Postseason Report: Labor Wins Impressive Victories with Regulators and Shareholders

Labor was a force to be reckoned with this past proxy season, chalking up victories in advocating regulatory reform and proposing shareholder resolutions. Unions can take credit for lobbying the Securities and Exchange Commission to take action in two key areas: mutual fund proxy-voting disclosure, where the commission adopted a landmark rule; and access to director nominations, a topic that the commission has catapulted to the top of its current agenda. In addition, union pension funds were particularly active in proposing shareholder resolutions on compensation and other issues.

Shareholder Access

The American Federation of State, County and Municipal Employees (AFSCME) pension plan became the catalyst of what has become the latest major shareholder activist front: equal access to the proxy ballot. AFSCME's pension fund filed a total of six proposals, half of which would have been binding amendments to require that companies allow shareholders owning at least 3 percent of company stock to nominate one candidate for the board. One of the proposals was filed at Citigroup Inc., which eventually became the eye of the storm on this issue.

On April 14, 2003, after weeks of discussions with representatives from the American Federation of Labor - Congress of Industrial Organizations (AFL-CIO), AFSCME, and other institutional investors, the SEC finally announced that the commission would uphold its staff's previous — and highly controversial — decision on the Citigroup proposal allowing management to exclude the proposal from the company's proxy statement.

But that same day, the commission announced that it would carry out a "top-to-bottom" house-cleaning of its rules governing proxy rules and regulations and their interpretations for director election procedures.

Then on May 1, the commission began soliciting comments on its possible changes to the proxy rules. The commission was flooded with around 700 comments—including 165 from unions, pension funds, institutional investors, and their associations—which were considered for a mid-July report by the staff of the division of corporation finance. The "vast majority" of all responses supported a change for shareholder access, the SEC has said, with the clear exception of comments from corporations and executives.

The AFL-CIO weighed in on May 15 by suggesting that the SEC grant institutional shareholders equal access to the corporate proxy. In the comment letter, Secretary-Treasurer Richard Trumka said, "We believe the time has now come to restore democracy to corporate elections and genuine accountability to the boardroom by giving institutional shareholders the ability to economically run independent director candidates." Without real investor representation and accountability, he argued, no amount of government regulation can fully make corporate boards more accountable to the working families who are shareholders in their companies.

Also pressing the case was Rich Ferlauto, AFSCME's director of pension and benefits policy and one of the major organizers behind the open access reform agenda.

"Corporate governance problems such as undeserved executive pay, lack of independent committees, and accounting failures are symptomatic of the fundamental problem that shareholders have no real power to elect board members," he said. "Presently, board elections are nothing more than coronations. There is no SEC or state law requirement that says that it is the prerogative of incumbent board members to perpetuate themselves or their nominees for as long as they choose."

In mid-July, the SEC's corporation finance division issued a report that recommended the commission propose a rule that would allow major, long-term shareholders access to company proxy materials in cases where "triggering events" have demonstrated a failure to heed shareholder views.

The SEC is expected early this fall to publish its second proposal on rules governing access to the ballot. If the commission follows through with a new rulemaking, it could well become one of its most significant new rules in years.

Mutual Funds Disclosure

Labor unions also can take credit for contributing to the SEC's landmark decision to require mutual funds to disclose their proxy votes. In 2001, the International Brotherhood of Teamsters and the AFL-CIO filed rulemaking petitions requesting the SEC take up the matter.

When the SEC put the issue on its agenda last year, unions followed up by mobilizing public support for change. The AFL-CIO teamed up with two other organizations — Pax World, a socially responsible investor fund, and Fund Democracy, a shareholder activist group — to campaign energetically in support of the rule. Pax launched a website, MutualFundProxyVotes.com, which helped generate more than 1,000 automatic e-mails to the SEC.

The SEC ended up receiving roughly 8,000 comment letters, a record, the overwhelming majority of which supported requiring mutual funds to disclose their votes. Most mutual funds, along with their trade association, the Investment Company Institute, vehemently opposed the proposed rules. Nonetheless, the SEC eventually decided to adopt the regulations.

Options Expensing

Labor groups focused on compensation issues in shareholder proposals this past proxy season. And for good reason; as William Patterson, head of the AFL-CIO's Office of Investments, explained, "If you can realign executive pay, it's the predicate to corporate governance reforms."

Far and away, the movement to expense stock options led labor's presence on proxy ballots this year. Submitted largely by the Carpenters, Laborers and other Building Trade Unions, proposals to expense options received the most majorities and the highest vote totals.

With the Financial Accounting Standards Board (FASB) moving to propose regulations in early 2004 requiring expensing, a series of majority votes served to build a growing consensus behind the movement. At least 25 companies received majority votes on this issue to date. Some of them include: Georgia Pacific Corp. (65 percent), Equifax Inc. (60 percent), Kohl's Corp. (51 percent), Fluor Corp. (78 percent), Eastman Kodak Co. (66 percent), Starwood Hotels & Resorts Inc. (60 percent), and Delta Air Lines Inc. (60.4 percent).

Though technology companies argued against expensing, alleging damage to our capitalist society, four tech companies counted majority votes in favor of expensing: Veritas Software Corp. (57 percent), Mercury Interactive Corp. (52 percent), Apple Computer Inc. (52 percent) and NCR Corp. (51 percent). Respectable "near-hit" totals for expensing proposals took place at Hewlett-Packard Co. (43 percent), International Business Machines Corp. (47 percent), Intel Corp. (47.5 percent) and Siebel Sytems Inc. (35 percent).

Performance-Based Compensation and Other Options Approaches

One approach that did not meet with as high a level of success as expensing was a proposal seeking to grant only performance-based or indexed options to executives. This proposal—filed largely by the Building Trade Unions at more than 60 companies—looked to limit excesses and actually tie performance to compensation, a long sought-after ideal by corporate governance advocates that has been largely elusive in recent years despite the goal of manager-shareholder alignment via stock options.

Likewise, though none of these proposals received a majority vote this first time around, shareholders seeking actual pay for performance made their voices heard at companies including Delta (28 percent), Verizon Communications Inc. (21 percent), TECO Energy Inc. (27 percent), and Great Lakes Chemical Corp. (26 percent).

Another approach employed this year was a proposal to implement mandatory holding periods on options for executives. AFSCME filed holding period proposals at Gateway Inc. (12.2 percent) and Adobe Systems Inc. (9.7 percent).

A final shareholder approach to the problem of options tested this season was an outright ban on them as a form of compensation. The AFL-CIO led this charge, submitting proposals at companies including Verizon, AOL Time-Warner Inc., American Express Co., and Baker Hughes Inc.

SERPs

Yet another front in the call for reasonable pay involved placing supplemental executive retirement plans (SERPs) to shareholder vote. The AFL-CIO has been the main advocate on this front, filing proposals at companies including Sears Roebuck and Co. and Wal-Mart Stores Inc. (22 percent). The AFL-CIO actually scored a surprising victory at U.S. Bancorp Piper Jaffray, as its SERP proposal received a 51.6 percent majority, a first in this category.

In fact, outrage over excessive pay at U.S. Bancorp translated into three majority votes. U.S. Bancorp CEO Jerry Grundhofer received a $2.5 million salary and bonus in 2002, plus restricted stock awards with a potential value of more than $5 million. He also realized gains on the exercise of $5.5 million worth of options. Grundhofer did not take a bonus in 2001, but his 2001 salary of $975,037 was supplemented by restricted stock awards worth an estimated $6.17 million. His total 2001 compensation was $9.6 million.

A resolution submitted by representatives of the AFL-CIO called for U.S. Bancorp's board members to get shareholder approval before instituting any SERPs—it received majority support of 51 percent of the shareholders voting. Another resolution, filed by the United Brotherhood of Carpenters Pension Fund, called for the bank to start reporting stock options as expenses in its annual income statements; it received 60 percent of the vote.

Reincorporation Becomes a Lighting Rod

Labor also directed its energy to the issue of reincorporation.

AFSCME, Amalgamated Bank LongView Collective Investment Fund, and the AFL-CIO submitted shareholder proposals that called for companies incorporated in offshore tax havens to return to the U.S. This item appeared on the agendas of Tyco International Ltd., Cooper Industries, Ingersoll-Rand, and the dual listed companies of Carnival Corp. and Carnival PLC.

At Tyco, for instance, the resolution would have required the scandal-ridden, industrial giant to repatriate from Bermuda back to the United States. The proposal tallied more than 26 percent of "yes" votes at Tyco's annual meeting, according to the AFL-CIO.

For all four companies the rationale of the proponents was similar. First, proponents believed that consumers view companies incorporated in tax havens as unpatriotic. Second, they cited pending legislation that could close the loophole in the U.S. tax system, eliminating the benefits of an offshore tax jurisdiction.

Contributing to this article were Proxy Voting Services (PVS) Managing Director Robert Kellogg, Senior Policy Analyst John Keenan, Policy Analyst Edward Kamonjoh, and Program Coordinator Etelvina Martinez, as well as ISS Global Analyst Margaret Capps. PVS is a division of ISS serving Taft-Hartley managers and public plan sponsors.