Jubak's Journal
Recent articles:
• Defense shift yields 5 strong stocks, 6/23/2004
• Boeing, Motorola, Rite Aid fail the Clean Stocks test, 6/22/2004
• 3 techs that could buck the market tide, 6/18/2004
More...
| | Jubak's Journal
Corporate America to shareholders: Butt out!
At annual meeting after annual meeting, corporate boards and CEOs refuse to act on demands from the people they supposedly work for. But there are some signs the pressure is getting to them.
By Jim Jubak
After the U.S. government completes its mission of democratizing Iraq, its next target could be a little closer to home: American corporations.
Current securities laws give company directors and chief executive officers almost total freedom to run companies as they see fit, ignoring, for the most part, the people who really own the companies -- the shareholders, meaning you and me.
You neednt look any further than the recently concluded corporate proxy season to see the point Im making. At annual meeting after annual meeting, hired managers and company board members who, theoretically at least, represent stockholders, told investors to butt out.
Sure, the shareholder revolt at Walt Disney (DIS, news, msgs) got plenty of coverage and sent financial reporters atwitter at the prospects that investors might actually oust a high-powered, big-name CEO like, drum roll please, Michael Eisner. But lets be honest about what happened. More than 45% of all the votes cast at Disneys annual meeting in March opposed Eisners re-election to the board. But because investors couldnt nominate their own candidate, Eisner was re-elected. As a sop to shareholders, the Disney board of directors took the chairmans job away from Eisner, but kept him on as CEO. But the board then gave the chairmans job to former U.S. senator and Eisner ally George Mitchell, who also drew significant shareholder opposition.
SEC proposals dont go far enough
Despite investor opposition, Disneys board was able to essentially anoint its own director because shareholders dont have the ability to offer their own nominees under SEC regulations. Last fall, the SEC proposed rules that would allow shareholders to include their own nominee for director on the company proxy one year after more than 35% of voters withheld their votes from a candidate. But that proposal drew intense corporate opposition.
SEC Chairman William Donaldson is now looking at allowing boards to nominate a replacement candidate if shareholders withhold 50% of their votes from any nominee. If shareholders withhold 50% of their votes from the replacement nominee, then and only then could shareholders put their own nominee on the ballot -- the following year.
Yeah, that would be a real step forward.
Of course, Eisner didnt actually lose the election, some defenders of the current rules have said.
OK, so how about this one?
On May 20, 68% of Gillette (G, news, msgs) shareholders voted to elect all board members annually. That would have replaced the current system where board members serve staggered three-year terms. The board -- made up of those very disinterested directors -- decided to ignore the vote. CEO James Kilts explained the boards decision: We believe that shareholder interests are best served by retaining the classified board structure.
Related news and commentary on MSN Money
In other words, like unruly children, shareholders arent fit to make their own decisions, and the board acted to prevent those children from hurting themselves.
The board ignored a similar vote at the 2003 annual meeting, when 64% of shareholders voted for annual board elections, and in 2002, when 56% voted for annual elections. By the way, the resolution for annual elections was brought this year by a group led by Christian Brothers Investment Services, which manages $3.5 billion. All told, the group owns 313,725 shares of Gillette. If the Gillette board feels comfortable ignoring this kind of shareholder, imagine how much attention theyll pay to the average individual investor?
Investors left out in the cold
Or how about this one?
At Intels (INTC, news, msgs) May annual meeting, a shareholder proposal that would require the company to deduct the expense of employee stock options when it calculates its earnings passed with 54% of the 5.7 million votes cast. Shareholder proposals are, of course, non-binding, and the company has said that it wont decide how to account for options until the SEC, Congress and the Financial Accounting Standards Board issue standards for expensing options. Of course, in the meantime, Intel plans to continue to use corporate money to lobby Congress and regulators to make sure that options dont have to be expensed.
That lobbying by Intel and other companies that oppose expensing options has already had an effect: On June 15, the Financial Services Committee of the U.S. House of Representatives voted to limit expensing of options. The House bill would have the effect of overturning rules newly proposed by the Financial Accounting Standards Board that would require expensing all options, since the House bill limits expensing to options granted to only the top five executives at a company.
Almost two years since the passage of the Sarbanes-Oxley Act of 2002, legislation aimed at toughening accounting and reporting standards, shareholders remain out in the cold.
That clearly makes some CEOs and company directors quite happy. Even the limited reforms in Sarbanes-Oxley strike some vocal CEOs as a waste of their time and their companys money. For example, American International Group (AIG, news, msgs) CEO Maurice Greenberg, told shareholders at his companys annual meeting in May the regulations were foolishness that cost the company, by his estimate, $300 million a year. Just for reference, AIG had revenues of $86 billion and earnings of $10 billion in the last 12 months.
Your money, your power
So is it all pointless? Should shareholders should just give up and let CEOs do what they want, and stop voting for reforms that company managers and directors just ignore anyway?
Not at all. Shareholders do have one source of power: They can vote with their money and sell the shares of companies that operate against their interests. (Thats one reason why I do regular Clean Stocks columns such as last weeks Boeing, Motorola, Rite Aid fail the Clean Stocks test.) And the threat that theyll exercise that ultimate vote, keeps company managers and directors from ignoring shareholders completely.
If shareholders keep the pressure on long enough and hard enough, company executives and directors, or some of them at least, understand that and they do respond.
Speaking up can pay off
Look at the details of the Intel proxy on all the resolutions offered by shareholders and the company over the last two years, rather than just this years vote. Last year, a similar resolution to require Intel to expense stock options garnered 48% of the vote. It failed to pass, but that vote certainly paved the way to this years 54% majority for a similar measure.
Intels management and directors may have decided to ignore this years majority vote in favor of expensing options, but they werent totally unresponsive to last years vote or to building pressure on this issue. This year, a coalition of trade-union pension funds put a similar proposal on the proxy at 22 companies and won majority votes at 20, including Hewlett-Packard (HPQ, news, msgs) and Adobe Systems (ADBE, news, msgs). And another shareholder proposal on compensation that would link all options grants to executives to company performance won 40% of shareholder votes.
This years proxy at Intel included a company-sponsored proposal that asked for approval of a new stock option plan that requires an annual shareholder vote, beginning in 2005. A yes vote for the companys proposal would replace the 1997 stock option plan, which was never presented to shareholders for a vote, with a new plan that would require annual shareholder approval. In addition, the new plan would be designed to reduce, over time, the number of options granted but not yet exercised. The new plan would also prohibit stock option re-pricing and eliminate discounted stock options.
That proposal got yes votes from 86% of shareholders.
I doubt that it would have ever been put before Intel shareholders without the pressure of shareholder resolutions on these issues that either failed to win a majority or that managers and directors decided to ignore.
And Ill bet that someone at Gillette is thinking seriously about what to offer shareholders to make sure that 68% of them dont vote against the company again next year.
Think what might be possible if the SEC actually let shareholders nominate their own candidates for the board of directors.
New developments on past columns
Boeing, Motorola, Rite Aid fail the Clean Stocks test
Correction: I got a fact wrong about Motorolas wireless handset business in this column. I wrote In wireless phones, the company is a fading No. 3 in an industry that it invented. Motorola (MOT, news, msgs), in fact, remains No. 2 in the wireless handset business behind Nokia (NOK, news, msgs) and ahead of Samsung Electronics (SSNLF, news, msgs) with 14.5% of the worldwide market in 2003, versus 34.8% for Nokia and 10.8% for Samsung, according to market researcher Strategy Analytics. I certainly regret the error, and thanks to all those at Motorola who e-mailed me.
A safer way to play higher oil prices
Shares of Teekay Shipping (TK, news, msgs) dropped $1.10 a share on June 22 after Morgan Stanley lowered its rating on the shares to underweight from equal weight. The concern was valuation. Tanker stocks are frequently and most usefully valued on the net asset value of the ships owned, and not on earnings. On that basis, Teekay Shipping is trading at 113% of net asset value. That, notes Morgan Stanley, is near the top of the historic valuation range of 80% to 130% of net asset value. Teekay shares are nearing Morgan Stanleys target price for the stock at $38 a share, and thats not too far away from my target of $40. Conservative investors should certainly consider taking some money off the table here. I think that the rise in Saudi oil production increases the percentage of the worlds oil that travels long distances in tankers, and that should extend the stocks run from here toward my target. But Ill be watching this one carefully as an exit is getting near.
10 winning stocks for a stuck-in-the-rut market
In a bid for more market share, Wolverine World Wide (WWW, news, msgs) is cutting back the number of styles its leading Merrell brand sells. That has introduced an element of uncertainty that has stalled the stocks climb. Wolverine World Wides aim is to cut the number of Merrell styles it offers by about two-thirds and to group the remainder along with new styles in groups organized around activities. These groups of styles can then, Wolverine hopes, be more aggressively marketed to a wider range of targeted retailers. The goal is to increase sales of Merrell, which account for about 40% of Wolverines revenues, by 25%, the company said. I think the strategy will work and that the stock has only temporarily stalled. But investors will know more as retailers start to place new orders in July.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: American International Group. He does not own short positions in any stock mentioned in this column.
|
