Heard Off the Street: Corporate reformers out in full swing

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As winter descends on Pittsburgh, frustrated Pirates fans harbor hopes that this will be the year. It's a feeling corporate reformers can identify with. For spring not only brings Opening Day, but also shareholder meetings where pension funds and other investors who are not content with the status quo can lobby for changes in the way public companies are run.

The ink was barely dry on the Pirates' 20th consecutive losing baseball season when Harvard University Law School's Shareholder Rights Project swung into action.

In late November, the group announced that eight institutional investors managing portfolios worth more than $400 billion will be submitting proxy proposals at 74 companies recommending that directors be elected annually. The institutional investors include state agencies in Ohio, Massachusetts, North Carolina, Illinois and Florida that oversee pension funds and other investments.

The 74 companies are all members of the S&P and Fortune 500s. They include four Pittsburgh companies: U.S. Steel, EQT, PPG Industries and Wesco International.

Public companies generally elect directors one of two ways. Either they put everyone up for election the same year or they have what is known as a classified board, electing a portion each year. For example, they put a third of the board up for a three-year term one year, another third the next year and the final third in the third year.

Proponents of annual elections -- or declassified boards -- contend they make directors more accountable to shareholders and therefore improve performance. Annual elections make it possible for swifter, more decisive action at poorly performing companies, they say.

Opponents contend annual elections add to the short-term pressures that public companies face, distracting them from concentrating on long-term goals that are more important. The detractors include a group of lawyers from Wachtell, Lipton, Rosen & Katz that took issue with the Harvard group in a post on the law school's website. The New York firm specializes in representing corporate clients.

"The argument that annual review is necessary for accountability is as specious in the corporate setting as it is in the political arena," they wrote. "There is no persuasive evidence that declassifying boards enhances shareholder value over the long term."

Last year, contrary to the board's advice, shareholders at EQT approved a non-binding resolution calling for the annual election of directors. U.S. Steel and PPG shareholders gave significant support to similar proposals at their meetings last year.

PPG's board had unanimously recommended that shareholders vote in favor of the proposal, saying it would make for better corporate governance and hold board members more accountable. Spokesman Jeremy Neuhart said PPG has talked with officials from the Harvard group for two years and decided annual elections are in the best interest of shareholders. Last year's proposal failed to gain the required support of 80 percent of outstanding shares, but the proposal will be offered again at this year's meeting, he said.

Last year, U.S. Steel opposed a resolution sponsored by the treasurer of North Carolina. In a statement sent to shareholders in advance of the vote, U.S. Steel said staggered elections have "served our shareholders well throughout our history and we believe it would be a mistake to change it now."

Only 126 companies in the S&P 500 have classified boards, down from 302 in 2002, said Colin Diamond, an attorney in the New York office of White Case.

"There has generally been significant support from shareholders to declassify," he said.

That could be one reason why EQT has had a change of heart. Last month, the company said it will ask shareholders to approve switching to annual elections. If approved, the new voting system would be phased in starting with the 2014 shareholder meeting. The proposal, and EQT's rationale for supporting it, will be outlined in a proxy statement EQT will send to shareholders in March.

Harvard's Shareholder Rights Project is talking with the companies targeted by this year's initiative and expects that a large percentage of the 74 companies will agree to move to annual elections. A similar initiative last year resulted in 48 S&P 500 companies agreeing to declassify their boards, the group said.

Mr. Diamond said proposals to curb political spending by public companies or require them to disclose more information about contributions also will be featured prominently in this spring's proxy season. Proponents of the proposals have stepped up their efforts in the wake of a 2010 U.S. Supreme Court ruling that restrictions on campaign spending violated the First Amendment rights of businesses.

A group of 10 prominent law school professors, including Harvard's Lucian Bebchuk, asked the Securities and Exchange Commission in August 2011 to develop rules for how much information public companies should disclose about their political spending. Last week, New York's pension fund sued Qualcomm, seeking the right to inspect the wireless technology and services provider's books to determine its political spending habits.

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Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.


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