GOVERNANCE - Power of the Purse

Shareholders are gaining unprecedented influence over the affairs of public companies, and nowhere is that newfound power being felt more profoundly than in the pocketbooks of CEOs. Of the 805 governance-related proposals shareholders made at public-company annual meetings this year, 290 dealt with executive compensation -- the single most popular topic on proxy ballots, according to advisory firm Institutional Shareholder Services.

Pay has long been a focus of stockholder proposals, but a critical difference this year is that investors have won key concessions from a host of big companies -- including American Express Co., Bristol-Myers Squibb Co. and Home Depot -- that have agreed to change policies or hold talks with investors on compensation issues to stave off shareholder votes. At least 40 pay-related proposals were withdrawn following negotiations between proponents and companies, according to ISS.

"Companies are realizing it makes sense to hear from investors rather than battle with them," says Sandra Leung, general counsel at Squibb, which in February joined a working group of investors and corporations aimed at giving shareholders an advisory vote on compensation. Once Squibb joined the group, the American Federation of State, County and Municipal Employees dropped a proxy proposal directed at the company that sought to give shareholders a voice on compensation.

Of this season's 70 so-called say-on-pay proposals, which ask companies to hold a nonbinding shareholder vote to approve or reject the annual remuneration of top managers, 45 made it to votes. Majorities approved the petitions at four companies: Blockbuster, Ingersoll-Rand Co., Motorola and Verizon Communications. A dozen more measures received 48 to 50 percent support, according to Afscme, which made the bulk of the proposals. Some targeted companies avoided votes by taking actions to satisfy investors. Among these were Schering-Plough Corp. and Tyco International, which both agreed to join the industry working group examining the issue.

Measures seeking to link pay with performance enjoyed less support: 47 such proposals received an average vote in favor of 36 percent, according to the United Brotherhood of Carpenters and Joiners of America, whose pension fund sponsored many of these petitions. Such proposals typically sought to link incentive payments to performance benchmarks like earnings growth. Among the most successful were measures targeting Allegheny Energy, Hewlett-Packard Co. and KB Home, each of which received a majority of shareholder votes.

Another big shareholder focus: severance and retirement packages. Victories for activists in this area included a decision by American Express to limit the types of compensation that qualify when determining contributions to supplemental executive retirement plans. (Shareholders have long argued that bonuses and equity grants shouldn't count.) "Supplemental benefits are where you see the most egregious" compensation abuses, says Edward Durkin, a spokesman for the UBC, which submitted the SERP-capping proposal that preceded AmEx's policy change. (Spokeswoman Judith Tenzer says AmEx had been planning the change as part of a wider governance review.)

The spirit of compromise is being encouraged by new Securities and Exchange Commission rules requiring more-detailed reporting of compensation, including perquisites and retirement benefits. Companies expect scrutiny of pay to rise with the additional disclosures. "The new disclosure policies pushed companies to take actions," says Richard Ferlauto, Afscme's pension and benefit policy chief.

Another catalyst: an increase in the number of companies that require directors to be elected with a majority of shareholder votes. (Previously, just one vote for a nominee was enough to elect him or her.) Now directors who don't respond to shareholder pay concerns risk losing their jobs. Says Carol Bowie, director of governance research at ISS: "Directors are more accountable. They know they can't ignore shareholders anymore. This is a sea change from ten years ago."