WALL STREET JOURNAL ON THE NEW SHAREHOLDER ACTIVISM
Shareholders at EMC insisted that the Board be dominated by external people,
and not insiders.
Shareholders at another public company insisted that lucurative management
compensation arrangements be approved by all stockholders.
Are these isolated events or an emerging trend towards shareholder activism?
Here is what the WALL STREET JOURNAL has to say. We'd love your
opinions on this article and will reprint them at the end of the WSJ
piece. Just mail to lstybel@boardoptions.com.
BOARD OPTIONS INC.
Boston, MA
www.boardoptions.com
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Shareholder Activists Win Big Ones
On Votes at EMC, Mentor Graphics
Investors Approve Resolutions Management Opposed
Concerning Independence of Directors, Stock Options
By JERRY GUIDERA
Staff Reporter of THE WALL STREET JOURNAL
September 8, 2002
In a sign of increased shareholder activism following widespread corporate
accounting scandals and concern over outsized executive pay, investors in two
companies -- EMC
Corp. and Mentor
Graphics Corp. -- approved shareholder resolutions opposed by management.
Typically, such measures are defeated, often by a wide margin. However, EMC
shareholders handed management a surprising defeat, with 56% of the votes
cast in favor of a nonbinding resolution promoting a majority of independent
directors on the board of the big data-storage firm, according to a
preliminary tally at EMC's shareholder meeting Wednesday.
And Mentor Graphics said 56.7% of shareholders voting at its annual meeting
on Tuesday backed a nonbinding resolution asking that all significant
stock-option plans be submitted to the software company's shareholders for
approval.
The votes could provide encouragement to advocates of corporate good
governance, which has been getting increased attention as a result of
numerous disclosures of questionable practices and the sharp slide in many
stocks in the past year, especially technology issues. Indeed, Peter Clapman,
senior vice president and chief counsel for corporate governance at
TIAA-CREF, a big institutional investor that sponsored the Mentor Graphics
resolution, said the vote on the stock-option measure sends a "clarion
call" for action by regulators.
The EMC resolution approved by shareholders also recommends that the audit
and compensation committees of the board -- two panels with power to rein in
any management accounting trickery or excessive pay packages -- and the
director-nominating committee also be composed solely of independent
directors.
EMC management had opposed the proposal, saying it would limit the company's
flexibility in selecting board candidates. Although the resolution is
nonbinding, management said after the vote that it would comply with its
terms -- though EMC's definition of what constitutes "independent"
may not square with corporate good-governance advocates.
 EMC's
board was for many years dominated by its founding Egan family, friends and
company employees. Shareholder activists have argued that a more independent
board might have prodded the company into actions that may have prevented the
recent collapse in its business fortunes and stock price. EMC stuck doggedly
to a storage-only, hardware-dominated strategy while newcomers began chipping
away at its franchise via storage software and bundled package sales of many
technology products.
EMC shares, the best performers on the New York Stock Exchange in the 1990s,
lost 80% last year. As of 4 p.m. in broadly higher New York Stock Exchange
composite trading Wednesday, EMC shares were up 61 cents, or 7.9%, to $8.30.
Shareholder activists and corporate-governance experts were pleased by the
support for the resolution. Carol Bowie, director of governance-research
services for Investor Responsibility Research Center, a research organization
in Washington, D.C., said the support was "remarkable." She noted
that only three out of some 50 similar proposals calling for an independent
board won the support of shareholders between 1996 and 2001.
EMC is the first company this year to lose a shareholder fight over the
independence of its board. But shareholders have won some 16 other fights so
far, according to proxy service IIRC, mostly dealing with the timing of
directors' terms. Shareholder resolutions favoring election of all directors
at the same time -- a schedule that makes it easier to unseat incumbents than
does staggered elections -- succeeded this year at Airborne
Inc., Goodyear
Tire & Rubber Co., Occidental
Petroleum Corp. and Morgan
Stanley, among others.
Bill Patterson, who heads the office of investment for one of the proposal's
backers, the AFL-CIO, said he wasn't expecting to win this vote, even though
EMC is one of the 26 companies the labor federation is targeting through its
vast holdings in pension funds. Other shareholders supporting the resolution
included the Connecticut Retirement Plans & Trust Funds, Walden Asset
Management, Friends Ivory & Sime, Trillium Asset Management, Calvert
Group, Green Century Equity Fund, Trinity Health and the General Board of
Pensions and Benefits of the United Methodist Church.
EMC sought to downplay the impact of the vote. EMC Chairman Michael
Ruettgers, in an interview, said the company's board already has a majority
of independents, which some of the resolution's supporters would dispute. But
he disclosed that EMC picked an executive-search firm to fill two board
positions that have been vacant since last September with independent
candidates. He said they would be nominated by the end of the year. He also
affirmed that the audit, compensation and nominating committees would be
independent by then. EMC will have to establish a nominating committee to
meet the resolution's recommendation; until now, it has made nominations via
an "ad hoc" internal group, Mr. Ruettgers said.
Mr. Ruettgers said some potential directors have withdrawn from consideration
because of the increased time demanded by the job, especially for such
high-profile positions as audit committee chair. "Especially when you're
looking for people to run the committees ... you almost have to find someone
who is retired," he said.
EMC has seven current board members. The company and shareholder activists
agree that three of them are not independent -- Mr. Ruettgers, EMC Chief
Executive Joseph Tucci and John Egan, the son of one of the co-founders,
Richard Egan, and also a former EMC executive. Three others are agreed to be
independent -- former Gillette
Co. CEO Alfred M. Zeien; Windle Priem, vice chairman of executive recruiters Korn/Ferry
International; and Michael Cronin, the CEO of Cognition Corp.
But the two sides disagree over W. Paul Fitzgerald, a director who left EMC
as an employee in 1995 and is considered independent by management. Mr.
Fitzgerald is the brother-in-law of EMC founder Richard Egan and the uncle of
fellow director John Egan. His brother's insurance-brokerage firm was paid
$1.57 million last year by EMC. Those connections, say shareholder activists,
disqualify him as independent. Jay Lorsch, a specialist in corporate
governance at Harvard Business School, questioned Mr. Fitzgerald's ties,
saying "independence is more than a legal definition, it's a
psychological condition."
The Mentor Graphics resolution was backed by TIAA-CREF, which stands for
Teachers Insurance & Annuity Association-College Retirement Equities
Fund. The big institutional investor has been crusading against the adoption
of stock-option plans without investor approval, and has submitted
shareholder resolutions on the issue to 13 companies. In the case of Mentor,
TIAA-CREF argued in the company's proxy materials that option grants under
one plan that shareholders had not approved were equivalent to a 7% increase
in the number of shares outstanding in Mentor's fiscal 2000, diluting the
holdings of other shareholders.
Mentor, which makes software used in designing chips and other electronic
products, said that its stock repurchases and retired options negated any
shareholder dilution. It declined to comment further following the vote.
Mr. Clapman, the TIAA-CREF senior vice president, said the vote supporting
the resolution could persuade the Big Board, the Nasdaq Stock Market and the
Securities and Exchange Commission "to craft much stricter
shareholder-approval requirements for stock-option plans."
-- Don Clark contributed to this article.
Write to Jerry Guidera at jerry.guidera@wsj.com
Updated May 9, 2002 12:11 a.m. EDT
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