What Shareholders Want

Following the May 16 annual meeting of Astoria Financial Corp., Seymour Holtzman, president of Jewelcor Management Inc., issued a press release triumphantly declaring victory. Holtzman`s proposal to eliminate the antitakeover provisions in Astoria`s certificate of incorporation and bylaws had just received 60% of the votes cast at the meeting, and the Wilkes-Barre, Pennsylvania-based investor was expecting great things would come from the nonbinding vote.

“This vote shows that the shareholders agree with my philosophy that antitakeover defenses create insurmountable obstacles for potential purchasers of the company,” Holtzman was quoted saying in the release. “There is no doubt in my mind that the removal of the antitakeover defenses will enhance shareholder value.” It was not exactly how the management of Astoria saw the vote, however. In a statement released publicly the same day, George Engelke Jr., the bank`s chairman and chief executive, said that what Holtzman saw as antitakeover provisions were really strategic necessities “to promote stability in the company`s corporate governance and to protect shareholders from hostile takeover abuses.”

He added that while significant, the vote “does not represent the views of the holders of a majority of total shares outstanding” and promised only that the board would consider the recommendations. In a time when the election of the president of the United States is decided by several hundred votes in one county of Florida, mandates such as those presented to the boards of Astoria and others can be virtually dismissed by boards of directors. What is deemed fair and just in the political world does not always carry over into corporate America, where management and the board has the power to set rules that prevent even a clear majority from setting corporate policy. Nonetheless, the Astoria vote was significant enough to get management`s attention, however unlikely it is that any changes will be made. And that, say shareholder rights firms, is about all activists like Holtzman can expect, unless they intend to get their own slate of directors elected to the board. The 2001 proxy season for banks saw similar actions that are indicative of shareholders` mounting distaste with provisions they believe reduce the value of their holdings. In this year`s tally of proxy initiatives, investors in bank stocks challenged antitakeover provisions that included requirements for supermajorities, staggered director terms, and prohibitions against shareholders calling special shareholder meetings. On the executive compensation side, they proposed replacing stock options and pay packages that reward management regardless of performance with those that are purely performance based. They also sought to end the practice of providing some executives with what many see as excessive severance benefits. Shareholder activism is relatively new to the banking industry, according to Patrick McGurn, vice president of corporate programs with Institutional Shareholder Services, a Washington, D.C. proxy services firm. Bank One Corp., for example, did not have any shareholder initiatives on its proxy this year, while Wells Fargo & Co. had just one. Predictably, the three largest banks in the nation, Citigroup, Bank of America Corp., and J.P. Morgan Chase & Co., had the largest number of shareholder initiatives at five, four, and three, respectively. One reason for the relative quiet at bank shareholder meetings is that banks are able to dispense with most initiatives before they ever reach the proxy statement, says McGurn. If they do not directly relate to corporate decision making, the Securities and Exchange Commission typically allows the institution to reject the proposals. The bank regulatory environment also creates impediments to hostile takeovers, thereby limiting the need for antitakeover defenses. “You just need to get too many approvals,” McGurn says. That hasn`t stopped some institutions, though, particularly smaller ones, from upsetting shareholders by incorporating antitakeover provisions into their corporate charters. In part, smaller institutions employ such tactics because they feel vulnerable to hostile outsiders: Nearly 95% of all depository institution acquisitions since 1998 have involved banks or thrifts with assets of less than $5 billion.

Putting antitakeover provisions into corporate charters is not the way to handle such matters, shareholders say.

Holtzman contends that institutions that amend their bylaws often do so because they have unsophisticated directors on their boards. “They`re insecure and they don`t understand the game,” Holtzman says. In addition to the threat of being sold, macroeconomic factors trigger shareholder activism. In particular, management and boards of small institutions have difficulty achieving wide-scale efficiencies, and added to the dearth of funding that translates into lower net interest margins, and, eventually, poor performance numbers. When combined with the limited float and liquidity for shareholders in such institutions, you have all the ingredients necessary to put shareholders on edge. Social issues are becoming more commonplace at larger institutions. Investors, both institutional and retail, are more have become more sensitive about how corporate governance issues affect not only their pocketbooks but their sense of fairness and propriety. A proposal included in Citigroup`s proxy, for example, sought to force the bank to avoid the kind of predatory lending practices that companies like Associates First Capital Corp.u00e2u20ac”which Citigroup acquired in Januaryu00e2u20ac”are accused of perpetrating. In this case, the proposal did not receive the required votes to pass. Equally important, institutional investors such as the California Pension and Employee Retirement System (CalPERS) and the State of Wisconsin Investment Board are keenly aware of the leverage they have as large investors over public companies. And with the recent overall slide in stock market values, board-level matters are under even closer scrutiny.

In this environment, any decision by a board that does not sppear to be in the best interests of shareholders can spark a proxy fight, says Ronald Janis, a partner with Pitney, Hardin, Kipp and Szuch, a New York City law firm. “What really stimulates the best proxy fights are when a board ignores the market, rejects an offer, and the price of the stock goes down,” he says. “It`s economics that move [investors] to say these people are incompetent.” Voting for or against a merger is one of a handful of corporate governance issues where shareholders have a direct say. Another is in the election or rejection of directors. Last year`s battle over Dime Savings Bank featured both issues. In fact, the skirmish carried over into this year`s annual meeting after the Delaware Court of Chancery ruled in November that last year`s class of directors would have to stand for election again this year. The Dime battle began after the New York City-based thrift`s board rejected an unsolicited bid from North Fork Bancorp at a price North Fork estimated was 41% above the pending merger offer from Hudson United Bancorp. The turmoil forced Dime and Hudson to call off their merger and eventually persuaded Dime`s board to implement several changes, such as reinstating a share repurchase program, raising new capital by selling restricted shares and warrants to Warburg, Pincus Equity Partners, and implementing other cost-saving initiatives. Although North Fork eventually lost its bid to purchase Dime, the experience seems to have been overall, a healthy one for Dime shareholders. In late June, the bank announced that it was in talks with Washington Mutual of Seattle to sell the companyu00e2u20ac”a deal that even North Fork CEO John Kanas has said makes sense.

According to Patrick McGurn, a similar battle might develop as a result of the competition over Winston-Salem, North Carolina-based Wachovia Corp. “If anything is going to rock the industry, that one will,” McGurn says. “Clearly this fight is going to test whether boards can handle deal jumpers once a friendly merger has been announced. I expect it to become a big, full-blown, nasty proxy fight.” SunTrust is already trying to do just that. After Wachovia`s board rejected its offer, the Atlanta-based bank proposed on June 4 to amend Wachovia`s bylaws to permit holders of 10% or more of Wachovia`s shares to request a special meeting of shareholders. SunTrust explained that the maneuver would permit it to call a special meeting if Wachovia`s shareholders ultimately reject the merger with First Union at the Aug. 3 meeting and the Wachovia board then refuses to negotiate with SunTrust. By late June, however, it looked as though SunTrust`s hopes of success were dimming. When SunTrust made its original offer on May 14, the $14.7 billion share swap amounted to a 12% premium over the original offer presented by First Union on April 16. By June 21, though, the premium had narrowed to just 2.3%, even though SunTrust`s shares had climbed to $65.37 from around $60 in late May. That margin, Janis says, is the critical indicator. “It`s all in the stock price.” While most bank shareholder gatherings this year did not have the kind of fireworks expected at Wachovia`s August meeting, many banks had to respond to a mix of proposals dealing with predatory lending, antitakeover provisions, forgiveness of debt to third-world countries, and the thorny issues that surround executive compensation. Issues that are likely to raise the most ire among shareholders are those that directly affect the value of banks` shares. And few shareholder activists are better at raising those issues than Holtzman, he adds. “Seymour Holtzman is good at having shareholder values at heart when making a proposal,” Janis says. “If you don`t have shareholder values at heart, you`re never going to get close” to winning a vote. Yet the success of his initiative against Astoria`s takeover defenses surprised even Holtzman. He says he never called anyone about the proposal prior to the vote and did not send out any proxies on the matter. All he did, he says, was take advantage of the SEC`s rule 14a-8, which allows investors to submit proposals at a very low cost. While he insists Astoria is a well-run institutionu00e2u20ac”it posted a return on average equity of more than 16% for 2000, after accounting adjustmentsu00e2u20ac”he says the antitakeover provisions were destroying shareholder value. “It`s like management and the board hung out a sign saying that we are not for sale unless you are willing to take care of us,” he says. “When management has total say in whether to do a deal, they have an incentive to feather their own nests.” This latter issue has many executives feeling like a target has been painted on their backs. Often, though, it`s not the quantity but the quality of the compensation that raises shareholders` hackles. A 2001 shareholder initiative on Bank of America`s proxy advocating the use of performance-based stock options won approval from 34.6% of voting shareholders, for example. Holtzman is a strong advocate of adequately giving executives incentive-based stock options: “You want the executives to feel comfortable and to act like owners rather than employees.” While paying executives for performance is one thing, enriching them upon their exit is a different matter. Another initiative on the Bank of America proxy that would require the board to seek shareholder approval for certain golden parachutes received 40.7% of the votes cast. The issue arose as a result of a payout made to former Bank of America chief executive David Coulter that was estimated to be worth between $50 million and $100 million. Coulter left the bank soon after its merger with NationsBank and on the heels of a $372 million writedown on hedge fund losses made during his tenure. The two issues that raise the most controversyu00e2u20ac”antitakeover defense provisions and executive compensationu00e2u20ac”often go hand in hand. The connection is so touchy that experts advise boards to take extreme care when they are authorizing severance packages to avoid any appearance of a conflict of interest. Ever since the term “golden parachute” became part of the corporate lexicon during the early 1980s with the well-publicized takeover battle among Bendix Corp., Martin Marietta Corp., and Allied Corp., such severance packages have raised controversy.

Government and union officials, as well as large investors, have argued that it is wrong to award hefty severance packages to executives at the same time line workers are receiving pink slips. It was the Teamsters Union, in fact, that made the proposal about golden parachutes at the Bank of America annual meeting in April. Human resources consultants advise boards not to make packages so generous that they encourage management to consider a sale at a below-market bid, yet not so parsimonious that management will reject an offer just so executives can continue to collect salaries and bonuses. John E. Moyer, a partner in the human resources services consulting group at Ernest & Young in Atlanta, says golden parachutes are not only common these days, they are often necessary if an institution is to hire a highly qualified management team. He says most parachutes include three years` pay (the Teamsters proposal for Bank of America suggested a limit of two years` pay), accelerated vesting of nonvested equity and stock options, and additional retirement plan credit for up to three years` work. If the company is sold, Moyer says, it is likely many members of senior management will lose their jobs. If they are not sheltered from at least part of that risk by severance packages, it may affect the way they approach outside bids. “[Severance packages] are there to cause executives to approach deals objectively and independently,” he explains. “If you have a reasonable severance at the change of control, you are more likely to approach a potential offer with an open mind.” Holtzman agrees such packages are important. “I don`t believe that a golden parachute is a takeover defense,” he says. “An employment agreement is very important if you are to have good management.” The problem with golden parachutes, as with executive compensation, is when they cross the line and become so onerous that they cloud management`s judgment.

To avoid such problems, the board`s compensation committee should include only outside directors and only those who have an interest in such matters or who have skills that can add to the process. “This is a complicated, challenging, and important area for a company,” Moyer says. “If you have that kind of group working at the board level, you will have a rational, defensible position” when shareholders question executive pay. He adds that the committee should gather as much data as the individual directors can digest about what competitors are paying their executives. By knowing what the competition is doing, the institution has a gauge for its own plan that will help defend its decisions. For institutions still in fear of a hostile takeover, there are preventive steps short of poison pills and antitakeover provisions that a board can take. Topping the list and the one that will likely win greatest favor with shareholders is to get as many shares as possible into hands friendly to management and the board. Ways to do so include offering stock options to management and employees and stock distribution via other mechanisms, such as an employee stock ownership plan, 401(k) matching payments made in company shares, or a 423 plan, which allows employees to purchase shares through payroll deduction. Beyond that, pension plans can invest up to 10% of plan assets in the sponsoring company`s shares, and up to 25% with approval from the Department of Labor. Another thing a board should do, Pitney Hardin`s Janis says, is pay attention to the market. “Stock price and shareholder value are the driving factors in determining what management should do and whether they will lose in a fight with a dissident shareholder.” As for shareholder proposals on social issues, the meager approval rates such matters receive would seem to indicate to boards that they are not top-level concerns to most shareholders. Even so, directors and management need to be aware of public and investor views. For one thing, Congress, which is attuned to such sentiment, can require regulators to enforce social goals in much the same way it has acted with regard to predatory and fair lending issues. Even if shareholders overwhelmingly approve a proposal in the manner that Astoria`s owners did in May, there is little a board is required to do. “The board has to endorse something before it can get done,” says Janis. “The only way to do that is to get its consent.” In Astoria`s news release the day of the annual meeting, Engelke pointed out that it would take a lot of effort to achieve the kind of change envisioned by Holtzman`s proposal. For one thing, he said, it would require an amendment to the company`s certificate of incorporation and to its bylaws. To do that, the company would have to receive an affirmative vote from 80% of those holding outstanding shares, not just of those voting, to affect the change. That was the point behind Holtzman`s effortu00e2u20ac”not to put provisions in the corporate charter that would serve as impediments to increasing shareholder value, but to preserve it. In the long run, boards can ignore the will of the shareholders for only so long before shareholders take matters into their own hands. |BD|

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