from Second Quarter 2009
Corporate Board Member
by Steven Flax
There’s a saying in Texas that there’s no tree so tall that a short dog can’t pee on it. In other words, you don’t have to be a big shot to express your disapproval of big trees.
That was certainly true in early 2006, when the then-little-known Frederick E. “Shad” Rowe, the short pooch in our story, took aim at the four directors who served on the compensation committee of Pfizer Inc. (annual revenues that year: $48.4 billion). Rowe was fired up because over a five-year period they had doled out $65 million in total compensation to Pfizer chairman and CEO Henry McKinnell Jr. and agreed to pay him a hefty pension, while during the same years the drugmaker’s stock had lost 40% of its value.
Rowe and his group, the Investors for Director Accountability Foundation (IDA), never did manage to oust those committee members. But McKinnell became a poster boy for overcompensated CEOs and under pressure from the board stepped down about a year ahead of schedule.
What’s next for Rowe? More to the point, which comp committee is in his sights? The onetime stockbroker and institutional investor, and now general partner of Greenbrier Partners, a private investment firm in Dallas, is keeping that secret. But he does say that it’s time to crank up another campaign. “We’re like Zorro,” says Rowe, 63. “We come out when the time is right. Well, the world is ready for it. Everybody is pissed off at corporate America. It’s time for directors to do their frigging duty.”
His foundation’s website is specific about what he thinks that duty is. “Mushrooming management compensation unconnected to performance is an obvious area where directors have failed the people they legally represent,” it says.
Rowe will probably find a lot of support among today’s investors, keener than ever, as the economy collapses, to link CEOs’ pay with their performance. And his foundation—“a governance insurgency group,” as he calls it—has trustees who were shareholder activists long before the current meltdown, which gives them extra cred. They include John Bogle, 80, founder of the Vanguard funds; Robert A. G. Monks, 75, a co-founder of the Corporate Library, a watchdog and research firm; and Don Phillips, 47, a managing director of the investment research firm Morningstar. Another trustee is the ever-morphing T. Boone Pickens Jr., 80—a 1980s raider, an oilman who made a fortune out of water, and now a proponent of wind power as a fix for the country’s energy problems. “Most of the time management’s attitude toward shareholders is ‘If you don’t like the way we run things, sell your stock,’” says Pickens. “That’s like the gardener telling the estate owner, ‘If you don’t like the way I take care of your property, sell it and move out.’ That’s not the way the real world works.”
So should you be aware of Rowe, or wary of him? That depends on how much accountability you can handle. As Rowe ponders what board to go after next, it’s worth examining how accurate his charges against Pfizer’s comp committee members actually were.
The committee’s chairman was (and still is) Dana G. Mead, now 73, formerly CEO of Tenneco and chairman of the Massachusetts Institute of Technology Corp. Mead defended the McKinnell package at the time of Rowe’s attack, saying the committee had “carefully reviewed the performance of the company’s chief executive officer and made compensation decisions in light of that performance.” He and other Pfizer directors declined to be interviewed for this story.
Did McKinnell even come close to earning his keep? During the furor over his compensation—and specifically his pension—it was largely ignored that while he was CEO Pfizer’s revenues grew at a compound annual rate of 10% and its net income rose by more than 20%, thanks in part to two acquisitions he oversaw. The dividend increased from 36 cents per share in 2001 to 96 cents in 2006.
When McKinnell took over, he saw Pfizer’s new-drug development as inadequate and pushed to correct that. He had his share of hits and misses. The latter included Exubera, an inhalable insulin; it failed to sell and was withdrawn from the market. Among the hits was Geodon, which is used to treat schizophrenia. McKinnell also gets a large part of the credit for Lipitor, the anti-cholesterol drug that became the bestseller of all time. It joined the Pfizer lineup because of a drug-development deal he’d made with Warner-Lambert in his pre-CEO days, back when he was chief operating officer and head of pharmaceuticals.
It wasn’t only Pfizer’s board members who liked what McKinnell was doing. Institutional Investor named him the best CEO in the pharmaceutical industry for four years in a row, from 2003 through 2006, basing its citation on surveys of investors and securities analysts.
One company insider, who asked to remain anonymous, is still fuming over the damage he says Rowe did, not only to McKinnell’s reputation but also to that of some board members. “I’m not critical of all investor advocates, but I am of him,” says the insider. “He was trying to influence people in a way that was really dishonest, and using data that was wrong or seriously misleading.” For one thing, Rowe inflated McKinnell’s retirement package to $200 million, a figure that Rowe had to know was inaccurate, the insider says. The actual amount was around $83 million, and it reflected not just his time as CEO but his entire 36 years with the company.
Still, $83 million is serious money, and even McKinnell may have thought so at one point. According to a report that Corporate Board Member has been unable to confirm, at McKinnell’s first board meeting as CEO he tried to persuade the board to trim future retirement benefits for all company employees, himself included.
The insider calls Rowe “an evil man with an agenda,” but Rowe seems impervious to words. Indeed, that, along with his readiness to pee on tall trees, accounts in large part for why Robert Monks took a shine to him back in 2004. Rowe’s activism at that point had been limited to targets he could see from his front porch. He’d flexed his muscles in what he calls “grasstops” movements like Texans for Lawsuit Reform, which among other things persuaded the state legislature to put a cap on civil damages, and he’d served as chairman of the Texas Pension Review Board, a watchdog agency. That role put him at odds with Governor Rick Perry, who appointed him to the job—and then demoted him for disobedience. (Rowe remained on the board.) A Perry spokesman accused Rowe of having his own agenda (that word again). His reaction? “I do have an agenda,” he said. “Total candor.”
The exchange appealed to Monks. “No question about it, he is perfectly willing to say something that offends those in power,” he says. “It’s hard to get fired from a nonpaying job, but Shad did it. We need to have a country of many Shad Rowes.”
Rowe’s original target at Pfizer had been the full board. But he narrowed that down, opting instead to push shareholders to withhold their votes for the four members of the compensation committee. He also tried to get support from money managers. Too often, he says, these folks vote their shares in support of compliant or incompetent boards and abdicate their duty to shareholders for whom they serve as fiduciaries. “The big money managers are conflicted,” says Rowe. “They need to think and act like owners. But they don’t do it. They don’t demand anything. They don’t want to be perceived as rocking the boat.” Rowe was unable to win any of them over, as it happens, but he did get the support of three investment advisory firms, including Glass Lewis & Co.
At the annual Pfizer meeting, all the members of the comp committee won a majority of the votes cast, though their popularity varied greatly. More than 21% of the shareholders withheld support for Mead and George Lorch, now 67, chairman emeritus of Armstrong Holdings. The other two committee members—Stanley Ikenberry, 73, then and now president of the board of overseers at TIAA-CREF, and Robert Burt, 71, retired chairman and CEO of chemical maker FMC Corp.—escaped shareholder wrath. Relative newcomers to the committee, they were reelected with minimal dissent. The election’s outcome unnerved the board, and it asked McKinnell to retire a year ahead of schedule, which he did.
So what’s next for Rowe? This time around, he won’t just be going after a comp committee that overpays its CEO at one specific company. He wants to expand his campaign into something of a national cause and argues that matching pay with performance will help revive the economy. “Directors thinking on behalf of the shareholders is the way out,” he says. “The key to our economic future is large public companies doing their best, most productive work for shareholders. Those big companies are what pension returns are based on. They’re what people have invested their IRAs and Keoghs in. But it all begins with directors, and it begins with investors. We’ve tried everything else.”
This time, too, he’s planning to secure the backing of a group that spurned him during the Pfizer episode: big-time money managers. Corporate Board Member has learned of a memo Rowe recently wrote to his organization’s steering committee that summed up discussions he’d had with individual members. “There is general consensus that a solution would involve an alliance of 20 or so of the biggest money managers (including index funds) in order to capture the proxy power that their combined holdings represent,” the memo read. “Big institutions have an incentive to be proactive now in order to head off far more inconvenient initiatives likely to follow.”
Comp committees that have been doling out fat paychecks and lavish bonuses or approving extravagant retirement packages should take notice. And they should make sure their companies pay special attention to the shareholders. If they don’t, Rowe will.