Shareholders have their say on pay
Say on pay may not have had as much of an impact on this year’s annual meetings round in the US as many had anticipated. Was that because of the good work put in by companies and their proxy advisers to preempt too much antagonism? Or was it because shareholders are broadly happy with the status quo?
The answers to such questions can never be obvious, and in any event, it wasn’t plain sailing for all companies: those deemed by their shareholders to be over-compensating their senior management still had some music to face. And say on pay, while non-binding, did show itself to have some serious teeth this year. Just ask Occidental Petroleum.
In May, a majority of Occidental’s shareholders refused to support the oil and gas giant’s executive compensation package, citing a lack of performance metrics and generally excessive totals. This was no idle warning shot. Not waiting for the details of proxy access to be clarified, on July 30 two disgruntled shareholder groups, the California State Teachers’ Retirement System (CalSTRS) and activist hedge fund Relational Investors, sent a letter to Occidental’s board announcing their intention to oust four of the company’s 13 board members. The activists declined to comment on which directors will find themselves under fire at the 2011 annual meeting, and who will be on the dissident slate, although it is rumored that all four are members of the compensation committee, and Relational principal Ralph Whitworth has announced he will be among the replacement candidates.
Taking stock
The two groups between them own more than 1 percent of Occidental stock, an interesting fact in light of the SEC’s recently announced ownership threshold of 3 percent for proxy access. Investor groups such as the Council of Institutional Investors have claimed that even the largest public pension funds, like CalSTRS, on average only own about 0.3 percent of any company’s stock. If the activists do follow through with their threat next proxy season, they will have to foot the campaign costs themselves or scrounge up another 2 percent in holdings to get their nominees on the corporate ballot.
Top of the dissident shareholders’ list of grievances is chairman and CEO Ray Irani’s compensation package, which, according to the July 30 letter, ‘functions essentially as a corporate giveaway program.’ In terms of pay for performance, the dissidents argue that performance targets are set ‘excessively’ low and awards ‘excessively’ high in comparison to Occidental’s peers.
Irani’s pay is indeed considerable. A recent Wall Street Journal article, entitled The decade’s top 25 earners, put Irani in the number three slot with a take-home payout of $847 mn over the past ten years. Of that, he earned $34.4 mn last year. Whether Occidental’s targets are way off the mark or not is, of course, another matter. The company has been performing well by some measures – its stock price has climbed about 95 percent in the past five years and has remained relatively stable since CalSTRS and Relational’s campaign announcement.
Lack of succession success
But there’s another issue at stake, according to the dissidents: Occidental’s CEO succession plan, or lack thereof. Irani is 75 years old, and despite exceeding the mandatory retirement age, he signed an employment agreement in 2007 that extends his tenure through May 2015.
‘The only explanation we can envision for the continued major governance failings that have characterized the board’s stewardship is that the board, as currently composed, suffers from entrenchment and ossification, which renders each of its members incapable of functioning as vigorous and independent shareholder representatives,’ the letter reads.
On this front Occidental announced that its president and chief financial officer Stephen Chazen has been promoted to chief operating officer, and James Lienert, executive vice president for finance and planning, will succeed Chazen as CFO.
This has not appeased investors. ‘The Occidental board has repeatedly failed to announce and implement a chairman/CEO succession plan, and that’s why the recent appointment of Stephen Chazen as COO is a long-overdue positive first step,’ CalSTRS spokesman Ricardo Duran says. ‘However, CalSTRS feels this move is reactive to issues brought to the company by shareholders outside the boardroom, whereas a vigorous board would have been proactive.’
Relational Investors declined to comment further, as did Occidental. How this will play out will prove an interestincase study in shareholder communications. The vote will likely come down to Occidental’s 20 largest institutional investors, which as of December 2009 together control 45 percent of the total stock. The activists believe other investors share their sentiment, citing the failed say-on-pay vote and the fact that without an organized solicitation effort, members of the executive compensation and human resources committee received 36 percent withhold votes.
As the letter asserts, ‘Therefore, we are convinced that shareholders would overwhelmingly support our candidates to replace members of the current board, including its chairman and lead director.’ In addition, the letter notes that ‘timing is everything’ and that the announcement comes ‘just at a time when such abuses strike at the rawest societal and investor nerves.’
