Pfizer -- Electoral Dysfunction

Diane Francis column Friday May 5:

The battle to defend free enterprise has been joined in Corporate America. Moods are turning ugly south of the border during this year's proxy and annual meeting season.

American investors have begun to lose patience with greedy executives and pliant boards getting rich while delivering mediocre results. The biggest issues to pension fund managers and other shareholder activists are excessive executive pay, entrenched directors and dual class shares.

More activists are stepping up the plate in the absence of tougher regulations and best practices. For instance, Denis Nappier, Connecticut's State Treasurer said his government's US$23-billion Retirement Plans and Trust Funds will oppose re-election of compensation committee members this year at AT&T, Wal-mart, Home Depot, Merck, TimeWarner, Verizon Communications, Safeway, Bell-South and Pfizer Corp.

But unseating corrupt or incompetent managers and directors is not easy.

The root of the problem is the election process for directors which is neither democratic nor just. Corporate democracy has been an oxymoron. Uncast votes are automatically cast in favor of incumbents and the only way to overcome this is to mount expensive proxy battles. This is like saying that anyone who didn't vote for a candidate in 2004 automatically voted for incumbent President Bush.

Unable to change laws just yet, activists have been devoted to getting corporations to agree to majority-rule votes, in order to get rid of directors and mediocre managements more easily.

These rules allow shareholders to curb executive gouging and put companies into play if they are under-performing. They do this by requiring that directors be approved by a majority vote in annual board elections.

An estimated 120 public companies have these rules and another 120 are being targeted by activists such as labor unions, pension and mutual funds, hedge funds and gadflies.

But this is only a small percentage of the total. Virtually all public companies rig the rules by limiting shareholders to voting for slates only and by counting all withheld votes as votes of approval.

Some two dozen big companies have adopted versions of majority-vote rules and the SEC has also proposed balloting reforms.

But the SEC's reforms are stalled and dirty tricks are underway.

One of the worst examples of shareholder abuse involves giant that Viagra helped build - Pfizer Corp. whose CEO Hank McKinnell has frustrated the exercise of his shareholders' rights.

Mr. McKinnell has made US$65 million in compensation since he became CEO in January 2001. He has been under fire recently, before last week's annual meeting, because he negotiated a US$83 million severance package for his retirement in a couple of years.

In the meantime, he has been a mediocre CEO and Pfizer's stock has declined by 46% since he took over in 2001.

Instead of facing a pink slip, Mr. McKinnell has been busy securing his unjustifiable remuneration through a series of cunning maneuvers, including co-opting some of his own shareholders to secure his privileged position.

What's important to note is that Pfizer, on paper anyway, has an enlightened set of governance principles - enhanced disclosure requirements as well as a majority-vote rule of sorts.

The company guidelines stipulate that if more votes for any director are withheld than cast in his favor, the director must resign. The cute part is that the board doesn't have to accept the resignation but has to disclose why it won't accept it.
Unfortunately for Pfizer shareholders, two directors on the compensation committee survived the vote.

And the reasons this occurred are unseemly.

For starters, the company used shareholder money to fight shareholders who wanted to mount a case to withhold votes from these directors.

Some shareholders may have been confused because Mr. McKinnell has also wrapped himself in the corporate governance flag. He formed, with Texas buddies such as Boone Pickens, an organization calling itself Investors for Director Accountability Foundation.

But shareholders upset with his pay were unable to muster the necessary votes mostly because various institutional shareholders must have backed him.

The New York Times reported that some of Pfizer's biggest single shareholders are institutions who are also suppliers making millions from Pfizer. These include institutions which make millions managing Pfizer employee investments, mutual funds designated for employee investments, pension funds managing money, institutions earning management banking or underwriting fees as well as those earning insurance premiums.

So Mr. McKinnell prevailed.

Frankly, laws should forbid such shareholders from voting because they have conflicts of interest. They should also forbid boards from authorizing funds to fight shareholders unless the cause is approved by a special committee of truly independent directors.

Lastly, all public corporations should be forced to adopt majority-vote rules to rid the system of scoundrels.