At a time when public attention has focused on corporate governance, the LongView Funds have continued to play a leadership role among institutional investors in prodding corporations to adopt practices that promote sound corporate decision-making and enhance shareholder value.
The 2001-02 year completed the LongView Funds' first decade of shareholder activism. During that time the Funds have come to be recognized as a leader by advancing cutting-edge governance issues and advocating its positions effectively, both in dialogues with individual companies and in public forums, such as corporate annual meetings.
Consistent with its practice in recent years, the Funds submitted 20 shareholder resolutions to companies listed in large-cap, mid-cap and small-cap indices on a range of topics. This year the Funds placed a strong emphasis on corporate governance and executive compensation in particular. Fourteen of the 20 resolutions came to a vote, and three won a majority of the shares voted, including a resolution on executive severance agreements, a topic which in prior years had never received a majority vote. (All percentages cited here are percentages of "yes" and "no" votes only.) Also of note, more than one-third of the shares at a major oil company were voted in favor of a proposal asking the company to be guided by International Labor Organization ("ILO") conventions. This is apparently the highest "yes" vote ever recorded on a labor-related shareholder topic.
The following is a topical analysis of the votes at particular companies.
In recent years shareholders have expressed concern about executive compensation packages that do not closely correlate pay to company performance. Of particular concern are severance agreements, including so-called "golden parachutes," that reward executives if they leave the company, even if performance has been poor.
The LongView Funds sponsored six resolutions seeking a shareholder vote on future severance agreements that exceed 2.99 times a senior executive's base pay and bonus. In prior years, such proposals often got no more than one-quarter of the vote, but in 2002 the Fund obtained 54% of the vote at Norfolk Southern and almost won with 49.9% of the vote at Sprint. More than 40% of the shareholders said "yes" to LongView proposals at Massey Energy, Raytheon and IMC Global. A repeat proposal to Sierra Health obtained less than 30% of the vote.
A related proposal at General Electric asked the company to adopt a policy that would tie future stock options more closely to company performance. It received a 30.9% "yes" vote.
The LongView Funds took the lead on another compensation issue, asking McDermott International and Kmart not to consider "pension credits" as part of any formula used to calculate executive compensation. This once-obscure issue achieved prominence in the past year when it was disclosed that a significant portion of reported profits at some companies consisted not of corporate revenues, but of estimated income to the company's pension fund - which of course cannot be used to fund corporate operations. Under FASB guidelines such "pension credits" must be reported in a company's consolidated financial report, and in a booming stock market, the inclusion of such anticipated pension fund revenues can make it appear that companies are performing better than they really are. Moreover, to the extent that executive compensation is based on calculations that includes such pension credits, executives at poorly performing companies may be rewarded, even though shareholder value has suffered.
The LongView proposal asked companies not to include pension credit income in formulas used to calculate executive compensation. McDermott's board of directors agreed to implement this policy without a shareholder vote. The proposal at K mart did not reach a vote because the company filed for bankruptcy protection.
Believing that director accountability is enhanced by having all directors elected each year, rather than in staggered or "classified" terms, the Funds continued their advocacy of this reform at VF Corporation, and the shareholders agreed with a 54.4% "yes vote.
The Funds' third majority vote came at State Street Corporation, where 52% of the vote was cast in favor of a proposal asking that the company's anti-takeover device be redeemed to put to a vote of the shareholders. State Street had adopted a "poison pill" several years ago without prior shareholder approval.
In a remarkable breakthrough, 34.4% of the shares voted at Unocal supported a LongView proposal asking the company to adopt a code of conduct based on ILO conventions barring slave labor or forced labor and recognizing the rights of workers to engage in activities to protect their interests. This is apparently the highest vote ever recorded in favor of any "social" resolution and may reflect growing shareholder unease with Unocal's record of doing business in Burma. Believing that lack of attention to these issues can affect corporate reputation and ultimately a company's stock price, the Funds have offered this proposal at various companies over the years.
The collapse of Enron shone a spotlight on questions of auditor independence and of whether auditors are performing non-audit consulting functions that may create conflicts of interest. Proposals seeking to sever audit from non-audit functions were offered at Labor Ready and Albertson's, and they received 29.4% and 12.5% of the votes, respectively.
The Funds proposed separating the position of Board Chairman from that of Chief Executive Officer at Union Pacific. This repeat proposal obtained 28.3% of the "yes" vote, an increase over 2001.
The Funds have long believed in the importance of corporations being sensitive to equal opportunity issues, as negative public perceptions (particularly in the employment area) can expose a company to litigation and potentially large judgments or settlements. In response to media accounts that Six Flags is a defendant in several lawsuits regarding the expulsion of certain minority patrons, the Funds filed a resolution seeking an affirmation by the company of its dedication to equal opportunity principles and a report showing what Six Flags was doing in some key areas. Although the company did re-affirm its commitment to equal opportunity, the Fund's proposal still achieved 22.2% of the vote, which is a significant showing based on past votes on this topic.
The AIDS pandemic in Africa has focused attention on whether drug manufacturers are doing everything feasible to make drugs available to the poorest nations and individuals. As part of an ongoing dialogue with pharmaceutical makers, the Funds joined a coalition of investors whose resolutions sought a report on that topic at Abbott Laboratories and Bristol-Myers Squibb. The latter proposal was voluntarily withdrawn after a dialogue with the company, while the former proposal was voted at the annual meeting and received enough votes (4%) to be resubmitted next year. During the year, the Funds engaged in a continuing dialogue with Pfizer on that company's work in the area, although the Funds did not sponsor a proposal on the topic.
