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Shareholder rights groups plan to kick their campaign for greater corporate democracy into high gear next year. Frustrated by corporate governance policies that virtually assure management nominee picks will win company board seats, shareholder rights groups and labor unions have been pressing for shareholder votes in favor of largely symbolic, nonbinding resolutions to signal widespread discontent with prevailing practice. Next year, however, influential investor proxy advisory firm Institutional Shareholder Services Inc. plans to team up with those critics to fight for binding resolutions that will force companies to establish bylaws that don’t necessarily favor management-picked board nominees. At issue is the existing “plurality voting” system, where an uncontested nominee can win a seat with as little as a single vote even if every other shareholder votes against him (that is, withholds votes). Labor unions and other shareholders are pressing for companies to adopt measures that would require director nominees to secure a majority of voting shareholders to win a board seat. Support by the controversial ISS should provide much-needed momentum to the campaign. It was only this fall that the Rockville, Md.-based company recommended against a binding majority vote proposal at Rochester, N.Y.-based payroll processor Paychex Inc. It’s not that ISS has reversed course on the issue. The Paychex proposal, ISS says, was unacceptably flawed because it didn’t provide a “carve out” for contested elections. Even though only about 20 percent of voting investors supported the binding measure at the Oct. 12 Paychex annual meeting, American Federation of State, County and Municipal Employees’ director of pension and benefit policy Richard Ferlauto expects to be more successful when he submits similar binding proposals next year now that ISS is on board. He already has five proposals in the hopper for 2006, but he declined to comment on which companies will be targeted. ISS was concerned by AFSCME’s previous proposal because it could, strangely enough, have helped protect incumbent board members during contested elections. Under AFSCME’s original proposal, if the dissident received more votes than the management backed but didn’t win an outright majority, the incumbent director would be reappointed. “You could get the most votes, but because you don’t have a majority, the incumbent gets elected,” says ISS director Patrick McGurn. To eliminate the predicament, McGurn recommended that the binding majority vote proposals include a provision that reinstalls the plurality voting system in cases of proxy contests — so dissidents that win elections can be assured that they can take their positions on boards. Ferlauto says he had no problem modifying AFSCME’s binding proposals for 2006 to include the ISS provision “because it does empower shareholders more.” He adds that the Paychex proposal was introduced on its own this year as a “test case” to work out the “kinks” for next year’s broader filing strategy. Ferlauto is optimistic about the binding initiative’s prospects because of previous shareholder support for the nonbinding versions. Shareholders submitted majority proposals at 88 corporations in 2005, according to the Investor Responsibility Research Center, and votes were cast on 55. Initiatives were approved by shareholders of Marathon Oil Corp. of Houston and Raytheon Co. of Waltham, Mass., as well as Delray Beach, Fla.-based Office Depot Inc. and 10 other companies. But since these proposals are only recommendations, companies are not required to adopt them — and rarely do. If binding measures do gain momentum, corporations may begin petitioning the Securities and Exchange Commission, just as they did — unsuccessfully — to block the nonbinding proposals. (Paychex opted not to petition the SEC with its binding proposal). “You can bet your bottom dollar that the next corporation that sees a binding majority vote proposal will take it to the SEC,” says Richard Grubaugh, senior vice president of New York proxy solicitation service DF King & Co. For the binding initiatives, Ferlauto is counting on ISS’ ability to frequently convince a huge swath of the institutional investor community that they should base their votes on the proxy adviser’s recommendations. “ISS is the only proxy advisory firm that can determine the outcome of a proposal or any vote,” says Grubaugh. “If ISS supports the proposal, it will get more backing from shareholders.” Grubaugh says AFSCME and other shareholder groups are likely to get some victories on binding majority proposals next year. But, he adds, it’s unlikely all institutional investors will sign on, simply because of the forcefulness of a binding vote. He expects even greater support for nonbinding majority proposals next year. ISS says these measures received, on average, 44 percent support in 2005. That would pass the majority threshold if one of three major investor group holdouts — Fidelity Investments, Vanguard Group Inc. and Barclays Global Investors — gives its support, he says. “If any of these [investor groups] change their voting policy for ’06, you will see a huge number of these precatory proposals being adopted.” Ron Orol covers hedge funds for The Deal. Copyright �2005 TDD, LLC. All rights reserved.

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