Analysis: Activists Push For Voting Secrecy To Rein In U.S. Executive Power

Top executives and directors at some major U.S. companies may have less sway over votes on chief executive officer compensation and other shareholder matters if a campaign by a number of investor activists succeeds. For the 2014 annual meeting season, activists have filed resolutions with about a half dozen companies to restrict who can see how votes are tallying up in the days and weeks before companies hold their annual meetings. They aim to strip corporate leaders of the ability to use access to the voting numbers to tailor last-minute targeted campaigns and turn results of ballots in the direction they want. The changes could apply to all sorts of questions, from executive pay to takeover attempts. The suggested reforms reflect how springtime shareholder meetings have taken on a new significance in recent years. Big institutional investors are taking tougher stands on the quality of corporate governance while activist investors look to change corporate strategies. For instance, the measures could have an impact on future high-profile battles of the sort seen earlier this year at J.P. Morgan Chase & Co where CEO Jamie Dimon had to work hard to defeat a measure that would have taken away his additional role as chairman. The idea ended up only getting 32 percent support, down from 40 percent support for a similar measure in 2012. The activists say leaders such as Dimon currently get an unfair edge by tracking tallies, which in turn helps them use company resources to make their case. "That's dirty pool," said Robert Rehm, a Verizon Communications shareholder who also recently retired as a director of the Association of BellTel Retirees, which represents former Verizon workers. "It's not the democratic way." Rehm recently filed a measure at Verizon to create "enhanced confidential voting" requirements that would go beyond current ballot-secrecy rules and prevent companies from seeing running tallies, except in some cases such as picking directors. It was modeled on a resolution that a similar retiree group filed at CenturyLink Inc last spring that won 42 percent support. In addition the influential independent activist John Chevedden of Redondo Beach, California, said he aims to have about a half dozen similar measures on shareholder ballots in 2014 including at chipmaker Intel Corp and home improvements retailer Home Depot Inc. His frequent ally, James McRitchie, filed a similar measure at grocer Whole Foods Market Inc. A Verizon spokesman said the company is reviewing the proposal and declined further comment. A Home Depot spokesman said via email that "we're going to share our point of view on this through the standard proxy process." An Intel spokesman said that it is currently reviewing shareholder proposals and that it will comment on them afterward. Spokespeople for Whole Foods and CenturyLink declined to comment. The measures face skepticism from some corporate governance experts. For one thing, they say, knowledge of early voting can pressure executives and company boards into changing policies to head off a defeat. Proxy adviser Glass, Lewis & Co, for example, recommended voting against the proposal at CenturyLink. "The companies should want to know what their shareholders are thinking," said Glass Lewis Chief Policy Officer Robert McCormick. SETTING UP FOR SPRINGTIME The calls for new voting rules, while non-binding, are among the hottest proposals to watch in the 2014 season, said Richard Grubaugh, senior vice president of D.F. King & Co, a proxy solicitor firm in New York that helps companies with elections. Grubaugh, McCormick and others expect to see resolutions in 2014 similar to ones introduced in previous years such as those that urge companies to make it easier to nominate directors or to elect directors annually, changes meant to give shareholders more leverage over management. For their part, many companies will seek bylaw changes in 2014 to make it harder for activist hedge funds to offer special payments for dissident directors who push for changes not necessarily favored by current management. AN EDGE FOR MANAGEMENT? The proposals on election rules could revive an old debate about how big investment managers decide on how to cast their votes. Few disclose why they voted a particular way except with broad policy statements. Some rare specifics emerged after Hewlett-Packard Co's 2002 battle to buy Compaq Computer Corp. A Compaq shareholder, the asset management arm of Deutsche Bank AG, initially voted 17 million proxies on HP shares against the deal but then changed sides on the last day of voting after learning Deutsche Bank's investment banking division was working for HP on the merger. The next year the bank agreed to pay a $750,000 penalty as part of a settlement with the U.S. Securities and Exchange Commission. The regulator found the asset-management arm violated its fiduciary duty to clients by voting without first disclosing the conflict of interest it faced. More recently, during the successful fight by JPMorgan's Dimon last spring, proponents of the measure that would have stripped him of the chairman's title ran into some limits. They were cut off by vote-collector Broadridge Financial Solutions from learning running tallies of votes received for and against the measure, even though Broadridge kept providing the data to JPMorgan. Shareholder activists and election specialists said that knowing the tallies would have helped the bank design its campaign. Executives could even have figured out the votes of individual investment firms with the help of proxy solicitors who can poll their contacts and can match sets of votes with the number of shares that investors report in securities filings. Michael Garland, who oversees corporate governance for New York City retirement funds, said new voting confidentiality rules could make for more fair elections if there isn't going to be wider data-sharing. "The status quo is absolutely unacceptable," Garland said. A JPMorgan spokesman said its executives would not comment because they are in the midst of reviewing shareholder resolutions and drafting the company's 2014 proxy. At least several of the enhanced-privacy proposals filed for the 2014 proxy season cite a 2008 paper by Yale Law School professor Yair Listokin titled "Management Always Wins the Close Ones." In about 16,000 contests from 1997 through 2004 he found many more management wins, including 56 contests in which management received 50 to 51 percent support - versus just 8 contests in which management received 49 to 50 percent "The results indicate that, at some point in the voting process, management obtains highly accurate information about the likely voting outcome and, based on that information, acts to influence the vote," Listokin wrote. REUTERS