Subprime Mess Could Hit CEO Wallets This Proxy Season

Mary Thompson, |Reporter

At annual meetings across the country, shareholders are making the yearly pilgrimage to have their voices heard — and votes counted — at the companies they own.  In some cases, those shareholders have a hand in changing the way firms do business.

Once again, the headline-grabbing proposals on this year's proxies will center around executive pay. A number of hedge funds and activist investors like Icahn and Triarc's Nelson Peltz are expected to agitate for change at firms where they hold big stakes. And there is a new storyline emerging; one that  has to do with a subject that's been front-page news for the last year: subprime mortgages. At some of the nation's biggest financial firms, investors are looking to unseat directors they feel failed at their job by not recognizing the financial hazard subprime mortgages posed for their companies.

Rockin' Proxy Season

"We're going to see numerous 'vote no' campaigns aimed at directors, typically members of audit or risk committees at some of the larger financial services firms as well as some of the mortgage lenders and the homebuilders," said Pat McGurn of proxy advisor RiskMetrics. "We're expecting to see quite a bit of shareholder anger spill out at those meetings, and so we're expecting to see some significant responses from boards, including seeing some directors leave office over the next 12 months."

Some of the key issues this year are:

Say On Pay/Executive Compensation
Over 100 of these shareholder proposals have been filed this year at companies ranging from CNBC's parent General Electric to Wal-Mart , to Altria .  Say on Pay proposals ask that investors be given an advisory vote to accept or reject the pay plans of top executives. This issue grabbed headlines last year but failed to grab enough support at most companies to garner the more than 50 percent of shareholders' votes needed for the proposal to be considered by the board.  These proposals did pass at four firms last year:  Ingersoll-Rand , Blockbuster , Motorola and Verizon . More shareholders are expected to get on board in 2008.

"Like anything, once proposals do have some measure of success, then institutional investors who may have been on the sideline in terms of supporting such proposals will tend to look at these a bit more closely and tend to support them," said Bob McCormick of the proxy advisor Glass Lewis.

Proponents of Say on Pay maintain giving investors a vote will help reign in excessive executive compensation, and point to countries like the U.K., The Netherlands and Australia where this is standard practice. Critics say, quite simply, giving shareholders the right to veto a pay plan is unnecessary.

Other pay issues to be voted on include recouping bonuses or clawbacks (GE).  Pay issues will also hit some directors.  Proxy advisor Egan Jones is recommending investors withhold pay from two directors for awarding KB Home's CEO a discretionary bonus of $6 million for a year when the stock dropped 56 percent.

Subprime Fallout
There is a group out there that thinks company directors should have had a better handle on the risks their firms took when they got invovled in the subprime market. Specifically, CtW Investment Group is targeting directors who sit on the audit and risk committees of the following companies: Morgan Stanley , Citigroup , Wachovia , Bank of America , Washington Mutual and Merrill Lynch .  CtW points out that, as of February,  the combined subprime related writedowns at these firms totaled more than $87 billion and the subsequent total losses in shareholder value have exceeded $290 billion.

This list is subject to change as CtW is trying to set up meetings with the directors before the annual meeting, but if the directors fail to provide CtW with what they see as an adequate explanation for their failure in oversight and a plan to fix it, CtW will ask that shareholders withhold their votes to re-elect these directors.

CtW works with the pension plans sponsored by unions affiliated with Change to Win, a federation of unions with more than 6 million members.

Proxy Access
The SEC has punted on this issue, ruling that shareholders cannot nominate directors to the board unless they hold more than 5 percent of the company. SEC Chairman Cox says he'll take another look at the issue this year (the SEC's been "looking at it" since 2003), so AFSCME has submitted proposals seeking proxy access anyway and threatens to sue if these are not included in a company's proxy.

As always there are a number of proposals linked to social and environmental issues, and RiskMetrics McGurn expects some of them to receive strong support this year.

"Climate change is the number one social concern for investors this proxy season," said McGurn. "Part of this stems from a growing number of institiutional investors calling for enhanced risks of climate change and its potentional impact on the financial performance of a variety of different firms."