McGraw-Hill Cos. has taken some tough licks in the market of late. Its Standard & Poor’s debt-ratings unit has come under heavy criticism for being late to identify the deterioration of mortgage-related securities over the past year. Its stock price has fallen more than 40 percent since June. And the publishing company has been taking heat from good-governance groups and activist shareholders. In an embarrassing March vote, 77 percent of shareholders backed a nonbinding resolution urging the publishing company to change its policy so that all board members would stand for reelection at once instead of in staggered groups, a practice that critics say can entrench management at shareholders’ expense. McGraw-Hill declined to heed the advice, irking many investors.
“They do not look too shareholder-friendly, at least in the governance community,” asserts Shirley Westcott, managing director of policy for Proxy Governance, a firm that advises investors on shareholder votes.
But McGraw-Hill is also doing plenty of things to please its owners: Last year, in the face of a flatlining stock price, it stepped up its share-buyback plan and increased its dividend, helping boost returns for shareholders in a tough environment. And its open and frank communications with Wall Street, at investor conferences and road shows and in its financial reports, win the company much praise. “Being accessible, transparent, candid and clear are all integral to our dealings with shareholders worldwide,” says Harold (Terry) McGraw III, CEO of McGraw-Hill (see box, page 44).
As a consequence, despite McGraw-Hill’s run-ins with governance watchdogs, professional money managers responding to our third annual survey selected McGraw-Hill as the most shareholder-friendly U.S. company in the Publishing & Advertising Agencies sector.
“The company has a strong history of returning capital to shareholders in the form of dividends, repurchase and capital appreciation,” notes one investment management firm analyst who responded to the survey. Says another, “They are very focused on return on invested capital, revenue growth, margins and cash flow.”
Shareholder friendliness, of course, is a rather subjective concept. As McGraw-Hill’s inclusion on our list of 57 standout companies shows, there is no set checklist that public companies can adhere to and keep Wall Street happy.
Specific governance policies matter, for sure, but in many cases companies that oppose or have flouted good-governance prescriptions are still held in high regard by shareholders for a host of other reasons, including solid earnings and share-price growth.
Like McGraw-Hill, National Oilwell Varco, a Houston provider of equipment and services to oil and gas exploration and production companies, maintains a staggered board. CEO Merrill (Pete) Miller Jr. dismisses reforms championed by governance watchdogs, such as giving shareholders an advisory vote on executive compensation and allowing directors to be elected by majority vote. But the company’s shares are on a rocket ride, nearly tripling in the past year, giving shareholders plenty to be pleased about. Voters in our survey identified National Oilwell Varco as the top company in the Oil Services & Equipment sector.
“We have always run a pretty good business, so we never had too much shareholder activism,” shrugs Miller (see box, page 44).
Another company that has run afoul of governance critics yet remains wildly popular with shareholders is United Technologies Corp. The Hartford, Connecticut–based industrial conglomerate has come under fire from watchdogs such as the Corporate Library, which gives the company a “D” governance rating in good part because of CEO George David’s generous compensation. David earned $27.2 million in salary, bonus, options and other compensation in 2006, the latest year for which proxy materials are available. Our voters evidently think he is well worth the money: They have named the company the friendliest in the Aerospace & Defense Electronics sector for all three years we have conducted the survey. Investors who selected the company are more impressed with the 21 percent average compounded annualized gain in United Technologies’ stock over the past 15 years than they are worried about the paycheck of David, who deflects criticism of the company’s compensation practices by noting that the stock’s performance has supercharged the value of the equity portion of senior executives’ pay (see box, opposite page).
But a rising stock price is far from the only, or even the main, criterion for shareholder friendliness to many investors. Luxury retailer Coach, for example, is judged to be the top company in the Apparel, Footwear & Textiles sector despite a stock that ended the year down 30 percent. The New York company wins rave reviews for its openness and honesty with shareholders, who note that CEO Lewis Frankfort and other senior executives are always accessible to investors (see box, opposite page).
To determine the country’s most shareholder-friendly companies, Institutional Investor solicited the opinions of shareholders in the U.S. and around the world. More than 640 portfolio managers and investment analysts from some 360 institutions, with combined assets under management of $8.7 trillion in U.S. stocks, gave us their evaluations of companies in their areas of expertise. The top-rated companies in 57 sectors appear in the table on page 43; the complete ranking can be found on our Web site, institutionalinvestor.com.
Many of these shareholders simply don’t see a strong correlation between companies’ having textbook governance practices and delivering attractive financial returns. Several of the voters we spoke with regarding their choices are quick to point out that much of the academic literature analyzing governance practices fails to conclusively establish such a link.
Patrick McGurn, special counsel at RiskMetrics Group, isn’t surprised by this attitude. He laments that investors have a what-have-you-done-for-me-lately attitude: “They pay less for governance and other issues and focus more on a company’s operations and performance.”
Shareholder activists are, however, more engaged with corporate America than ever. In 2007 shareholders spearheaded 501 campaigns for changes in corporate control, including management and director changes as well as sales of assets or entire companies, a 17 percent increase over the 429 such battles in 2006, according to a report by FactSet SharkWatch, which tracks shareholder activism. Some 138 institutional investors and other shareholder groups announced their first-ever activist-related campaigns last year, and 110 proxy fights were waged in 2007, more than in any other year since FactSet began tracking these contests in 2001. That number is likely to rise this year, as stocks slump and the economy weakens.
Another sign of a rise in activism: Shareholders lodged 656 proposals to be voted on at public-company annual meetings in 2007, up 13 percent from 581 in 2006, according to RiskMetrics, which advises institutional investors on how to vote their proxies at corporate annual meetings. Labor union pension funds and other activists are homing in on compensation policies, with 40 proposals last year aimed at giving shareholders an advisory vote on the compensation packages of senior executives. These proxy measures on average received the support of 42 percent of shareholders and influenced some companies, including Verizon Communications and insurer Aflac, to adopt such “say on pay” votes voluntarily. That has emboldened activists to press the issue further in 2008.
In the coming year many of the same activists are planning campaigns around the subprime mortgage meltdown. The Laborers’ International Union of North America, for instance, is submitting resolutions to Bear Stearns Cos., Beazer Homes USA, Lehman Brothers Holdings, Ryland Group and Washington Mutual, proposing greater disclosure of these companies’ mortgage investments. Liuna also is calling for Citigroup, IndyMac Bancorp, McGraw-Hill and Wells Fargo & Co. to enhance disclosure policies and limit conflicts of interest between financial services companies and credit-rating agencies.
Skeptics, however, note that much of the proxy action is sponsored by unions and other groups with social and political agendas and aimed at large-capitalization companies whose activities garner headlines. “They hit the same companies over and over again to get publicity for their issues,” says John Laide, an analyst with FactSet.
Several of the companies cited by our voters as exemplars of shareholder friendliness have been targeted by the activist crowd. Last year’s majority vote urging McGraw-Hill to scrap its staggered board came after three previous attempts fell short of the 50 percent mark. Also in 2007 the bulk of its shareholders asked the company to modify the requirement that a supermajority of shareholder votes be cast to change its bylaws. United Technologies has been a target of shareholder resolutions requesting a say on pay and for greater ties between executive compensation and company performance.
These companies have found other ways to make friends with their shareholders.
United Technologies Corp.
After United Technologies Corp. reported fourth-quarter 2007 earnings in late January, analyst Timothy Burger of UMB Investment Advisors was reminded why he considers the conglomerate such a shareholder-friendly company.
“They are very transparent,” he says of the Hartford, Connecticut–based company, which wins top honors in the Aerospace & Defense Electronics sector. “You get a view of all of their business and details about how the different units are performing.” This contrasts with another high-profile conglomerate he follows — General Electric Co. — which Burger calls “opaque.”
This openness does not come by accident. Chief executive officer George David explains that since the early 1990s, the company, known for its Pratt & Whitney airplane engines, Otis elevators and Sikorsky helicopters, has released detailed quarterly reports on each of its six business segments, providing the Securities and Exchange Commission and Wall Street with the same metrics its managers use internally. What’s more, each of its six division presidents holds regular briefings for analysts and investors, presenting their plans and outlook.
“I want them to feel accountable to shareholders,” says David.
That doesn’t mean everyone is happy with the company, of course. Governance watchdog the Corporate Library gives United Technologies a “D” grade, largely because of concerns over executive compensation. “David’s base salary and total actual compensation are more than 20 percent greater than median total actual compensation at similarly sized firms and raise concerns over the alignment of executive interests with shareholder interests,” the organization wrote in a recent report.
David counters that the company aims to award salaries and bonuses in line with the median of its core group of 25 competitors. The company’s equity awards have yielded multiples of their originally computed value because of the stock’s extraordinary performance. Over the past 15 years, United Technologies’ shares have appreciated by 1,573 percent, racking up a 21 percent compounded annualized gain.
Of course, when the conglomerate announced its latest quarterly earnings, it had good reason to be so transparent: Profits rose by 23 percent over the same quarter in 2006. Performance like that wins a company plenty of friends in the market.
McGraw-Hill Cos.
Few Wall Street analysts paid much attention to McGraw-Hill Cos. back in 1993, when Harold (Terry) McGraw III became the group’s chief operating officer. McGraw set out to change that immediately, directing senior executives to reach out to Wall Street and relay the company’s strategy.
“We weren’t focused on communicating with the investor community, and as a result very few investors knew us,” recalls McGraw, whose great-grandfather co-founded the New York–based company, which wins in the Publishing & Advertising Agencies sector, more than a century ago. Since being promoted to CEO in 1998, McGraw has continued to stress regular, open dialogue with shareholders and analysts. He and other senior executives frequently speak at investor conferences across the country, including eight such events in 2007, and conduct road shows to make sure that the market is intimately familiar with the company and its operations. “We work very hard to make our business strategy and results easily accessible for investors,” McGraw explains.
All the communication and transparency in the world won’t help if a company isn’t performing well. And the past several months have been tough for McGraw-Hill, whose Standard & Poor’s debt-ratings unit has been buffeted by the subprime mortgage crisis. The company also publishes BusinessWeek magazine, which has been affected by the industrywide decline in advertising sales. McGraw-Hill’s shares are trading near their 52-week low, in the low $40s. But the company is making up for the decline by continuing to share piles of excess cash with investors. It increased its dividend by 13 percent at the beginning of 2007 and by 7 percent last month, and it has stepped up its stock-buyback program. In 2007 alone it returned $2.5 billion to shareholders through these routes.
“As an investment manager, you are charged with maintaining and growing investors’ money,” says one survey voter, who gives the company credit for its efforts to boost returns despite its lagging share price. “The quintessential bottom line is how the stock did.”
National Oilwell Varco
Merrill (Pete) Miller Jr. of National Oilwell Varco makes no bones about opposing a host of policies favored by corporate-governance activists, including giving investors an advisory vote on executive compensation and allowing directors to be elected by a majority vote of shareholders. Of course, when your company’s shares have nearly tripled in the past year, you may not have to worry too much about such matters.
“We have always run a pretty good business, so we never had too much shareholder activism,” says the 57-year-old CEO matter-of-factly. During Miller’s seven years atop the Houston-based maker of oil-and-gas-extraction equipment, which survey respondents selected as the most shareholder-friendly company in the Oil Services & Equipment sector, its stock gushed from $17 to $82 per share, before trading lower in recent weeks on an easing in energy prices. In December it took advantage of its soaring stock to acquire competitor Grant Prideco for $7.2 billion, in a deal that is expected to close by midyear.
Still, certain company policies and practices do irk some shareholders. Despite making themselves available for question-and-answer sessions during quarterly earnings calls, for instance, Miller and other senior executives decline to provide Wall Street with earnings guidance or business forecasts. And the company staggers the terms of directors, an approach that some watchdogs oppose because it can entrench management control.
The CEO argues that companies are better off if directors are divided into groups serving three-year terms because that enables board members to spend time learning about the company and coming to understand management. “It is not beneficial to elect all of the directors every year,” he says.
To be sure, National Oilwell’s governance practices are anything but unsound. Proxy-advisory firm Institutional Shareholder Services, for example, rates National Oilwell’s governance policies higher than those of nearly 87 percent of its energy-industry peers. That, and the company’s financial hot streak, should keep shareholders plenty happy for the foreseeable future.
Coach
Nearly a decade of superlative performance wins luxury handbag maker Coach the benefit of the doubt from investors despite a share price mired near the bottom of its 52-week range and below its level of two years ago. Voters in our survey of America’s Most Shareholder-Friendly Companies name the New York retailer as tops in the Apparel, Footwear & Textiles industry for a third consecutive year.
The company’s lackluster financial performance of late is “mostly due to the business cycle,” asserts analyst Adam Murl, who follows Coach for ING Investment Management. “It’s not particular to what they are doing. They operate at a high level.”
Murl and others praise Coach CEO Lewis Frankfort, along with CFO Michael Devine III and investor relations chief Andrea Shaw Resnick, for being more accessible to shareholders than their peers are. The trio visit shareholders regularly and maintain an open-door policy for investors who want to see and speak with executives. Later this year the company will host its first analyst day, a program that will feature not only top management but also other key personnel, such as the head of its U.S. retail business. The event will be Webcast for those who can’t attend in person.
Perhaps most important, the company takes pains not to spin less-than-flattering news or promise what it can’t deliver.
“We are consistently accessible to shareholders, while delivering an honest and complete message,” Frankfort tells Institutional Investor. “There is no divergence between what we say and what we do.”
As a result, the financial community has shown Coach a tremendous amount of goodwill, which is carrying it through an uncharacteristically rough patch for its shares. The company’s stock peaked at $54 in April but before that had been on a spectacular run, rising more than 2,000 percent during the nearly seven years following its October 2000 IPO.
“We are continuing to implement our growth strategy,” says Frankfort. “The stock price is not the most important report card at any one time. Long-term investors who have been with the company for quite some time will stick with us despite the fluctuations with the stock price.”
The Top Shareholder-Friendly Companies of 2008
Listed here by sector and industry are the 57 companies that scored the highest when Institutional Investor asked portfolio managers and sell-side equity analysts to choose the most shareholder-friendly companies in their domains.
BASIC MATERIALS
Chemicals
Monsanto Co.
Metals & Mining
Freeport-McMoRan
Copper & Gold
Paper & Forest Products
Weyerhaeuser Co.
CAPITAL GOODS/INDUSTRIALS
Aerospace & Defense Electronics
United Technologies Corp.
Airfreight & Surface Transportation
FedEx Corp.
Electrical Equipment & Multi-Industry
General Electric Co.
Environmental Services
Republic Services
Machinery
Deere & Co.
Packaging
Ball Corp.
CONSUMER
Airlines
Southwest Airlines Co.
Apparel, Footwear & Textiles
Coach
Autos & Auto Parts
Johnson Controls
Beverages
PepsiCo
Cosmetics, Household & Personal Care Products
Procter & Gamble Co.
Food
Kellogg Co.
Gaming & Lodging
International Game Technology
Homebuilders & Building Products
Toll Brothers
Leisure
Carnival Corp.
Restaurants
McDonald’s Corp.
Retailing/Broadlines & Department Stores
J.C. Penney Co.
Retailing/Food & Drug Chains
CVS Caremark Corp.
Retailing/Hardlines
Staples
Retailing/Specialty Stores
Urban Outfitters
Tobacco
Altria Group
ENERGY
Electric Utilities
Exelon Corp.
Integrated Oil
Exxon Mobil Corp.
Natural Gas
Questar Corp.
Oil & Gas Exploration & Production
XTO Energy
Oil Services & Equipment
National Oilwell Varco 1
FINANCIAL INSTITUTIONS
Banks/Large-Cap
Wells Fargo & Co.
Banks/Midcap
Zions Bancorp.
Brokers & Asset Managers
Goldman Sachs Group
Consumer Finance
American Express Co.
Insurance/Life
Prudential Financial
Insurance/Nonlife
Allstate Corp.
REITs
Simon Property Group
HEALTH CARE
Biotechnology
Gilead Sciences
Health Care Facilities
Community Health Systems
Health Care Technology & Distribution
Medco Health Solutions
Managed Care
WellPoint
Medical Supplies & Devices
Stryker Corp.
Pharmaceuticals/Major
Merck & Co.
Pharmaceuticals/Specialty
Allergan
MEDIA
Cable & Satellite
Comcast Corp.
Entertainment
Walt Disney Co.
Publishing & Advertising Agencies
McGraw-Hill Cos.
Radio & TV Broadcasting
Entercom
Communications Corp.
TECHNOLOGY
Computer Services & IT Consulting
Accenture 2
Imaging Technology
Adobe Systems
Internet
EBay
IT Hardware
Hewlett-Packard Co.
Semiconductor Capital Equipment
KLA-Tencor Corp.
Semiconductors
Texas Instruments
Software
Microsoft Corp.
TELECOMMUNICATIONS
Data Networking & Wireline Equipment
Cisco Systems
Telecom Equipment/Wireless
Qualcomm
Telecom Services
AT&T
1 In December 2007, Grant Prideco and National Oilwell Varco agreed to merge; the deal is expected to close before mid-2008.
2 Based in Bermuda.
