – more carefully now that firms must reveal all such expenses in excess of $10,000.

Ward notes that this year's raft of pay-related initiatives almost exclusively target firms that have performed weakly. That's because he says shareholders can generally stomach big salaries, generous stock options, and perks for leaders when an organization is thriving. Conversely, he says activist shareholders are most likely to agitate and prevail this year at the likes of Hewlett-Packard, United Health, and other companies eager to improve board oversight in the wake of reports highlighting governance problems.