Boardrooms open up to investors' input

— -- As the 2007 proxy season winds down, activist shareholders are gaining more clout and a greater say in boardrooms on corporate-governance issues than ever before.

Recent shareholder victories on key issues — plus a new willingness by companies to discuss boardroom topics — mark a turning point from the chilly ties and combative debates between the most vocal shareholders and companies.

"This is the era of engagement," says Amy Borrus, deputy executive director of the Council of Institutional Investors, which represents public pension funds and other large shareholders. "Directors aren't just digging in and saying no. They realize it makes sense to listen to shareholders."

A record 1,169 shareholder resolutions were proposed this year, says Carol Bowie, corporate-governance director at Institutional Shareholder Services (ISS), a proxy-research firm. And a record 23% of those were withdrawn by shareholders after companies agreed to adopt new policies, or to sit down and discuss the issues.

Since the 1980s, public pension funds and other activist shareholders have crusaded against poorly run companies and weak directors and executives. Their main weapon has been shareholder resolutions aimed at companies and urging investors to vote on various issues before annual corporate meetings.

Shareholders have fought outrageous CEO pay packages. They've urged spineless directors to provide stronger oversight of management. They've pressured executives to police their companies for accounting fraud.

For many years, business leaders dismissed dissenting shareholders as rabble-rousers who dragged social, labor and environmental issues into the boardroom. They argued that executives and directors, not investors, should run companies.

Today, though, companies can no longer ignore shareholders, whose proposals on CEO pay and other hot-button issues are receiving record high "support" votes of 30% to 60% from investors. In earlier years, votes of 2% or 3% were common.

Shareholders' votes are only advisory. But publicly traded corporations can ill-afford to anger investors who hold billions of dollars in stock.

In June, for instance, one-third of Yahoo yhoo shareholders — upset about the Internet giant's poor stock and earnings performance and former CEO Terry Semel's $108 million pay package — voted against re-electing one or more Yahoo directors. The high "no votes" were believed to be a big factor in Semel's resignation as CEO, although he remains board chairman.

Better relations

This year's proxy season also shows that relations between shareholders and companies clearly are improving, with more corporations and investors seeking common ground on issues.

"It's staggering — there's definitely a sea change going on," says Carolyn Kay Brancato, governance director at The Conference Board, a business-research organization. "Companies are taking shareholders' issues much more seriously than they used to."

There are several reasons for that:

•In the post-Enron era, companies have strengthened their oversight because of tougher anti-fraud and accounting laws, the federal crackdown on corporate crime, and court rulings that say directors can be held liable in shareholder class-action lawsuits.

•More investors and companies realize that corporate-governance, labor and environmental issues are mainstream investment issues, not "fringe nuisance proposals" that surface at annual meetings, says Howard Sherman, CEO of the GovernanceMetrics International research firm.

"These issues have financial impact and can affect portfolio returns," Sherman says.

•Faced with Congress and the Securities and Exchange Commission imposing new rules and regulations, a growing number of executives and directors prefer to meet privately with shareholders over corporate-governance issues.

"Rather than wait for something to be mandated, smart companies implement best practices voluntarily and on their own timeline," says Tracey Rembert, senior governance analyst for the Service Employees International Union (SEIU).

Business leaders argue that some activist shareholders overstep their legal bounds. State corporation laws give directors and management, not shareholders, the power to run companies, says John Castellani, president of the Business Roundtable, an organization of U.S. executives.

"At a certain point," Castellani says, "executives become so distracted by these issues to the detriment of producing shareholder value."

Businesses also argue that some labor and environmental activists advance their political agendas, rather than address broader corporate-governance issues.

David Hirschmann, senior vice president at the U.S. Chamber of Commerce, warns that too much shareholder power will lead to divided boards and directors beholden to special-interest groups.

Nonetheless, shareholders and business officials say there have been several breakthroughs this year, including:

•Majority voting proposals. In one of the most hotly debated proxy issues over the past decade, shareholders have pressed companies to adopt majority voting for directors to be elected to board seats.

For decades, board directors were elected by a simple plurality vote, or whoever received the largest number of votes. Activist shareholders contend that the plurality system made it difficult to oust lame directors, and that it's more democratic to choose directors by a 51% majority vote.

So this year, activist shareholders — such as the United Brotherhood of Carpenters and Joiners of America pension fund — filed 140 resolutions with companies, urging shareholders to approve majority voting.

To the surprise of shareholders, more than half of those companies agreed to voluntarily adopt majority voting, so shareholders withdrew their resolutions, according to Bowie at ISS.

"This is absolutely unprecedented, for so many proposals to be withdrawn," Bowie says.

Following the lead of Colgate-Palmolive cl, Pfizer pfe and others, more than 400 U.S. companies have adopted majority-voting policies — "a very healthy trend," says Sherman of GovernanceMetrics.

•Summit talks. Shareholders and business leaders are cooling the fiery rhetoric and forming several working groups to hash out the most troublesome proxy issues, from out-of-control executive pay to the shareholders' "majority-vote" issue.

High-powered shareholders and corporate leaders recently signed "The Aspen Principles," an agreement to work closely on executive pay and other issues. The parties included the AFL-CIO labor federation, the Business Roundtable trade group for executives and the Council of Institutional Investors.

In another big summit in New York this summer, 150 shareholders, executives and directors met in conference rooms at the Latham & Watkins law firm to air their views — and possible solutions — on shareholder resolutions seeking to cap sky-high pay to executives.

What's more, pharmaceutical giant Pfizer said recently that it will meet yearly with large shareholders to discuss corporate-governance and pay issues.

Dozens of companies have called Pfizer to ask about its plans, according to Margaret Foran, senior vice president of corporate governance at Pfizer.

"People are coalescing around issues," Foran says. "They're looking at the pros and cons in good faith."

•Global warming resolutions. A record 43 global-climate resolutions were filed by Trillium Asset Management, Calvert mutual funds, the SEIU and the North Carolina state treasurer with energy, auto, home-building and financial companies.

Shareholders withdrew one-third of the resolutions after the companies — ConocoPhillips cop, Toll Bros. tol and others — agreed to reduce their greenhouse gas emissions or report on their energy-efficiency plans.

The resolutions that went to a shareholder vote garnered a record 22% support, says Ceres, a coalition of large shareholders and environmental groups. No longer are environmental resolutions ignored as tree-hugger issues, says Ceres President Mindy Lubber.

At her group's first conference on global warming in 2003, turnout was low. Now, the conferences are jammed with senior executives furiously taking notes.

"Climate risk," Lubber says, "is a fundamental economic issue that affects shareholder value, the strength of companies and the fiduciary duties of corporate board members and large investors."

•Out-of-control pay. As pay keeps rising for CEOs, shareholders keep pushing to cap excessive salaries and stock packages for executives whose companies perform poorly.

Last year, shareholders were outraged over sky-high compensation and retirement pay to former CEOs at Home Depot hd, Pfizer and other companies.

So this year, a record 124 pay-related resolutions by shareholders received average support votes of 30% to 43% at Apple, Hewlett-Packard hpq and other companies, according to ISS.

The resolutions sought to link executives' pay to their performance, to give shareholders advisory votes on pay and to halt the controversial practice of backdating stock options.

Aflac, the health-insurance firm in Columbus, Ga., became the first major U.S. company to voluntarily give shareholders an advisory vote on executives' pay, starting in 2009.

In a statement last spring, CEO Dan Amos said that shareholders, as owners of the company, "have the right to know how executive compensation works."

Unresolved issues

Not all shareholders and companies get along, of course, and many obstacles remain.

For one, activist shareholders of ExxonMobil accuse the oil behemoth of ignoring their concerns about global warming. Investors say the company trails BP, Chevron and other rivals in dealing with climate risks.

Last May, shareholders holding $120 billion, or 31%, of ExxonMobil xom stock, voted for a resolution urging the company to reduce greenhouse gas emissions.

Several explosive issues loom, including a long-running and divisive battle at the SEC over rulemaking on shareholders' access to the proxy. Proxies, the main arsenal of shareholder activists, are the written authorizations that give shareholders the power to vote on issues at annual company meetings.

More shareholders also are debating whether to divest their holdings from global companies with business ties to countries such as Sudan and Iran, accused by the State Department of sponsoring terrorism.

Business leaders such as the U.S. Chamber's Hirschmann, though, are cautiously optimistic that companies and shareholders will slowly forge ahead on proxy issues.

"We may not agree with everything, but most boards are eager to engage with shareholders," he says. "This dialogue is very helpful."