How Directors Handle (Shareholder) Rejection
from January/February 2008
by Lois Gilman
Most board members don’t want to talk about the “no” and “withhold” votes they get at annual meetings—particularly when a sizable percentage of shareholders voice disapproval about how they’ve been doing their job. After all, with a growing number of companies adopting majority voting for director elections, more of these unpopular board members will have to step down.
One who has already faced rejection is former astronaut Mae C. Jemison, 51, president of the Jemison Group,a Houston consulting firm that focuses on integrating science and technology into everyday products. She tendered her resignation from the board of Gen-Probe, a genetics-diagnostic manufacturer in San Diego that has adopted majority voting, after collecting a 70% “no” vote last May from shareholders distressed that she’d missed two of the four scheduled board meetings the previous year. As Corporate Board Member has reported, many boards that are subject to majority-voting rules enjoy fine-print escape hatches—often the right of the other board members to vote “no” themselves and reject their peer’s offer to quit. Indeed, Gen-Probe’s board asked Jemison to stay on, citingher “unique qualifications,” among other things.
Jemison did not return phone calls asking for comment, which places her firmly in the silent majority of the more than 20 directors Corporate Board Member tried to reach after they drew negative votes at 2007’s annual meetings. That reluctance to say anything about the vote applied not only to those who came in for significant criticism (like Jemison) but also to those who still won the support of most of their shareholders. Example: Arthur H. Kern, 60, the chairman of Yahoo’s compensation committee, declined to comment on the 33% “no” vote he received from investors angry over the substantial bonus and retention pay awarded Yahoo CEO Terry S. Semel while the company’s stock plummeted.
A few directors did speak about the experience.
Among them:
- Private investor John L. Townsend III, 52. He gota 39% “no” vote at International Paper, where he chairs the audit and finance committee and sits on the governance and executive committees. Most directors who drew criticism were targeted by proxy firms or institutional shareholders. Townsend fell afoul of Calpers, the California pension group that is after International Paper for its failure to “declassify” its board by adopting annual director elections, which a majorityof IP shareholders voted forin 2006. “I was the only individual on the governance committee up for election,” says Townsend, who joined the board in March 2006 to fill a vacancy and was standing for reelection after serving just a year. “There was no basis for someone to judge whether I was representing the shareholders well. I think that’s a little bit of a perversion of what we’re trying to do. The role of these institutional firms actually creates a very difficult situation when they make unilateral recommendations on how shareholders vote. I wish there was the ability to have more enlightened conversations with them.”
- Stanford University professor of economics Michael Boskin, 62. A director of Exxon Mobil, Boskin found himself under attack by the Connecticut Retirement Plan & Trust Fund’s campaign on global climate change. The group had tried to meet with him when he served as chairman of Exxon’s public-issues committee. (He referred it to Exxon chairman and CEO Rex W. Tillerson instead.) Boskin effectively ended up with a gusher of support from shareholders—only 7% voted against him. “It was gratifying to receive such an overwhelming favorable vote that virtually all shareholders saw through [my opponents’] misstatements and appreciated the professional manner in which the company and I addressed the issue,” says Boskin, who also serves on the boards of Oracle, Shinsei Bank, and Vodafone Group.
- Roger L. Headrick, 71. The managing general partner of HMCH Ventures receiveda 42.7% “no” vote from shareholders of CVS Caremark after CtW Investment Group, which works with union pension funds, alleged thathe had failed to protect the interests of Caremark’s shareholders during its merger with CVS and questioned his handling of stock options at Caremark. (The investment group also targeted director Lance Piccolo, 66, CEO of HealthPic Consultants, citing the same complaints. He got a 33% “no” vote.) Headrick, also a director of specialty-chemicals company Chemtura, retired from the CVS Caremark board two months later. But he says, “My retirement from the company was personal and entirely unrelated” to the shareholder vote or to CtW’s allegations. The merger was not intended to produce immediate returns, he says, but to “create an entirely different strategic enterprise in the health-care industry. We thought thatthis was in the best interest of the longer-term interest of the shareholders.” He notes that the authorities dropped their investigations of stock-option backdating. As for the charge that he didn’t act in the interests of shareholders, he says, “I am not concerned in my mind as to whom I represent. I represent the shareholders [and did so] to the best of my ability.” Piccolo remains on the board.
Backdating stock options was the source of shareholder unhappiness at several companies, with members of compensation committees often taking the heat. This happened at Apple, where Institutional Shareholder Services, a proxy firm, led the attack. It recommended “no” votes for all six of Apple’s outside board members. Many shareholders went along with ISS, doling out “no” votes to the whole bunch. The most (37%) went to Jerome York, who served on the special board committee that investigated the backdating. The committee concluded that while some Apple options had been backdated to get favorable pricing for key employees, there had been no misconduct by the current management. It did acknowledge, however,that CEO Steve Jobs had been aware of the selection of some of the dates, and regulators are still investigating that case.
Apple does not have majority voting, but even if it did, York, 69, the head of Harwinton Capital Corp., a Michigan investment firm, and also a director of Tyco International, would have had enough shareholder support to keep his seat. But he isn’t one to stick around if he’s not wanted. “The day I don’t get 51% of votes is the day I'll be out of there on my own," he says.
