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Activists take heart in Wal-Mart results

by William McConnell in Washington | Published June 6, 2012 at 9:48 AM

A series of shareholder initiatives directed at Wal-Mart Stores Inc. by institutional investors was defeated at the company's annual meeting on June 1, including efforts to deny the reappointment of 16 directors to the Wal-Mart board. But a strong showing among the company's outside investors demonstrated the growing strength of the shareholder rights movement.

Advocates for shareholders said the momentum is building even though a Securities and Exchange Commission rule meant to give shareholders a better chance at influencing corporate governance was shot down by the Supreme Court last summer.

Wal-Mart's annual meeting has been looked at as a bellwether for the state of the shareholder rights movement after public pension funds from New York and California said they would press for rejection of some board members in the wake of a U.S. Department of Justice investigation into allegations that officials at the company's Mexico operation tried to bribe officials in that country.

Because Wal-Mart's founding Walton family controls a majority of the company's stock, the initiatives had no chance of succeeding. But several shareholder endeavors, including efforts to prevent company chairman Rob Walton, CEO Mike Duke and former CEO Lee Scott from retaining their board seats, garnered substantial support from institutional investors. While the 13 other directors up for reelection received little opposition from voting shareholders, opposition to Walton, Duke and Scott ranged from 12% to 16%, almost half of the votes cast by outside shareholders.

Another initiative, which would have required the company to detail political expenditures, was supported by 15.8% of the shares represented at the meeting. Finally, a measure to consider whether shareholders should have more input on executive compensation was backed by 9.3% of the shares present at the meeting.

One initiative, a measure to consider whether at least one director should have healthcare expertise, received only 2% of the shares present.

Amy Borrus, deputy director of the Council of Institutional Investors, said the strong support for several of the initiatives indicates the depth of investor concern about the bribery allegations and frustration with Wal-Mart management. "Given that the descendants of the company founder hold about half of the shares, the double-digit 'against' votes for some directors represent a sharp rebuke by shareowners," she said in an e-mailed statement. The votes "speak volumes about the outside owners' lack of confidence in the board's handling of allegations of bribery in Mexico."

Wal-Mart's vice president of corporate communications, David Tovar, said the results of the election show that Wal-Mart investors are withholding judgement until the bribery investigation is completed. "Obviously a substantial majority of our shareholders supported [the directors'] election," he said. "As we have said, a thorough investigation will take time, and we are in the early stages. It would be inappropriate for us or others to come to conclusions before the investigation is complete. If violations of the law or company policies occurred, appropriate action will be taken. Acting with integrity is not a negotiable part of our business. We will do the right thing the right way, and we hope people will judge us by our actions after the investigation is concluded."

Borrus said that efforts to give investors a stronger voice in corporate management is gaining momentum despite a July 2011 federal appeals court ruling striking down a SEC rule that would have required public companies to include dissident shareholder nominees in their corporate proxies. Rather than relying on a universal rule for gaining proxy access, activist shareholders had to revert to individual company's bylaws for proxy access. Shareholder pressure is bringing more companies to the negotiating table to address investors' concerns despite the absence of the SEC rule.

She pointed to Chesapeake Energy Corp.'s decision to replace more than half of its directors after shareholders Southestern Asset Management Inc. and Carl Icahn complained that the board was too close to controversial CEO Aubrey McClendon. "The vote at Wal-Mart, coupled with the extraordinary moves to improve governance by the board of Chesapeake Energy ahead of its annual meeting on June 8, show how willing and able shareowners are to rock the boat at companies that are too complacent."

Patrick Quick, a partner with Foley & Lardner LLP's transactional and securities practice, said strong showings for shareholder proxy initiatives are more likely to bring about changes in company practices regardless of whether they actually prevail. Although he would not address Wal-Mart's circumstances specifically, he said substantial support "definitely gets the attention of people on the board."

He said strong votes against directors could lead to actions ranging from shuffling of directors' committee assignments to changes in nomination and compensation practices. "Corporate actions could range from minor to major in response to votes like this," Quick said. "Shareholders want to know their views are being heard and respected."

A study of Fortune 200 companies released by the Manhattan Institute issued last week found that virtually all shareholder initiatives are being voted down. For instance, nine of 34 proposals to require disclosure of corporate political donations and lobbying expenses have received support of at least 30% of shareholders in the 2012 proxy season. Conversely, management-backed executive compensation plans have been supported 87.9% of the time to date in 2012.

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Activists take heart in Wal-Mart results

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