Investor's Business Daily, March 16th, 2007
Activist shareholders at Hewlett-Packard say broad support for a proposal to expand board nominating rights gives them a mandate to take up the issue with the Securities and Exchange Commission as well as with HP directors and managers.
At HP's annual shareholders meeting Wednesday, investors led by the American Federation of State, County and Municipal Employees won 39% of votes in support of their proposal to let shareholders nominate board directors.
This fell short of the two-thirds threshold HP HPQ had set for approval. But many observers considered the level of support high, saying it shows investors' growing interest in board accountability. Shareholders did approve separate proposals letting them vote on anti-takeover measures and forging a tighter link between executive pay and company performance. HP recommended against all three measures.
"This sends a message to HP's board that they should meet with shareholders to discuss nominating procedures," said Rich Ferlauto, AFSCME's director of investment policy. "We are also calling on SEC Chairman (Christopher) Cox to announce what his process will be for putting in place a solution that gives shareholders access to the company proxy."
The HP vote marked the first time that shareholders have voted on a provision to grant investors the right to name board candidates on the company proxy, the agenda for the annual meeting. This right has historically been an exclusive prerogative of the board's nominating committee, though all shareholders can vote on whether to approve the nominated directors.
"The 39% vote is very high for a proposal of this kind," said Kent Hughes of proxy advisory firm Egan-Jones. "It reflects a high degree of shareholder dissatisfaction. Issues like this were on the fringe, but are moving mainstream."
Egan-Jones and shareholder advisory firm Institutional Shareholder Services, or ISS, both recommended that investors vote in favor of the AFSCME proposal.
Mutual fund manager TIAA-CREF, a large HP shareholder, won't yet disclose how it voted, as per its custom. But Hye-Won Choi of TIAA-CREF's corporate governance unit says the vote suggests that HP investors want more sway. "The fact that the proposal received such a significant level of support really is an indication that shareholders have serious concerns about the governance of this company," she said.
Ferlauto plans to request a meeting with the HP board's nominating committee to discuss the quality of directors that need to be brought onto the board. "The board needs someone who is a consensus builder and who has experience putting together a well-functioning board after it's been through some kind of scandal," he said.
The AFSCME, a labor union with $850 million in pension assets, says shareholders have a legal and financial basis for demanding change on HP's board given its recent turmoil. Ferlauto cites the contentious merger with Compaq, lavish pay packages for current and former CEOs, and the use of private investigators to obtain the phone records of directors suspected of leaking information to the press.
The AFSCME also has locked legal horns with insurer American International Group AIG over nominating rights. In that case, a federal judge asked the SEC to clarify its regulations for proxy access. But the SEC has been gridlocked.
"There's a sharp divide among commissioners on the issue," said Carol Bowie, ISS research director.
In a speech last month, SEC official John White said Cox plans to act on the matter "in time for the 2008 proxy season."
For now, the HP vote may spark more interest in nominating rights.
"Shareholders could witness a bumper crop of access proposals next spring or even as soon as this fall," said Sarah Cohen of ISS.
Reliant Energy RRI and UnitedHealth UNH are fighting legal battles with shareholders seeking nominating rights.
Copyright 2007 Investor's Business Daily, Inc.
