A Groundswell Builds For 'None of the Above'

What do New Hampshire Republicans and Connecticut Democrats have in common with America's shareholders? Plenty. This proxy season, investors, like fed-up voters, are raring to send a message. Where corporate performance is poor, pay excessive, or management unresponsive, they want change, even to the point of throwing out the bums--not just insiders, but independent directors, too.

Dislodging corporate directors, however, is even harder than defeating political incumbents--it's well-nigh impossible. Shareholders generally are offered only one slate of candidates, and they can vote no only by withholding votes from would-be board members.

BREAKTHROUGH YEAR? No matter. Protest is the point this mean proxy season. Colorado's Public Employees' Retirement Assn., for example, is hardly an activist investor, never even having sponsored a resolution. But this year, the $11.5 billion fund is withholding votes from directors at American Express, Occidental Petroleum, Travelers, Westinghouse, and Unisys--thus far.

Withholding votes is a new tactic, so it may not get a true test of power this year. The idea gained appeal after the executive-pay flap spilled onto the front pages in January, radicalizing a lot of shareholders. Colorado didn't disclose its intent to deny votes to directors until Apr. 14. That's one reason that AmEx's board slate on Apr. 27 won 96.9% of the proxies voted, vs. 98.3% last year. Directors at companies where shareholder dissatisfaction is more widespread--Sears, Roebuck & Co., for one--may not fare as well. If 10% to 20% of votes are withheld, any board is likely to be shaken. That's a real possibility as the idea catches on among more big investors--next year if not this.

Some experts even see 1992 as a breakthrough for activism. "This season marks the beginning of a new governance process," declares John Pound, an economist at Harvard University's John F. Kennedy School of Government. "We're seeing the real seeds of what will happen in the post-takeover era."

Until recently, activist shareholders haven't focused very much attention on directors, even though they supposedly represent shareholders. Instead, the activists' primary weapon has been the shareholder resolution, usually aimed at pernicious corporate-governance policies--asking companies to adopt confidential proxy voting, for instance, or to redeem poison pills. Past proxy seasons saw battles for outright control of a company, with dissidents offering a slate of directors to replace a board.

PUBLIC OUTRAGE. This year, there are few contests for control. But there are a lot of contests for influence, and that's prompting the votes against directors. Says Sarah A.B. Teslik, executive director of the Council of Institutional Investors: "I've urged members to use it as almost the exclusive vehicle this year."

Although many funds are mum about such plans--partly to avoid any chance of infringing federal rules that prohibit the solicitation of votes without formal disclosure filings--some have stepped forward. The $68 billion California Public Employees' Retirement System (CalPERS) is withholding votes from directors at IBM and Sears, among others. The Wisconsin Investment Board is doing the same at Westinghouse (page 80). And the New York City Employees Retirement System (NYCERS) is one of many funds expected to vote against Champion International Corp.'s directors. Those corporations already have company (table)--and are likely to have plenty more.

Withholding votes from directors isn't the only weapon angry shareholders are brandishing. Wisconsin, NYCERS, and others continue to offer resolutions (table). This year's most notable ones try to tackle executive pay, since for the first time the Securities & Exchange Commission allowed proposals on the subject.

Surprisingly, those resolutions have garnered few votes. A move to cap pay at Baltimore Gas & Electric won 13% of the proxies voted, while the proposals at Bell Atlantic and Equimark got about 16.5%. The vote for other governance resolutions usually reaches 28% to 44%.

But again, the results may not be a fair gauge of shareholder sentiment. The SEC decision came in February, past the filing deadline for most companies. The resolutions that made ballots were all offered on speculation last fall by individuals--and struck many institutions as too arbitrary. "We don't think shareholders should meddle in the details of compensation," says James E. Heard, president of Institutional Shareholders Services Inc. "I prefer to see them focus on pay structure, disclosure, and accountability." One intriguing proposal, at Grumman Corp., asked that no cash bonuses be paid to management until the company's stock returned to 1986 levels. It was disallowed on technicalities but may be back in 1993--along with other carefully crafted measures.

INCOMING TIDE. Shareholder anger shows up in other votes, too. Stock, option, and bonus plans are getting careful scrutiny, especially at companies that reduced cash compensation but made up the difference--or more--with generous stock plans. Marriott, Adobe Systems, and Warner-Lambert are among the companies whose plans may face nay votes. "People are voting not only against the plans but also against the boards that approved the plans," says A. Camille Nichols, president of Investors' Fiduciary Services Inc.

The struggle for influence over the board doesn't end there. A new resolution filed by NYCERS asks Sears to elect a chairman separate from the chief executive. NYCERS also wants the compensation committee at Reebok International Ltd. to be composed entirely of outsiders. Ditto for the nominating committee at Digital Equipment Corp. At General Dynamics and Wang Laboratories, shareholders just want a majority of outside directors on the corporation's board.

There's no question that activists have hardened their determination to force corporate change. Again and again, they've voted in big numbers for resolutions, only to be ignored. Yet they've recently eked out some small victories--voluntary acceptance of confidential voting, for example. And they won two big ones: Last July, Time Warner Inc. replaced a controversial stock offering with a more palatable one; in March, General Motors Corp.'s directors staged a boardroom coup. "I see all of this as a wave that's building," says New York City Finance Commissioner Carol O'Cleireacain, chairman of NYCERS' board. "What happened at General Motors would not have happened if we hadn't put in place the steps of previous years--confidential voting, a majority of independent directors, and so on. That's why we keep sponsoring resolutions." And it's why activists keep trying new tactics, too. For angry investors, the status quo will no longer do.