Staggered boards: Public companies' directors the centerpiece of a tug of war [Chicago Tribune]
(Chicago Tribune (IL) Via Acquire Media NewsEdge) April 01--Public companies with staggered boards are on shakier ground these days.
Oak Brook-based McDonald's Corp., Chicago-based CME Group Inc. and Navigant Consulting Inc., and Lisle-based Navistar International Corp. are part of a number of public companies planning to put their directors up for re-election annually.
Activist investors have been pressuring businesses to ditch their "classified," or staggered, boards, on which only a few directors each year are subject to shareholder voting. They believe that making board members stand for re-election annually reflects better corporate governance.
This proxy season, the Illinois State Board of Investment, which manages $11.5 billion in pension assets for three retirement systems, is asking 25 public companies to put their directors up for annual elections. Twelve, including Newell Rubbermaid Inc., Owens-Illinois Inc. and Progressive Corp., have agreed to do so.
"Annual elections create accountability for directors, increase shareholder confidence and maximize shareholder value," said Linsey Schoemehl, chief compliance officer and general counsel for the Illinois board, which oversees pension assets for the General Assembly, state judges and state workers.
Companies with multiyear-term directors can be harder to take over, a frustration for shareholders hoping to profit on their stock investments. Governance watchdogs also say companies with staggered boards have lower values, are more likely to make questionable acquisitions and are less likely to scrutinize compensation for top officers.
The percentage of Standard & Poor's 1,500 companies with staggered boards has dropped to 40.6 percent from 57.1 percent in 2005, according to data provider FactSet SharkRepellent.
ETrade Financial Corp., Janus Capital Group Inc., Western Union Co. and eBay Inc. are among those that have recently disclosed plans to rid themselves of staggered boards.
Even McDonald's Corp., which, for years, has enjoyed rising sales and stock prices, has had a change of heart. At its 2011 annual meeting, a nonbinding shareholder resolution sought to compel the burger chain to eliminate its staggered board.
A wary McDonald's had urged a vote against the proposal. The company argued, among other things, that the continuity and stability of its existing board structure had helped generate "substantial value to shareholders."
"In the five years ending March 31, 2011, McDonald's was the best performing stock in the Dow 30," the company told shareholders last year on why it should keep its staggered board.
But the 2011 shareholder proposal carried despite McDonald's recommendation to vote against it, with 544.9 million votes for and 158.2 million against.
In its latest proxy statement, filed March 7 with the Securities and Exchange Commission, McDonald's said that, pending shareholder approval at its May 24 annual meeting, directors will be re-elected annually starting at its 2015 meeting.
Similarly, Navistar also said it's moving to phase out staggered board terms, in part because of "an agreement reached with some" stockholders.
But some companies are holding their ground.
Seattle-based F5 Networks Inc. has asked its shareholders to vote against an Illinois State Board of Investment proposal to elect directors annually.
Making its case in its proxy statement, F5 said terms of three years give directors time to understand the business. Also, with a multiyear stint in office, independent directors can better focus on shareholders' long-term interests. As well, board member recruitment is challenging these days, and candidates might be less willing to commit to getting up to speed on a company's issues and serving on its board if it might be for only a year, the company said.
F5 also argued that, without staggered terms, a potential acquirer could gain control of the company by replacing most of the existing board at one annual meeting. In turn, that new board could then approve a takeover at a less-than-adequate price.
F5 said its investors can already hold its directors accountable because a majority of the board can be replaced within two consecutive annual meetings.
"This is a complicated issue with well-qualified and responsible experts on each side," the information technology infrastructure company said in its proxy.
Supporters of staggered terms also point to studies showing a positive link between classified boards and outcomes for shareholders, including better credit ratings and less earnings manipulation.
F5 had its shareholder meeting on March 15. According to a March 20 filing with the SEC, there were 48.5 million votes in favor of the proposal to repeal the staggered board and 13.2 million against it. The company had no immediate comment Friday afternoon on the vote.
Lyle Ganske, a mergers and acquisitions lawyer for Jones Day in Cleveland, is among those who believe that staggered terms can be consistent with good corporate governance.
"If you have a gun to your head with annual elections, it's hard to do your job, which is to act in the best long-term interests of the company," said Ganske, a board member of Massachusetts-based transmission supplier Altra Holdings Inc., which elects its directors annually. "If you're a qualified independent director, you can enhance corporate governance if you're not forced to face re-election" annually.
He also has a theory on why a relatively high percentage of newer public companies has staggered boards.
"If you're already a public company, it's almost impossible to implement a classified board," Ganske said. "With newly created companies, it's the only time in their life cycles that they can put in place a classified board."
Of the 76 companies that went public in 2011, nearly 65 percent had staggered boards, though that's down from 82 percent of initial public offerings in 2002.
When Dr Pepper Snapple Group Inc. was spun off from Cadbury PLC in 2008, the parent determined that a classified board made sense because it was a new company with no operating history.
Now, Dr Pepper Snapple is joining the ranks of companies planning annual elections for its directors.
"Since the spinoff, the company has built a significant foundation, and its operating history indicates that the company is strong," Dr Pepper said in its proxy filed March 15. "In response to input from our stockholders during 2011," it has decided to pursue annual elections.
Chicago-based exchange operator CBOE Holdings Inc., which went public in 2010, has annual elections. But Envestnet Inc., a Chicago-based provider of wealth management software, has had a staggered board since its 2010 IPO.
In its proxy, CME Group laid out plans to move to annual elections starting in 2014. The Chicago-based exchange operator acknowledged a classified board had "promoted stability and continuity, facilitated long-term strategic planning, enhanced the independence of our directors and their knowledge of CME Group, and protected CME Group against the potential for abusive takeover tactics."
But due in part to "shareholder concerns," CME announced it's moving to annual elections of its directors.
"Our board understands that many investors believe that the annual election of directors is the best way for shareholders to influence policies and to hold management accountable," CME said in its proxy. "Our board is also cognizant that many U.S. public companies have eliminated their classified board structures in recent years in favor of the annual election of directors."
Asked to comply
The Illinois State Board of Investment, with help from the Harvard Law School Shareholder Rights Project, has sent shareholder proposals to 25 companies asking them to repeal their classified, or staggered, boards. It prefers that directors go up for re-election annually, instead of every few years.
The companies and their tickers:
*Akamai Technologies Inc. (AKAM), Cambridge, Mass.-based provider of Internet infrastructure services
*CenturyLink Inc. (CTL), Monroe, La.-based telecommunications company
Chipotle Mexican Grill Inc. (CMG), Denver-based restaurant chain
*Coventry Health Care Inc. (CVH), Bethesda, Md.-based managed health care company
*Fidelity National Information Services Inc. (FIS), Jacksonville, Fla.-based banking technology services provider
*Health Care REIT Inc. (HCN), Toledo, Ohio-based investor, primarily in senior living and health care properties (The Illinois investment board has withdrawn its proposal.)
*Juniper Networks Inc. (JNPR), Sunnyvale, Calif.-based technology designer
Limited Brands Inc. (LTD), Columbus, Ohio-based retailer
Lorillard Inc. (LO), Greensboro, N.C.-based cigarette-maker
Masco Corp. (MAS), Taylor, Mich.-based maker of home improvement products
*Newell Rubbermaid Inc. (NWL), Atlanta-based consumer products maker
*Owens-Illinois Inc. (OI), Perrysburg, Ohio-based maker of glass containers
*Principal Financial Group Inc. (PFG), Des Moines, Iowa-based provider of retirement and investment products
QEP Resources Inc. (QEP), Denver-based oil and gas exploration company
Quest Diagnostics Inc. (DGX), Madison, N.J.-based medical testing firm
*St. Jude Medical Inc. (STJ), St. Paul, Minn.-based medical device maker
*Progressive Corp. (PGR), Mayfield Village, Ohio-based car insurer
Urban Outfitters Inc. (URBN), Philadelphia-based retailer
Vulcan Materials Co. (VMC), Birmingham, Ala.-based maker of construction goods
Apache Corp. (APA), Houston-based energy exploration company
Edwards Lifesciences Corp. (EW), Irvine, Calif.-based provider of cardiovascular products
F5 Networks Inc. (FFIV), Seattle-based information technology infrastructure company
Vornado Realty Trust (VNO), New York-based real estate company
Cerner Corp. (CERN), North Kansas City, Mo.-based health care information technology designer
*BlackRock Inc. (BLK), New York-based investment manager
Note: *Companies that have publicly disclosed they will put up for a vote a management proposal to declassify their boards.
SOURCES: Illinois State Board of Investment, Tribune research
(c)2012 the Chicago Tribune
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