Randomly Noted

We’ve written before about the activist investor saga at the oil giant, Occidental Petroleum Corp., so we thought it only fitting to provide the happy ending, arrived at last week.

The basics of the conflict were that some shareholders thought the long-standing chief executive, 75-year-old Dr. Ray R. Irani, was getting paid too much and that the company didn’t have a good succession plan. Shareholders already had approved a non-binding negative vote on management pay practices. 

There was little doubt that on a relative basis, Irani was quite well paid. The company also has done very well by shareholders. The company produced a total return of 874% for shareholders in the past decade, The Wall Street Journal reported.

The California State Teachers’ Retirement System (CalSTRS) and San Diego money manager Relational Investors LLC were so aggrieved they publicly sent a letter about plans to offer four competing director nominations to Occidental’s board, which they lambasted.

But now peace apparently is the order of the day at Occidental Petroleum. Irani will give up being CEO in May 2011. He’ll serve as chairman through 2014. Stephen I. Chazen, the president, will succeed as CEO. One board seat will go to dissident investors, The Wall Street Journal reported.

Both men will take slimmer though potentially still significant compensation packages. “The direction they moved on the compensation is very good,” said Anne Sheehan, the director of corporate governance at CalSTRS, as quoted in the Journal.

The point made in previous columns on this issue is worth repeating here. CalSTRS and Relational owned about 1% of Occidental’s shares, below the threshhold of the rule recently approved (but under legal challenge) by the SEC that would allow some big holders to nominate directors whose candidacy would be carried on the proxy materials distributed annually by companies.

The point then as now is that big institutional investors are capable, powerful entities that didn’t need the extra and potentially divisive power that will eventually come to them through the SEC’s so-called proxy access rule in order to exert influence at major public companies.

Recently approved ”proxy access” should mean  more would-be directors’  names listed in the voting packages received by shareholders.

But an even greater additional power granted big institutional investors by the regulation, which mandates larger holders’ director nominees be listed alongside board-approved selections, may be demonstrated through their greater leverage in private meetings with current board members.

Here’s Kathleen L. Casey, one of the five commissioners at the Securities and Exchange Commission, as part of  her dissent last week on this issue.

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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.