The timing is quite interesting.
On the eve of new rules that will enable large institutional shareholders to more easily nominate their own candidates to U.S. public company boards of directors, two such investors are demonstrating why the pending Securities and Exchange Commission rule is not needed.
The two institutions, of course, are not setting out to disprove the need for the rule. They are simply and rightfully demonstrating the power big shareholders already have to try to change directors when they think something is amiss at a company in which they own shares.
“Entrenchment and ossification.” Those are the charges hurled at the board of Occidental Petroleum Corp. by the California State Teachers’ Retirement System (CalSTRS) and San Diego money manager Relational Investors LLC. The two own about 1% of Occidental’s shares.
Frustrated with what the investors say is too-high pay for Oxy Pete Chief Executive Dr. Ray R. Irani and the perceived lack of a succession plan for the 75-year-old CEO, the investors plan to nominate at least four directors to compete with incumbents at the company’s next annual meeting.
Switch to the SEC, where after years of debate a late August vote is expected to finally usher in an era of “proxy access,” where large holders whose shares have achieved some minimum age will be able to nominate directors whose candidacies will be carried in the proxy material companies sent to investors. In other words, some shareholders will get to nominate directors and the company will pay the freight to get the choices to shareholders.
The negatives here are the potential for the election of special interest directors representing the interests of large shareholders, including public pension funds and big unions, rather than all shareholders. It potentially turns more director contests than necessary into election campaigns.
Most of all, the Oxy Pete effort and others before this show that when they feel strongly about issues, large shareholders already have the wherewithal to try to spur change on boards and within top management. Legislating majority votes for non-contested director elections will reinforce these powers.
Back to Oxy Pete. The Wall Street Journal found Irani the third highest-paid executive in the past decade. Against that, the company’s share price is up 687% in the past 10 years, the Journal reported, compared with an oil index that rose 106% in a comparable period.
In their letter, the investors state Irani’s “target awards are now nearly twice those of the CEO at Exxon Mobil, the largest company in the world, and over three times that of Occidental’s peer group average.”
A company spokesman defended the pay practices and told The Wall Street Journal the recent elevation of the company’s chief financial officer to chief operating officer was indicative of the board’s deep involvement in succession planning.
As for CalSTRS and Relational, they say in their letter they are ”convinced that shareholders would overwhelmingly support our candidates to replace members of the current board, including its chairman and lead director.”
That certainly sounds like corporate democracy in action.