Risk & Governance Weekly

In Brief

Aflac’s Pay Practices Get 93% Support

In the first “say on pay” vote at a U.S. public company, Aflac investors gave 93 percent support to the company’s executive compensation practices, according to news reports.

There was only 2.5 percent opposition at Aflac’s May 5 annual meeting. The Columbus, Georgia-based insurer decided to hold an annual advisory vote after receiving a shareholder proposal on the issue in late 2006.

Aflac CEO Daniel Amos earned a total of $14.8 million, and had approximately $70 million in stock options vest in 2007, according to the company’s compensation report. Amos’ incentive-based pay is entirely performance-based, the company says, noting that since he took the post of CEO in 1990, the firm’s total shareholder return has exceeded 3,867 percent. Aflac’s stock price has risen about 126 percent since early 2003.

Six other U.S. companies, including Verizon Communications and bond insurer MBIA, have agreed to hold non-binding pay votes. Meanwhile, investors have filed more than 80 proposals this season asking other firms to take this step. --Ted Allen

Majority Support for “Say on Pay” at Two More Companies

Investors gave over 50 percent support to shareholder proposals asking for an annual advisory vote on pay at Motorola and South Financial Group this week, the companies reported.

The pay vote measure, submitted by the AFL-CIO, won 54 percent support at Motorola's May 5 annual meeting, according to regulatory filings. This is the second year in a row that a “say on pay” vote has won majority support at the Schaumburg, Ill.-based mobile services provider. A similar proposal by individual shareholder William Steiner received 54 percent support in 2007.

Daniel Pedrotty, director of the AFL-CIO’s office of investment, told Risk & Governance Weekly that the labor federation plans to push Motorola to hold yearly shareholder votes on pay in light of investor support for the issue the past two years. Pedrotty also said the AFL-CIO would be urging Apple to adopt “say on pay.” The labor federation’s proposal won 50.7 percent support at the computer company in March, according to regulatory filings.

South Financial Group, a banking company headquartered in Greenville, S.C., also reported that a “say on pay” proposal was approved at its May 5 meeting. The proposal--submitted by the Firefighters’ Pension System of the City of Kansas City, Missouri--received over 50 percent shareholder support, according to preliminary tallies. Official vote numbers will be released in the company’s next quarterly filing, a South Financial spokesman said.

The Motorola and South Financial votes mark the third and fourth instances that pay vote proposals have won majority support this year. In addition to Apple, printer manufacturer Lexmark International reported that a pay vote resolution from the Amalgamated Bank’s LongView fund won 59.8 percent shareholder support.

So far this season, “say on pay” proposals have averaged 43.2 percent support at 27 companies where results have been reported. That is comparable with the results in calendar 2007 where 52 such proposals had 42.5 average support. –L. Reed Walton

Merrill Lynch Agrees to Declassify Board

Merrill Lynch plans to ask shareholders at its 2009 annual meeting to vote to hold annual elections for all directors.

Merrill Lynch, which reported a $1.96 billion first-quarter loss stemming from mortgage-related investments, announced its support for board declassification at the April 24 annual meeting. The Wall Street firm now has 11 directors who serve staggered three-year terms.

Shareholders did not file a board declassification measure at the company this year or last. However, CEO and Chairman John Thain noted in a press release that the board recently discussed the issue with investors, including the CtW Investment Group, the investment arm of the Change to Win labor federation. Merrill Lynch was one of six U.S. banks with significant credit-related losses where CtW asked board members to explain what they did to mitigate the company’s losses. 

If shareholders approve declassification next year, Merrill Lynch would join the growing number of large firms that have implemented shareholder requests to hold annual elections for the entire board. According to RiskMetrics Group’s 2008 “Board Practices” study, just 40 percent of S&P 500 firms retain classified boards, down from 45 percent a year earlier.

“Annual director elections will ensure that our investors have a regular opportunity to express their confidence in the performance of the board and management,” Thain said.

While Merrill Lynch board members did not face an active “vote no” campaign this year, they did encounter greater opposition this year. Armando M. Codina, a new director who serves on the compensation committee, received a 13.3 percent negative vote, according to a May 6 company filing. In 2007, the three directors on the ballot were elected with 94 to 97 percent support.

The investor votes against Codina, the only compensation committee member up for election this year, may have been a reaction to the exit package received by former CEO Stanley O’Neal in October. While O’Neal did not get a cash severance payment or bonus compensation for 2007, he received $131.4 million in unvested equity and unexercised stock options, $24.7 million in retirement benefits, and $5.4 million in deferred compensation.

Also at the Merrill Lynch meeting, investors voted 37.5 percent of their shares for a Unitarian Universalist Association proposal seeking an advisory vote on executive pay, which was less than the 45 percent support the issue received at the firm in 2007. Investors gave 31.8 percent support to a new AFL-CIO proposal asking the firm to adopt principles to guide future employment contracts with top executives. --Ted Allen

Pay Panel Receives More Than 25 Percent Opposition at Citigroup

At Citigroup’s April 22 meeting, three compensation committee members received more than 25 percent opposition.

According to a company filing this week, committee chairman Richard Parsons received a 30.6 percent negative vote. Two other pay panel members, Alain J.P. Belda and Kenneth Derr, had 29.9 and 28.5 percent opposition, respectively. Anne Mulcahy, the Xerox CEO who also serves on the boards at the Washington Post Co. and Target, received a 23.3 percent “against” vote. C. Michael Armstrong, the outgoing audit committee chairman who was briefly targeted by the AFL-CIO, had 10.7 percent opposition. The other nine directors received less than 9 percent negative votes.

The votes against the pay panel members are especially noteworthy given the strong investor support that Citigroup directors have received in the past. In 2007, 13 of the 14 directors won more than 96 percent of the votes cast; Parsons had 93.7 percent support that year.   

There was no active “vote no” campaign at Citigroup this year. The company was one of six financial firms where the CtW Investment Group threatened to oppose board members if they didn’t explain the steps they took to mitigate the company’s credit risks.

The negative votes this year appear to stem from the retirement package received by former CEO and Chairman Charles Prince, who resigned in November as the company was reporting billions of dollars in credit-related losses. Prince received a $10.4 million bonus for 2007, even though the company’s shares fell 43 percent that year. Under his retirement agreement, Prince also will receive an office, an administrative assistant, and a car and driver for five years (or until he commences full-time employment with another employer). The company will also pay certain taxes on these post-termination benefits. The estimated value of these provisions, including the tax payments, is $1.5 million per year.

The votes at Citigroup and Merrill Lynch are further evidence that a significant number of investors are withholding support from directors at companies with credit-related losses--if there are compensation concerns. Five members of the human resources committee (which oversees pay) at Washington Mutual received more than 30 percent opposition on April 15 after the mortgage lender said it would shield 2008 executive bonuses from its subprime losses. By contrast, the board members at Wachovia and Morgan Stanley, which also reported significant losses, all had less than 10 percent opposition last month.  --Ted Allen