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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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Getty Images Entertainment
"I can't imagine a year with more contention between shareholders and companies," says an adviser to corporate boards. "The subprime crisis has really sharpened the knives of all shareholders."
March 24, 2008 12:01 AM ET
Three things seem certain in 2008: history-making U.S. presidential race featuring either the first female or the first black candidate, an Olympic Games surrounded by pageantry and police-state tensions in Beijing, and some seriously ugly annual shareholder meetings. Falling stock prices, outsize executive pay packages, poor risk management practices and resistance by many corporate boards to adopting so-called “shareholder friendly” governance practices have all emboldened investors, who are no longer requesting, but demanding, change at annual company gatherings this spring and summer. “I can’t imagine a year with more contention between shareholders and companies,” said David Wise, an adviser to corporate boards for consultancy Hay Group. “The subprime crisis has really sharpened the knives of all shareholders, and I’d expect they’ll be going after big companies like never before.” So, Financial Week asked investors, corporate governance experts, proxy advisers, investor relations pros and other knowledgeable observers for their “must-see” annual meeting picks for 2008. Everyone interviewed expects major bloodletting at the meetings of financial institutions engulfed by mortgage-market woes (especially those whose executive pay doesn’t mirror the huge losses suffered by shareholders), from investment banks like Citigroup and Morgan Stanley to lenders like Washington Mutual. (Bear Stearns has yet to schedule its meeting, typically in mid-April, following its spectacular collapse that led to last week’s J.P. Morgan Chase buyout bid at a mere $2 a share. Considering the few buyout alternatives for Bear Stearns, it may prove more shareholder sob story than mob story.) “If money is coming out of shareholders’ pockets, but the executives who are responsible are held harmless, that’s a good mixture for a shareholder revolt,” said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees, which has already filed shareholder say-on-pay resolutions at 100 companies this year, up from 52 last year. Meanwhile, the slowdown in the U.S. economy has left more companies vulnerable to hostile corporate takeovers (Yahoo vs. Microsoft, for example) or the unwanted advances of activist investors (Wendy’s International, Motorola and CSX, for starters). A potentially juicy proxy fight at the family-controlled New York Times Co. was artfully avoided last week when the long-underperforming media company agreed to add two directors selected by hedge fund Harbinger Capital Partners to its board. Even Exxon Mobil, which posted record profit of $40.6 billion in 2007, up 3% from 2006’s previous record gusher, faces tremendous pressure this year from a never-before-seen number of shareholder resolutions aimed at making sweeping changes to its governance and environmental policies. Here are the eight companies that topped experts’ must-see lists. (In most cases, the companies either declined to comment or did not respond to requests for comment.) April 8 Morgan Stanley: Mack the knifed? Wall Street peers Merrill Lynch and Citigroup last year canned the chief executives who oversaw their companies’ billion-dollar write-downs. But Morgan Stanley has kept chairman and CEO John Mack at the helm. His continued leadership, however, will be challenged next month. In February, CTW Investment Group, a union-backed assemblage representing investment funds with $1.4 trillion in total assets, launched a campaign asking shareholders to withhold their votes for Mr. Mack as chairman. The group is also targeting audit committee directors Robert Kidder and Howard Davies, whom it blames for failures in risk-management oversight that led to the company’s $9.4 billion in mortgage-related write-downs in 2007. CTW has a stake of about 0.5%—or about 6 million shares—in Morgan Stanley. The group does not plan a proxy contest to run its own slate of directors; rather, it argues that Mr. Mack should not serve as both chairman and CEO, noting that the company’s losses are “the costly consequences of allowing a hard-charging, risk-taking CEO” to also serve as chairman. (At some companies, a separate chairman can serve as an independent check on a powerful chief executive.) Morgan Stanley is one of six financial services companies—the others are Bank of America, Citi, Merrill, Wachovia and Washington Mutual—that CTW said accounted for 88% of the $87 billion in total subprime-related write-downs in 2007. Only Morgan Stanley has thus far been hit with a “no” vote campaign. CTW research director Richard Clayton argues that when Mr. Mack took over the CEO chair in 2005, he changed the risk-reporting structure so the chief risk officer reported directly to then co-president Zoe Cruz, who was also responsible for fixed-income trading. (Ms. Cruz resigned late last year.) “At the time,” Mr. Clayton said, “the audit committee didn’t approve the change—but they didn’t raise any objections either. We think that clearly indicates the culpability of the audit committee, as well as John Mack.” Morgan Stanley obviously disagrees, citing to Financial Week its “aggressive action in response to last fall’s...write-downs” and saying “shareholders are clearly best served by the strong leadership of John Mack...and Bob Kidder and Howard Davies as independent directors.” April 15 Washington Mutual: ‘An absolute zoo’ If WaMu directors aren’t prepping for battle, they should be. Members of the board’s risk committee have already been threatened with a “no” vote campaign by investors who claim the board failed to manage mortgage-related risk—costing shareholders $28 billion in 2007 as WaMu shares lost 70% of their value. Now, CTW is considering adding the board’s human resources committee to that “no” vote list after the committee members chose to protect WaMu executives’ 2008 bonuses by rejiggering pay formulas to exclude the impact on profit of any further housing-related loan losses. The new bonus plan protects WaMu chief Kerry Killinger and nearly 3,000 other executives by linking their pay to targets based on such factors as “customer loyalty performance” and “non-interest expenses.” Many analysts and compensation consultants have said they are baffled by the move, considering the housing market crisis remains the thrift’s biggest challenge in the coming year. Indeed, WaMu predicts up to $8 billion more will be needed to cover future loan losses. “Brazen daylight robbery” is how CTW’s Mr. Clayton described the bonus changes. Since the plan was unveiled in early March, WaMu shares have lost more than a quarter of their value and were trading at $9.83 last week, a 12-year low. Standard & Poor’s also cut the company’s credit rating to BBB from BBB+, predicting losses on residential mortgages will be higher than previously thought.” The shareholder meeting, Punk Ziegel & Co. banking analyst Richard Bove recently told Financial Week, “is going to be an absolute zoo.” Unscheduled Wendy’s: Peltz prepares to dish Get ready for what may be the defining battle in the war between billionaire activist Nelson Peltz and the board of Wendy’s. The fast-food chain’s annual meeting remains unscheduled (a classic sign of investor relations troubles), yet Mr. Peltz’s Trian Fund Management has already vowed it will attempt to seize control of the board. His plan—laid out in a recent letter sent to the company and filed with the Securities and Exchange Commission—would expand Wendy’s board to 15 directors from the current 13, at which point Mr. Peltz’s fund would try to get five board seats to add to the three it already has, giving him an eight-director majority. By overwhelming the board, Mr. Peltz could finally push Wendy’s to sell itself—to another of Mr. Peltz’s vehicles, of course. His Triarc Cos., which owns nearly 10% of the No. 3 burger chain, began bidding for Wendy’s last July, saying it was prepared to pay $37 to $41 a share (as much as $3.6 billion at the time). In November, Mr. Peltz made an additional, albeit undisclosed, bid that was less than what he said he had been willing to pay in July. Wendy’s stock closed last Thursday at $23.90. Citi Investment Research analyst Glen Petraglia said in a recent client note that an impatient Mr. Peltz wants to spark at least some sort of action from Wendy’s board, which began reviewing its strategic alternatives—including a sale or recapitalization—more than nine months ago. Under chief executive Kerrii Anderson, who is up for re-election as chairman this year, Wendy’s has continued struggling to boost profit and keep up with competitors. Mr. Peltz apparently feels slighted by management’s resistance to his offers. In a letter to the board last year, he wrote that he believes it would “prefer to sell itself to anyone other than Triarc.” April 22 Citigroup: Vikram Pandit’s big day When CEO Vikram Pandit faces shareholders in New York City at his first annual get-together next month, expectations are high the new guy will give a performance worthy of the Carnegie Hall stage he’ll be standing on. Since last summer, it’s been little but off-key notes for Citi, which has lost $155 billion in market value as it was slammed by subprime mortgage problems. Shareholders may be eager for a radical new vision aimed at turning around the world’s largest bank. But they may not get such a vision. As Punk Ziegel’s Mr. Bove recently noted to clients, Mr. Pandit seems to be emulating the approach of Jamie Dimon, who looked to “fix things”—i.e., cut costs—when he took over J.P. Morgan in 2004, but never “articulated an all-encompassing vision.” Mr. Pandit has moved quickly to reshape existing businesses, including wealth management and mortgages, to eliminate overlapping functions and to more clearly focus product mixes and marketing strategies. He announced another 2,000 job cuts last week. Yet some investors and analysts have said it’s not enough. They have called for even more staff cuts, the elimination of the company’s dividend payout and the selling off of major parts of the company to raise cash. Since Mr. Pandit took over Dec. 11, Citi has lost another third of its value and last week traded at around $21 a share. Then there are those pesky activists, enraged when former CEO Chuck Prince collected more than $40 million after a forced resignation last year. Shareholders will be asked to vote on a say-on-pay proposal, and the board will certainly be asked about its lack of a succession plan last year. “When you see a prominent financial company need to replace the chief executive—that’s scary,” said Hay Group’s Mr. Wise. “There will be a succession-planning focus like never before, and it will be more on developing a specific plan of action than just a discussion of the topic, as boards have done in the past.” Another proposal being floated by Ceres, a coalition of investors and environmental and public interest organizations, asks Citi to stop financing coal plants that emit carbon dioxide. “This is really the most aggressive of any of the proposals being filed regarding climate change,” said Rob Berridge, program manager of investor programs at Ceres. “It gets to the fundamental question of how seriously the company is taking the global warming issue.” May 5 Motorola: Round 2 with Carl Icahn Billionaire investor Carl Icahn took a major hit last year when he ran an unsuccessful proxy fight to get himself elected to Motorola’s board. Now he’s back up and taking a second jab, this time aimed at installing four of his handpicked directors on the company’s board. In a recent regulatory filing, Mr. Icahn wrote that last year the company insisted it “had the team and the plan to address Motorola’s problems. We are all painfully aware where that leadership has taken Motorola.” Mr. Icahn further noted that he hopes this year the company, “rather than launching another battle,” will elect his nominees and “avoid another wasteful struggle.” Though unsuccessful with his board campaign last year, Mr. Icahn has been credited with helping to force out former Motorola CEO Edward Zander, who resigned Jan. 1 after a turbulent year in which the company’s stock dropped 40% (shares are now trading at a five-year low) and its share of the global cell-phone market tumbled to 14% from 21%. While new CEO Greg Brown recently said the key to Motorola’s turnaround will be developing a new line of mobile phones, the company has also said it is considering selling or spinning off its struggling mobile phone unit—a move Mr. Icahn has long advocated. The mobile phone business posted sales of $19 billion last year, down 33% from a year earlier, and reported a $1.2 billion loss in operating earnings, compared with a $2.7 billion gain in 2006. Meanwhile, sales were up for the year in the company’s two other divisions: Home and Networks Mobility, which makes set-top boxes and wireless infrastructure (sales there rose 43% to $17.7 billion), and Enterprise Mobility, which makes digital two-way radios and voice and communication products (sales were up 9% to $10 billion). Overall, Motorola reported a loss of $49 million in 2007, compared with a profit of $3.7 billion in 2006. Mr. Icahn’s funds currently own 6.3% of Motorola’s shares, up from 5% in February. Scott Fenn, managing director of policy at proxy advisory firm Proxy Governance, said Mr. Icahn has been less specific about his intentions this time around and noted that last year he was pushing for a stock buyback, among other things. “He’s focused more on the governance practices and the general belief that management is doing a lousy job right now,” said Mr. Fenn, whose firm recommended last year that shareholders side with Mr. Icahn, but has not announced a decision yet for this year. It appears Motorola intends to dig in its heels again. In the company’s most recent proxy statement, filed in early March, it notified shareholders that Mr. Icahn’s nominees have “not been endorsed by your board of directors.” Motorola’s meeting is just one of the numerous annual shareholder gatherings Mr. Icahn and his associates are expected to haunt this year. His funds currently own stakes in, among many others, BEA Systems, Biogen Idec, Lear and J.C. Penney. Of Mr. Icahn’s various battles, Motorola will be the marquee event, said Patrick McGurn of proxy adviser RiskMetrics. “He got so close last year, people will be watching to see if he makes it this year.” Not yet scheduled Exxon Mobil: Coalition-style politics At last year’s annual meeting, a group of big investors and shareholder advocates led by the $244.7 billion California Public Employees’ Retirement System failed in an attempt to unseat Exxon Mobil director Michael Boskin, chairman of the oil company’s public issues committee, who they claimed repeatedly refused to meet to discuss the company’s strategy for climate change. While activists say the oil giant continues to ignore their concerns, they’re gearing up again to press management this year on everything from governance and executive pay to the environment. “This is a case where the environmental and social activists are really coming together with the governance activists,” said Tracey Rembert, a representative of the Service Employees International Union who last week began organizing institutional investors to press for change at Exxon Mobil. “There’s a feeling that we really need to push this year or we could be in trouble.” More than two dozen shareholder resolutions have already been filed with the company this year, up from a total of 15 last year, according to Ms. Rembert. They include requests that the company state specific targets for reducing greenhouse gases and make larger investments in renewable energy. Ms. Rembert said investor groups are rallying behind a proposal floated by Robert Monks, the shareholder advocate and founder of Institutional Shareholder Services, asking that the company’s chairman be an independent director. Currently, Rex Tillerson is both CEO and chairman. “An independent chair empowers other directors to ask the tough questions of management,” Ms. Rembert said, adding that Mr. Monks’ proposal garnered approval from 40% of shareholders last year. “That’s pretty incredible support, considering the company had just reported record earnings. I expect we’ll see even more support this year.” Not yet scheduled Yahoo: Fighting hard against Microsoft Yahoo’s annual powwows have been anything but boring lately. Last year, shareholders—none too pleased with the lagging share price and what some saw as egregious compensation paid to then-chief Terry Semel (he pocketed $72 million in 2006)—waged a campaign to oppose the re-election of four directors on the company’s compensation committee. More than a third of investors opposed the election of at least one Yahoo director. (The company wouldn’t break out individual vote tallies, saying only that each director received at least 66% of the vote.) Many observers say such strong opposition helped force Mr. Semel’s resignation less than a week later. This year, of course, Yahoo has other issues. It’s doing almost everything it can to fight off a hostile takeover bid from Microsoft, valued at $44.6 billion in late January, that Yahoo’s board quickly rejected as too low. Last week Yahoo tried to convince shareholders that it can go it alone during an investor presentation at which it set out ambitious plans to double operating cash flow in the next three years. Management also reaffirmed its earnings outlook for the year. The board bought some time—to either work out a friendlier deal with Microsoft or find another suitor—by extending its deadline to nominate directors. Chief executive Jerry Yang wrote in a recent e-mail filed with the SEC that the move will “enable our board to continue to explore all of its strategic alternatives” to the Microsoft bid. The original deadline was March 14, which would’ve launched the two companies into a formal proxy contest last week. Now, Yahoo’s deadline will fall 10 days after it announces the date for its still-to-be-scheduled shareholders meeting. The board can’t hold off forever, of course: By Delaware law, the company must hold a meeting within 13 months of last year’s June 12 gathering. At this year’s meeting, Yahoo will likely also have to explain its pay practices. The company disclosed earlier this month that it paid president Susan Decker a $1.1 million bonus for 2007, a year in which shares of the company fell 9%. It’s hardly Semel-level stuff, but the board should be ready to clarify the pay-for-performance link. Postponed until June 25 CSX: Who’s railroading whom? High atop the list of “must-see” meetings for Mr. McGurn of RiskMetrics is railroad operator CSX. For more than a year, CSX has been locked in a nasty boardroom battle with the Children’s Investment Fund (TCI), a $15 billion U.K. hedge fund that has built up a 4.2% stake in the company. Among the demands made by TCI, which is run by renowned agitator Christopher Hohn, are that the railroad go private and stop new capital expenditures. This year, it has teamed up with another hedge fund, 3G Capital Partners, in an attempt to nominate a slate of five directors to the company's 12-member board. The two funds combined own 8.3% of the company. “It looks like both sides are so dug in that they won’t settle out,” said Mr. McGurn. To wit: Last Monday, CSX filed a lawsuit against the two hedge funds claiming that they violated federal securities laws by not properly disclosing their entire stakes and that the funds’ disclosures are “false and misleading.” CSX spokesman Garrick Francis said that because those violations may influence how shareholders vote, the company postponed its annual meeting, originally scheduled for May 7, to June 25. (In a statement, the two funds called CSX’s allegations “wholly without merit.”) “It’s going to be a nasty one,” predicted Mr. Fenn of Proxy Governance. “TCI is no fly-by-night outfit. They’ve had quite a bit of success with activism in Europe.” CSX’s greatest ally in its fight to retain control may be Washington. At a House transportation committee hearing this month, lawmakers worried that the hedge funds’ aggressive tactics could lead to a freeze in new capital investment that might “threaten public safety.” Worse, some lawmakers voiced discomfort with the idea of a stretch of U.S. infrastructure falling under the control of foreign investors. “We don’t need these kinds of characters involved in our railroads,” said Rep. Peter DeFazio (D-Ore.). While Congress lacks the regulatory power to prevent the hedge funds’ actions, political pressure could certainly influence shareholder voting at the meeting. FW
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