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Tina Van Dam had her hands full in the months leading up to The Dow Chemical Co.’s annual meeting in May 2005. “Initially, we had eight shareholder proposals on topics from corporate governance to social issues such as animal testing,” recalls Van Dam, then the company’s corporate secretary. But by May 12, the date of Dow’s annual meeting in the company’s hometown of Midland, Mich., Van Dam had winnowed that list to a single item: a resolution, filed by an individual investor, that sought additional disclosures about possible human health effects of certain chemicals manufactured or released into the environment by Dow. In its proxy statement response, the company urged shareholders to defeat the measure. More than 90 percent of those present voted no. The measure’s defeat represented a grand slam for Van Dam, who had, earlier in the year, convinced the institutional investors sponsoring most of the other seven proposals — two on corporate governance issues, five on social and environmental matters — to drop their efforts. She can sum up her approach in a single word: “dialogue.” In those cases, she and Dow officials with expertise in the appropriate subject areas met face-to-face with the proposal’s proponents to listen, explain the company’s position and push for alternatives to a proxy vote. For example, one proposal sought additional restrictions governing executive compensation. “We were able to successfully negotiate a withdrawal of that one after explaining our performance-based equity programs,” which tie executive salaries and bonuses to both individual achievement and the company’s overall financial performance, says Van Dam, now senior counsel for corporate governance and finance for the National Association of Manufacturers in Washington, D.C. Within the past few years, shareholder resolutions have evolved from an annual nuisance that companies largely ignored to an annual nuisance that companies have to take seriously. The Securities and Exchange Commission allows shareholders who have owned at least $2,000 in stock for at least one year to file proposals for consideration at annual meetings. Typically, proposals fall into two camps: those pressing companies to report or take a position on social issues such as global warming, diversity and human rights, and those on corporate governance matters, often requesting companies to take actions such as limiting executive compensation or eliminating anti-takeover defenses. At least 1,050 shareholder resolutions on corporate governance and social issues were filed at public companies in 2005, according to the Investor Responsibility Research Center, a consulting and proxy service firm based in Washington, D.C. That figure is up sharply from 2001, when the IRRC recorded just over 800 proposals, but down slightly from 2004′s acrimonious all-time high of 1,116. “[Last year] … was the year where activist shareholders discovered just how effective their campaigns could be,” says Bruce Goldfarb, general counsel and senior managing director of Georgeson Shareholder Communications Inc., a New York-based shareholder advisory and research firm. Dow’s experience reflects an evolving trend in how companies respond to such aggressive shareholder activism. Increasingly, management — specifically corporate secretaries and corporate counsel — are resolving many issues raised in such proposals beforehand, keeping them off the proxy ballot, Goldfarb says. For most companies, of course, that’s the desired outcome, because it prevents having potentially controversial matters dragged into the public eye. Only 570 shareholder proposals actually made it onto company ballots this year, compared to 708 in 2004 and 698 in 2003, according to a preliminary report from Institutional Shareholder Services, a proxy voting and corporate governance firm in Rockville, Md. Moreover, says David Katz, a Wachtell, Lipton, Rosen & Katz partner who tracks proxy votes, companies seem more responsive to proposals than in the past. Goldfarb agrees. “What we have witnessed this year in terms of corporate governance proposals is that companies are more willing to engage in dialogue about them,” he says. “They’re also more willing to take action in terms of re-evaluating their corporate governance profiles so as to render some proposals moot or get shareholders to withdraw them.” In some cases, companies are giving in and making the changes that shareholders have demanded. Such demands include dropping defenses against hostile takeovers, such as staggered terms for board members and “poison pill” provisions that make a company less attractive as an acquisition target. Just this year, for example, Calpine Corp., a San Jose, Calif.-based electrical power company, and Caterpillar Inc., a Peoria, Ill.-based heavy-equipment manufacturer, terminated their poison pills after shareholders at each company approved nonbinding proposals to eliminate the takeover defense. Some companies aren’t even waiting for shareholder resolutions to be filed before taking pre-emptive action. That’s what ProLogis, a global real estate investment trust specializing in industrial distribution facilities, has done for the past two years. “We got rid of our [poison] pill at the end of [2004] without any resolutions from shareholders,” says Edward Nekritz, general counsel and company secretary for the Aurora, Colo.-based company. “Looking at our whole kit and caboodle of takeover defenses, we viewed the pill as something that wasn’t in our best interests.” This year ProLogis has taken steps to declassify its board — again with no prodding from shareholders. “We looked at whether the staggered board provided a significant benefit to the company,” Nekritz says. “Our view was that, on balance, we didn’t need it.” Why tackle those issues when shareholders weren’t demanding action? Because good governance requires that directors keep their fingers on the pulse of what’s going on in the corporate community, Nekritz says. As ProLogis officers and directors saw other companies nationwide facing similar shareholder proposals attacking takeover defenses, they decided to examine those issues themselves. Nekritz says the company has other takeover defenses in place — he declines to provide specifics — and adds that the company, which reported revenue of nearly $845 million in 2004, is an unlikely takeover target because of its size and prominence in its industry. And then there are the companies like Dow that have convinced shareholders to drop their resolutions. Such back-and-forth with shareholders is part of good governance too, says Marc Gary, general counsel of BellSouth Corp. Of the three shareholder proposals BellSouth received this year, only one made it onto the proxy ballot. (The measure asked the company to provide a twice-yearly report on political contributions; shareholders rejected it.) Like Dow’s Van Dam, Gary dispensed with the other two through negotiations. “Our general approach is one of engagement. It’s really important that we understand what their concerns are,” he says. “Just having the dialogue is a good step toward serving our shareholders.” For general counsel, corporate secretaries, and directors, it’s not too early to start thinking about having those conversations in 2006. Shareholders are likely to keep pushing for a greater voice in the corporation’s governance. This year saw an upswing in proposals calling for directors to be elected by a majority of votes instead of a plurality, a measure that could help groups of shareholders block the election of directors by refusing to vote for them. “The majority-voting issue is going to be an even hotter issue next year,” Katz predicts. Following are some general guidelines for dealing with shareholder resolutions — before and after they arise. ANTICIPATE AND ADDRESS LIKELY HOT SPOTS “Every company needs to have a thorough evaluation of its corporate governance programs on a regular basis,” says Georgeson’s Goldfarb. Nekritz agrees: “Committees and boards need to look at what was in place when the company was established and see whether it still makes sense now,” he says. At his company, directors periodically revisit governance issues, updating or dropping them as needed. In addition, do some benchmarking beyond your own company walls. “Get a sense what are considered best practices for other companies in your industry,” Goldfarb recommends. If you see that many of your colleagues or competitors are, say, pre-emptively dropping their poison pills or issuing statements expressing support for diversity on the board and management team, you may want to consider doing the same. PROVIDE MECHANISMS THAT SHAREHOLDERS CAN USE TO CONTACT MANAGEMENT OR THE BOARD “There used to be a very firm policy that the company speaks through management, and shareholders don’t talk to board members,” says attorney Beth Young, a senior research associate with The Corporate Library, an independent research firm focusing on corporate governance issues. “That’s definitely changing.” Today, many companies include contact information for directors or the board as a whole — including hot lines and e-mail and mailing addresses — in their Web sites and annual reports, says Ralph Ward, publisher of Boardroom Insider newsletter. Whatever the contact medium, it should provide the opportunity for two-way communication, a step that may help keep some individual shareholders from airing their grievances by filing formal resolutions. ONCE A PROPOSAL IS FILED, TAKE THE INITIATIVE “I always contact, or have an upper management person contact, the proponent so that we understand who they are and what they want,” says Dow’s Van Dam. “If they have matters they wish to discuss, the company will engage in dialogue with them.” The advantage: “We’re able to meet and understand and learn from each other without the antagonistic environment” of a standard shareholder resolution and the deadlines and SEC regulations surrounding it, she says. “The goal is to share ideas and achieve mutually acceptable results, and it’s easier to do that in a non-confrontational, non-antagonistic way.” Often proposal proponents just want to know they’re being heard, says veteran Dow director Barbara Hackman Franklin, who serves on several other boards. Meeting face-to-face with a company’s top management can go a long way toward making shareholders feel that someone’s listening, she says. CONSIDER A COMPROMISE Those in-person meetings may lead to a compromise that keeps the proposal off the proxy ballot. For instance, a shareholder might call for declassifying the board by having all directors stand for election every year. The company might counter by agreeing to declassify the board, while keeping terms at three years because the longer terms provide more continuity for a working group of directors and prevent the board from having to lose time preparing for annual elections. SEEK AN SEC ‘NO-ACTION’ LETTER Companies can request a formal letter from an SEC attorney indicating whether the commission would be likely to take legal action against the company if it excludes a shareholder proposal from the annual meeting proxy ballot. (Some companies take this step as a safety measure while still negotiating with proponents about withdrawal.) If the SEC agrees that the proposal falls into one of 13 categories for exclusion — which include proposals that duplicate another proposal, recommend illegal activity, or benefit just one shareholder — an agency attorney responds with a letter indicating that, on the basis of the information provided, the commission would have no reason to take action against the company for omitting that particular proposal. Once the no-action letter is final, the company may simply leave the proposal off the proxy ballot. Although Dow received a no-action letter from the SEC for one of its eight proposals this year, Van Dam emphasizes that the no-action tactic should enhance discussion, not replace it: “The best line of defense is being open, being willing to engage in dialogue,” she says.

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