CORPORATE GOVERNANCE - Friendly Persuasion

As investor activism surges, our annual survey shows which companies are winning shareholders’ hearts, minds and money.

Click here to view the expanded rankings.Running a public company in today’s hypercritical, overly scrutinized environment is no easy task. Chief executives and their management teams not only must keep their eyes on day-to-day operations, but they also have to devote increasing amounts of time and energy to ensuring that investors are satisfied with the direction in which companies are going and the financial decisions being made. These days, shareholders insist on being well informed, and few will refrain from protesting if they aren’t happy. Many have become more demanding -- and vocal -- about their expectations.

“If you try to hide information, you lose credibility and make yourself a target for activist investors,” observes Alice Lehman, head of investor relations at Charlotte, North Carolinabased Wachovia Corp.

Home Depot found that out the hard way. Shareholders cheered the arrival of Robert Nardelli as chief executive officer when he took the helm of the Atlanta-based retailer in 2000. They cheered again when he was booted in January. Investors had become enraged to learn that, since taking the top job, Nardelli had earned more than $240 million while the company’s shares were losing value. They wanted answers. Nardelli’s standoffishness -- he famously refused to answer questions at last May’s annual meeting -- only inflamed matters, leading to a shareholder uprising.

Nor was his defenestration unique. Investors angry over Henry McKinnell Jr.'s $200 million pension forced the resignation of the Pfizer CEO last July, and UnitedHealth Group CEO William McGuire earned the wrath of shareholders -- and the scrutiny of the Securities and Exchange Commission -- when it was revealed that his backdated stock options totaled $1.6 billion; McGuire left the company in November.

“There is a shorter fuse on the whole notion of bad corporate governance practices,” sums up Kurt Schacht, managing director of the CFA Centre for Financial Market Integrity in New York. “Rational investors want a company to have the right practices in place and be accountable.”

Shareholders have all the time in the world -- and no end of admiration -- for executives at U.S. companies that treat them well. This year, for the second time, we asked investors to name the companies that they considered the most responsive to shareholders. Altogether, more than 760 portfolio managers and investment analysts from some 400 companies, with combined assets under management of $6.3 trillion in U.S. stocks, gave us their evaluations of companies in their areas of expertise; the winners constitute Institutional Investor’s second-annual ranking of America’s Most Shareholder-Friendly Companies. The top-rated companies in 62 sectors appear in the table on page 51; the complete ranking can be found on our Web site,

The results are eye-catching. Some of the companies, such as Walt Disney Co., General Electric Co. and Johnson & Johnson, are household names; others are less well known to consumers -- steel manufacturer Nucor Corp., recycling and waste management services provider Republic Services, electronics manufacturer Jabil Circuit -- but have made themselves favorably known to investors. And in interviews with II, shareholders are clear about what they want: detailed, easy-to-understand financial information; proof of good governance; access to company officers; and a clear justification of executive compensation.

Failure to meet these expectations can land a company in the headlines and in the doghouse with the investment community, as investors make clear in this year’s survey. In last year’s inaugural survey, Home Depot was the top-ranked Retailing/Hardlines company. By the time shareholders began to participate in this year’s survey, they were already restless; the company falls to fourth place in voting that concluded in midsummer -- months before Nardelli received his comeuppance. Pfizer, ranked third last year in Pharmaceuticals/Major, fails to rank this year; and UnitedHealth Group, last year’s No. 1 Managed Care company, slips to second place.

Shareholder uneasiness has not been lost on corporate chieftains, many of whom are reaching out to investors as never before. JoAnn Reed, chief financial officer of Medco Health Solutions, says she has stepped up her efforts to meet with shareholders. “We like to do as many investor conferences as possible to get our message out and continue to get exposure in the marketplace,” says Reed, adding that roughly 25 percent of her time is spent at such conferences, up from 15 percent a few years ago.

Reed also makes sure that earnings reports hold no surprises for shareholders. Medco’s investor relations team sends an advance e-mail blast to investors with “very detailed information around the results,” Reed says, and follows up by phone with the company’s biggest investors to answer any questions. “The more information we give out to shareholders, as well as the analyst community, the better off we are,” she says. “When analysts are better able to manage their financial expectations of the company, they get better data out to our shareholders.”

Investors approve of Medco’s outreach efforts: This year the Franklin Lakes, New Jerseybased outfit is rated the most shareholder-friendly among Health Care Technology & Distribution companies, up from second place last year. “They’re very responsive and quick on every question I’ve asked them,” says Joshua Fisher, health care equities analyst at Pequot Capital Management in New York. “A lot of companies, when they get to be large-cap, don’t give you good answers. Medco makes sure to give you answers -- the CEO, CFO, investor relations, the whole management team.”

The management team at Wachovia also makes a point of giving shareholders the answers they want, even as it engages in the kind of aggressive expansion that can give investors fits. “We’ve done four or five major acquisitions, and we always get a negative reaction,” says CEO G. Kennedy Thompson, referring to Wachovia’s acquisitions of SouthTrust Corp. in November 2004, Westcorp and WFS Financial last March and Golden West Financial Corp. last October. “Every time we announce a deal, we are very clear about the things we need to do to make that deal successful.”

As head of investor relations, Lehman set up what she calls a one-stop shop for shareholders -- and potential investors -- where they can find clear, accurate information. “The key is to not overwhelm shareholders with data but to help them understand how the company is doing and what its prospects are,” she says.

Wachovia, rated most shareholder-friendly in the Banks/Large-Cap sector (up from second place last year), has added an Outlook section to its quarterly earnings release, to give investors insight into the company’s financial goals and the ability to measure its progress. Managers’ goals are outlined, and if a goal is not met, the manager must explain why -- in writing. The point, Thompson says, is to build up shareholders’ trust in the company and their faith that management will do what it says it is going to do: “We want them to be comfortable with the management team and our credibility.”

Outlook is a hit with investors. “The disclosure in their financial statements is bar none the best,” says one shareholder. “If you’re an owner of Wachovia, shame on you if you don’t know enough about the business, because they give you every opportunity.”

When a company falls on tough times and investors are angry, management has two choices: stonewall shareholders à la Home Depot, or tell them everything they want to know. When J.C. Penney Co. hit the skids a few years ago, it opted for the latter approach, even though much of what company management had to tell investors wasn’t good.

The Plano, Texasbased retailer saw its debt downgraded to below investment grade in 2000, after its share price fell below $10; its return on equity fell to 8 percent (from 20 percent in the mid-1990s); and its earnings before interest, taxes, depreciation and amortization dropped to 3 percent (from 9 percent in the mid-'90s). Robert Johnson, vice president and director of investor relations for the past six years, says that as part of its effort to turn the company around, management stepped up its participation in investor conferences, increased the number of conversations it had with analysts and established more regular contact with the Street. “You have to be visible,” Johnson says. “Not every story was a good story, but generally, we’ve been on an upward trend.”

The company embarked on a major restructuring, centralizing its buying process, selling its Eckerd Drugstores division in 2004 for $4.5 billion and repositioning itself as a trendy value retailer. Those initiatives showed signs of success in just a few years, with operating income rising from $253 million in 2003 to $977 million in 2006. J.C. Penney shares now trade in the mid-$80s, its ROE is above 30 percent, ebitda is at 11 percent, and the company is viewed as the most shareholder-friendly among Retailing/Broadlines & Department Stores.

“J.C. Penney is the most remarkable turnaround I’ve seen, from both a financing standpoint and an operational standpoint,” says one shareholder. Company executives have “maintained a prudent capital structure throughout, which has given them time and enabled them to improve operations and to finally start growing again. Those things have created tremendous value.”

Although the retailer’s worst days appear to be in the past, J.C. Penney’s management maintains its commitment to full disclosure and open communication with shareholders. “We’re not biased on who we speak with,” says Edward Merritt, manager of investor relations. “A lot of IR teams don’t want to talk to a certain type of investor, but we treat everyone as if they’re a potential investor.”

In addition, J.C. Penney’s annual reports include information that many corporations’ don’t, such as return on capital invested and return on capital employed, all in an effort to reassure shareholders that they have invested wisely.

Executives who succeed in meeting or exceeding shareholders’ expectations will find themselves rewarded with investor loyalty. Those who don’t may find their transgressions splashed across the front pages of the morning papers -- and the subject of scrutiny on Capitol Hill.


Picking the Winners

More than 760 analysts and portfolio managers at some 400 money management firms responsible for investing a combined $6.3 trillion in U.S. stocks participated in selecting Institutional Investor’s 2007 list of America’s Most Shareholder-Friendly Companies. These asset management professionals were asked to name the companies they consider the most shareholder-friendly in the industry sector (or sectors) for which they are responsible. In making their choices, voters were instructed to consider the effectiveness of companies’ governance and investor relations as part of their overall efforts to maximize shareholder value. Respondents gave their first, second, third and fourth choices, which we weighted to produce a score for each company. We name the most shareholder-friendly companies in each of the 62 industry sectors surveyed for the 2006 All-America Research Team.

Our America’s Most Shareholder-Friendly Companies ranking was compiled by Associate Editor Michele Bickford under the guidance of Assistant Managing Editors Sathya Rajavelu and Tom Johnson and Senior Editor Jane B. Kenney.


Charlotte, North Carolinabased Wachovia Corp. loves growth, both organic and through acquisition. Investors appreciate the former -- the bank has achieved double-digit growth in earnings-per-share in each of the past five years -- but they can get a tad uneasy with the latter, especially when a bank expands at the rate Wachovia has: four major acquisitions in just over two years. As one shareholder notes, banks are always “put in the penalty box” following deal announcements, and investors can do little but “sit there and just hope they don’t destroy value one day.”

To G. Kennedy Thompson, Wachovia’s chief executive officer, open communication is the key to maintaining shareholder confidence. In January 2001 he added an Outlook section to the bank’s quarterly earnings reports that outlines initiatives in strategic areas such as employee retention, corporate governance, acquisition integration and revenue growth. “We do not give earnings-per-share guidance, but we give as much information as possible,” Thompson says.

Investors give Wachovia a big thumbs-up for its efforts. “Their disclosure and the way they handle earnings are probably among the best -- if not the best -- in banking,” says one shareholder. Another adds: “They hold themselves accountable because they put it all out there. It makes them supertransparent and superaccountable.”

Shareholders also praise Wachovia’s Web site. “There’s a good section highlighting corporate governance aspects and company policies, which is helpful,” notes one investor. “There’s also an address to contact directors. The accessibility and information -- it’s all very easy to get to.”

Thompson says he views shareholders the same way he views customers. “Everything we do to keep customers happy, we ought to do for investors -- open communication, being accountable for what we tell them, always being accessible for questions or for clarification,” he says. Making the senior management team available to investors and to Wall Street may be demanding on their time, but Thompson says it has plenty of benefits -- imposing discipline on executives and helping them more fully understand their business.

E.W. Scripps Co.


When Kenneth Lowe of E.W. Scripps Co. has information for investors, he communicates it like a true media professional: “We’ve always believed that the quality of information is more important than the quantity,” says Lowe, CEO of the Cincinnati-based newspaper and network TV company. “As we like to say around here, it’s all in the editing.”

Shareholders appreciate Lowe’s streamlined -- and transparent -- approach, with one investor citing three qualities that make Scripps especially shareholder-friendly: accessibility, disclosure and performance. “They’ve come through several times and always made themselves available at conferences, whether it’s the CEO, CFO or IR person,” this shareholder says. “They give a lot of detail in their financial and earnings reports about how all the different businesses are doing, and they’ve done a great job with the company, setting reasonable targets and surpassing them.”

Lowe attributes Scripps’ standing with shareholders to the company’s willingness to explain its decisions in great detail. For example, he recalls the myriad questions he and other company officials answered when Scripps started Home & Garden Television in the mid-1990s, and then again when it acquired the Food Network in 1997. “We felt compelled to go out and explain to investors, help educate them, on the long-term vision,” Lowe says.

Shareholders also have come to rely on Scripps’ vice president of communications and investor relations, Timothy Stautberg, who joined the company in 1990 and moved into IR in 1999. “He’s always happy to talk about the businesses and makes an effort to reach out to investors and make sure everyone understands what’s going on with the company,” one shareholder says.

Which is all part of Scripps’ shareholder-friendly plan. “Our management team makes sure that Tim is fully in the loop,” says Lowe. “All of them understand the importance of not only Tim’s role, but also the transparency and clarity of communications that we have to live up to.”

Medco Health Solutions


Medco Health Solutions believes in full disclosure: Consider how it handles the controversial practice of drug company rebates. Pharmacy benefit providers, third-party administrators of prescription drug programs, are not required to disclose how much money they receive from drug manufacturers for recommending one pharmaceutical product above another or how much -- if any -- of the rebate is passed along to customers in the form of lower prices. But the Franklin Lakes, New Jerseybased company has made a conscious decision to tell shareholders and analysts everything.

“We give out a significant amount of information about rebates -- how much is passed back to clients and what our net retention rate is,” says CFO JoAnn Reed. “Nobody else in the industry gives that kind of disclosure.”

Shareholders are impressed. “Medco senior management is very straightforward,” says one investor. Another asserts, “They provide the most disclosure in the industry on what percentage of rebates they keep.”

Medco, which operates the biggest mail-order pharmacy in the U.S., opted for full disclosure to avoid any appearance of deception, and the policy has paid an unexpected dividend: “By being more transparent, we’re actually winning more business,” Reed says.

Investors also praise Medco’s management team for the way the company’s finances are handled. “The managers are good stewards of capital and users of their balance sheet,” says one shareholder, citing the company’s aggressive stock-repurchase program. In August 2005, Medco announced it would buy back $500 million in shares. The company expanded the program in December 2005 by $1 billion and then again last November by an additional $1 billion. “It was not an exercise in option dilution; they used discretion and bought back a lot,” another shareholder adds. “And the stock was pretty cheap. It was a good move.”

J.C. Penney Co.


When Myron (Mike) Ullman III was named CEO of J.C. Penney Co. in 2004, shareholders had one primary concern: Would he be able to keep the Plano, Texasbased retailer on track following the remarkable turnaround that his predecessor, CEO Allen Questrom, had just achieved?

“I was very appreciative that, when I came in, the company had already been turned around,” says Ullman. “What the board discussed with me was not how to complete the turnaround but how to reinvent the company and focus on growth.”

In just two years, Ullman has worked to move the retailer forward by setting clear objectives such as opening new stores, increasing operating income and expanding online operations. In fiscal year 2006 the company opened 28 new locations and saw its operating income rise 29 percent over 2005 income and its Internet sales increase 26 percent -- in line with Ullman’s targets. He also emphasizes employee motivation, for everyone from senior management to store associates.

“There are two aspects to retailing: First, it’s a contact sport -- somebody’s losing every time you win -- and second, it’s a team sport,” Ullman says. “You need the balance to be able to lead and motivate people. Our team understands that, and everybody likes a win -- and the investors win.”

Investors are doing their fair share of cheerleading for the team. “The board has made executive management decisions that have been quite remarkable,” exclaims one shareholder. “They hired a great merchandiser, Allen Questrom, and gave him the latitude to do what he does best. And when Questrom was leaving, they made another fantastic decision to hire Mike Ullman and again gave him the latitude to do what he does best.”

J.C. Penney gets high marks for its disclosure and accessibility, and shareholders are impressed with the retailer’s investor relations team of Robert Johnson, vice president and director of investor relations, and Edward Merritt, manager of investor relations. “Bob and Ed really know the story very, very well,” says one shareholder. “They don’t have to come back to you with information, and they provide good management access. That’s all you really need from IR.”