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Payback by proxy

From making executives more accountable to pushing for corporate responsibility, shareholders are in revolt in 2002. You can thank Enron.

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By ROBERT TRIGAUX, Times Business Columnist

© St. Petersburg Times
published March 31, 2002


Is that a whiff of eau de Enron in this spring season of annual shareholder meetings?

At Walt Disney Co.'s recent annual meeting, a shareholder resolution calling for the company to stop awarding both lucrative consulting and auditing work to the same accounting firm failed to pass. But it garnered a remarkably high 42 percent of the vote, sending a clear signal. While Disney at first had opposed the resolution, the firm did an about-face and later supported the idea, making the final vote moot.

At such companies as Avon Products, AT&T, Boeing, Ford, General Motors and Raytheon, shareholder proposals this season ask the companies for tougher standards to discourage boardroom cronyism and keep key board committees independent from corporate influence.

At Black & Decker, Cendant, Citigroup, Motorola and Office Depot, shareholders formally want companies to strengthen the weakening link between what an executive is paid and how his company performs.

The debacle of Enron -- complete with Arthur Andersen auditors as pliable as Gumby, a go-along board of palsy directors and a "me-first" executive culture -- may actually have a silver lining.

Shareholder backlash.

Shareholder activists demanding greater accountability from corporate America say the volume and intensity of stockholder proposals seeking change at this spring's annual meetings is up.

"The 2002 proxy season is unusual," says Timothy Smith, national trade association chairman of the Social Investment Forum and director of socially responsive investing at Boston's Walden Asset Management. "Enron reminded us all how auditors and directors are so important."

We're not talking revolutionary change this proxy season. But there is change, nonetheless.

Change to try and improve the checks and balances that kept U.S. corporations and executives reasonably honest, that kept investors reasonably trusting of the stock market and audited numbers, and that gave employees cause to be reasonably loyal to their employees.

Post-Enron, activists say corporate executives (such as Disney CEO Michael Eisner) are a bit less likely to thumb their nose at shareholder resolutions. They say execs are a bit more willing to discuss matters that range from showing some environmental responsibility and trimming sky-high CEO compensation when company performance sags, to improving labor conditions in developing countries and recruiting outside directors that actually have backbones.

Activists also say pension funds that normally rubber-stamp the wishes of corporations they invest in are looking for change. Imagine: Pension funds -- that invest money for years for people to use when they are older -- actually thinking longer term! Activists also say some mutual fund managers, notorious for ignoring all corporate issues but stock profit and loss, are under new pressure by the Securities and Exchange Commission to be more diligent in exercising their vast supply of proxies.

Beyond the SEC, Vanguard Group founder (now retired) John Bogle wants mutual fund companies to form a "Federation of Long-Term Investors" to push for change on corporate governance issues such as auditor independence; the dilutive effect of stock option grants on earnings; and aggressive accounting. The potential clout is formidable, since the 75 largest mutual fund companies control 44 percent of the voting power at U.S. companies.

Behind it all is the buzz of Enron, Enron, Enron. It's the new mantra of annual meetings.

Robert Monks, a long-time shareholder activist who works with fellow corporate watchdog Nell Minow, says Houston's Enron raised investors' consciousness about how corporations should be run to "a level that is unimagineable."

If not for Enron's politically charged meltdown, who would have guessed the pro-business/pro-Texas Bush administration would start pushing tougher corporate rules?

President Bush now wants CEOs to attest each quarter to the accuracy of their corporate financial statements and disclosures. Any accounting-related abuses would be punished by forcing the executives to forfeit bonuses and other compensation. In extreme cases, CEOs could be barred from serving as officers on other publicly held corporations.

Last week, Federal Reserve chairman Alan Greenspan endorsed Bush's proposals, saying the best way to improve the quality of corporate leadership was to hold such officers more accountable for company operations.

Monks witnessed similar saber rattling against corporations in the post-Nixon era of the late 1970s. A byproduct of the Watergate investigations into illegal political contributions and money-laundering was the revelation that American corporations were, in effect, bribing foreign officials to gain business advantages. That discovery was the driving force behind passage of the Foreign Corrupt Practices Act in 1977.

By 1980, the Ronald Reagan era was dawning and the enthusiasm to better control U.S. businesses quickly faded. Now, 22 years later, corporate accountability is making a comeback of sorts.

But is today's fervor just a brief fad?

In the 1930s, following the heights of corporate collapses and self-dealing, the country responded with a carefully legislated response. Yet in the 1980s and early 1990s, in the wake of the staggering fraud and collapse of the savings and loan industry, federal lawmakers held hearings, rapped a few S&L executives' knuckles, then handed the $150-billion price tag for the mess to U.S. taxpayers to cover.

The fad factor bugs shareholder activists. Asks Monks: "Has the enormity of this Enron disaster generated sustainable political energy? Recent history does not make one optimistic."

Last Wednesday, two organizations that promote corporate accountability and social responsibility revealed an analysis of shareholder resolutions at this year's annual stockholder meetings. The findings by the Investment Responsibility Research Center and Social Investment Forum indicate an Enron backlash and rising investor support for proposals to improve corporate oversight and encourage more attention to social concerns.

Among the highlights:

Of 712 shareholder resolutions filed so far in 2002, 428 focus on such "corporate governance" issues as: separating auditor work from consulting work; assuring outside directors on boards' compensation and audit committees stay strictly independent of the company they oversee; and making sure executive pay truly reflects the performance of the company.

261 of the 712 resolutions focus on corporate responsibility issues. Of no great surprise, the fastest-growing category is global warming -- a topic such companies as ExxonMobil have yet to acknowledge and the Bush administration is only reluctantly reviewing. This year, 18 global warming resolutions were filed (at Eastman Chemical, ExxonMobil, General Electric, Occidental Petroleum and Sprint, among others), up from seven last year.

The other hot button among resolutions this year is convincing companies to monitor and influence the labor practices (okay, let's say sweatshops) of foreign factories that produce their goods.

The Enron ripples extend beyond annual meetings. Even to lawyers. Last week, the American Bar Association said a task force was formed on "corporate responsibility" as a response to the shaken public confidence in the legal and regulatory systems.

Good idea. After all, following Enron's bankruptcy and Andersen's humiliation, Houston legal giant Vinson & Elkins was belatedly criticized for contributing to the downfall as the corporation's legal adviser.

So, with the taint of Enron still strong in our nostrils, what should we expect?

Don't look for many of the 712 shareholder resolutions to win approval from stockholders. None may make it this year.

That's not the point. In the real world, shareholder resolutions don't win. But if they can attract a healthy minority of investor votes -- as the split-the-auditing-and-consulting proposal did at Disney's annual meeting -- then they can send a powerful message.

Truth is, shareholder resolutions are really a last resort. Stockholders trying to alter corporate behavior would rather discuss their pet issue with management than push for a proxy vote.

Many proposed resolutions often are withdrawn from proxy statements exactly for that reason: the company is willing, finally, to talk. It's happening this year, more than ever, says Meg Voorhes, director of the Investment Responsibility Research Center.

"Companies are feeling more sensitive to shareholders in the current climate," she says.

Long may it last. Thanks, Enron.

-- Robert Trigaux can be reached at trigaux@sptimes.com or (727) 893-8405.

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