March 25, 2023

Fair Game: Shareholders Are Speaking Up, but Who’s Listening?

Consider what happened after the May 14 annual meeting of the CommonWealth Real Estate Investment Trust. Joseph L. Morea, a CommonWealth trustee, was up for re-election, and more than three quarters of the shares voted were cast against him. Under the company’s guidelines, this meant that he had to resign. CommonWealth, as is typical at many companies, requires that its independent directors resign if they don’t receive majority support from shareholders for their re-election.

Mr. Morea dutifully stepped down. But that was not the end of it. The next day, CommonWealth said its board determined that Mr. Morea’s loss seemed related to its battle with outside shareholders hoping to oust the trustees, rather than to any personal failings. As a result, it said, the board had “requested that Mr. Morea accept appointment to the vacancy created by his resignation.” So he returned to the board and will serve on three of its committees: those relating to audit, compensation — and nominating and governance.

You’d never know that the shareholders, a majority of whom voted against Mr. Morea, were the actual owners of CommonWealth. As a point of reference, the trustees who reappointed him to the board own only one-quarter of 1 percent of the company’s shares. CommonWealth declined to comment further.

Flouting its own trustee-election policies, as CommonWealth did, was brassy. But its board is by no means the only one that has thumbed its nose at concerned shareholders. A recent maneuver by Urban Outfitters, the retailer of youthful casual clothing, accessories and housewares, brings a new twist to the concept of good shareholder relations.

A vocal band of institutional investors in Urban Outfitters is concerned about board diversity. In the last three years, these investors have argued that the company’s all-male board is too homogeneous. They have mounted shareholder proposals requesting that the board focus on nominating at least one female or minority director. Shareholders will vote on the third such proposal on Tuesday at Urban Outfitters’ annual meeting in Philadelphia, where Richard Hayne, the chairman, C.E.O. and a co-founder, will preside.

To support their argument, these shareholders, including Calvert Investment Management, the Connecticut Retirement Plans and Trust Funds and the New York State Common Retirement Fund, cite research showing that companies with some heterogeneity among directors outperform those with none.

Studies done in 2007 and 2011 by Catalyst, a nonprofit organization that promotes opportunities for women in business, found that in two measures — return on sales and return on invested capital — companies with more women as directors significantly outperformed those with fewer.

“We’ve taken a very strong position that diversity on boards better positions a company to understand what’s going on in an increasingly diverse marketplace,” said Thomas P. DiNapoli, the New York state comptroller, who oversees the retirement fund.

Given that so many of Urban Outfitters’ customers are women, you might expect its directors to embrace the idea of adding a woman to its six-member board. But over the years that the diversity proposals have appeared on Urban Outfitters’ proxies, the company has urged shareholders to reject them. In this year’s filing, for example, the company said that imposing gender and minority requirements on the board selection process would be unduly restrictive and “would undermine the company’s holistic evaluation of candidates.”

Shareholder endorsement of the diversity proposal has been rising, though. It reached 39 percent in 2012, up from 23 percent of shares voted in favor of it in 2011.

And this support grows even larger if you remove from the calculation the shares owned by company insiders, who presumably voted their shares against the proposals according to the board’s recommendation. Subtracting the more than 30 million shares held by Mr. Hayne and his wife would bring the outside shareholder support for last year’s diversity proposal to 52.3 percent.

WITH that as a backdrop, let’s turn to this year’s proxy statement. In that document, in which companies describe the directors up for election, Urban Outfitters announced that it was — drum roll, please — nominating a woman to its board. It asked shareholders to support her at the coming meeting.

So who is the holistically evaluated candidate? Margaret Hayne, the wife of the chairman. Ms. Hayne, who is president of Urban Outfitters’ Free People division, joined the company in 1982.

Talk about poking your shareholders in the eye with a stick.

I asked Urban Outfitters about its nomination of Ms. Hayne, and whether it thought that would satisfy shareholders who were concerned about diversity. Neither the company’s director of investor relations nor Mr. Hayne responded to multiple requests for comment. Ms. Hayne could not be reached.

But Mr. DiNapoli took a dim view of the move. “To nominate someone who is also a long-term employee, an insider and married to the C.E.O. and chairman,” he said, “doesn’t pass the smell test of really trying to find someone that adds to diversity and is going to be an independent voice.”

Board diversity is not the only matter irking Urban Outfitters’ shareholders. Until this year, for example, its directors served for staggered terms, making it harder for shareholders to oust a group of them at once.

At the annual meeting in 2012, however, a majority of shareholders voted to declassify Urban Outfitters’ board, which would require directors to stand for election each year. The company’s directors again advised shareholders to vote against this proposal, but were unpersuasive. Instead of eliminating the staggered terms immediately, though, Urban Outfitters is making the change over the next few years.

Note well: Urban Outfitters is an extremely successful company. Over the last 12 months, its shares have risen 49 percent, and, last week, it posted record sales and a 39 percent earnings jump for its most recent quarter.

Perhaps the company’s directors think that superlative performance means that they can brush off shareholders’ concerns. Still, it hardly seems likely that adding an independent woman to the board would damage Urban Outfitters’ performance. And who knows? It might even enhance it.

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DealBook: In Britain, a Plan to Give Shareholders More Say on Pay

Vince Cable, Britain's business secretaryMatthew Lloyd/Bloomberg News Vince Cable, Britain’s business secretary, said the measures would provide shareholders with new powers to hold companies accountable.

LONDON – Britain will make shareholder votes on executive pay binding next year as part of a set of measures announced by the government on Wednesday to rein in excessive remuneration.

Vince Cable, the business secretary, presented the measures to Parliament on Wednesday, saying they would provide shareholders with new powers to hold companies accountable on their pay practices and increase transparency. The rules are expected to be approved by Parliament and then become law in October 2013.

“At a time when the global economy remains fragile, it is neither sustainable nor justifiable to see directors’ pay rising at 10 percent a year, while the performance of listed companies lags behind and many employees are having their pay cut or frozen,” Mr. Cable said.

Under the new rules, companies listed in Britain would have to gain majority support for their executive remuneration from their shareholders at least every three years or more often if they decide to increase pay. Companies will also no longer be able to pay departing directors more than shareholders have agreed.

But the measures, which also include the mandatory disclosure of a single figure for executives’ total annual pay, were criticized by the opposition Labor Party as not going far enough and being a watered down version of initial proposals.

Chuka Umunna, a Labor Party member of Parliament, welcomed the binding vote and other measures but accused Mr. Cable of doing a U-turn on original proposals. ”Having proposed an annual vote, he now seeks one every three years,” Mr. Umunna said. “Is it not the case that this will simply incentivize boards to draft policy as broadly as possible?”

Shareholder opposition against remuneration practices has been building in Britain, the United States and elsewhere after some companies continued to hand out large paychecks even though their share prices had declined. Pay practices at the insurance company Aviva, the oil producer Cairn Energy and the advertising giant WPP were rejected recently by more than half of investors.

Mr. Cable said that companies would have to report a single figure of total pay for executives after complaints that remuneration reports were too confusing and deferred bonuses or long-term incentive plans made it harder to compare annual pay.

The measures, which are the result of months of consultations with investor groups and companies, won support from business groups. John Cridland, the director general of the Confederation of British Industry, said the measures struck “a balance, by giving shareholders increased transparency on pay and providing ways to hold boards to account, without getting them bogged down in day-to-day micro-management.”

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