Activists put CEOs in a fishbowl
More shareholders are combining forces to scrutinize the practices of upper-level management.
from the February 26, 2007 edition
Page 2 of 3
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.
"Only companies that have found themselves in trouble are the ones who are the trail blazers" in embracing reform, Ward says. "Essentially, they're vulnerable. They're the weakest of the herd. If you're trying to get some governance change put in, they're the ones that you go to."
In principle, shareholders big and small alike have a voice in how a company is run. Each gets to vote on proposals that come before the annual shareholder meeting. If a shareholder can't attend the meeting, he or she may vote by proxy by filling out a ballot that arrives via postal delivery or e-mail, usually in February or March. Investors in mutual funds may "vote" by urging the fund, through its investor-relations office, to vote a certain way on resolutions pending at firms in which the fund is a stakeholder.
Still, even with new regulations increasing boardroom transparency, corporate America is no democracy. Shareholder votes are purely advisory and nonbinding upon a board of directors. What's more, because big shareholders get more votes than small ones, institutional investors such as mutual funds and pension funds tend to carry the most influence.
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