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June 24, 2003
Apria Democratizes Director Elections
    by William Baue

Apria Healthcare Group set a precedent as the first company to allow shareowners to nominate candidates for board of director elections.

On June 11, Apria Healthcare Group (ticker: AHG) announced that it would grant shareowners access to the company proxy to nominate candidates for the board of directors. Apria, whose headquarters is in Lake Forest, California, offers home respiratory therapy, home infusion therapy, and home medical equipment services. It had almost $1.3 billion in sales in 2002.

"It has become painfully obvious over the past few years that corporate America must improve board room dynamics," said Ralph Whitworth, chair of Apria's board of directors.

Apria claimed that the policy is "the first of its kind voluntarily adopted by a publicly traded company."

"The reform at Apria was initiated by the board of directors, but theirs is no normal board," said James McRitchie, editor of the website that advocates corporate governance reform. "Ralph Whitworth, the chairman, and Richard Koppes are well-known corporate governance activists whose faction increased their influence on Apria over a protracted campaign lasting several years." Mr. Koppes served as general counsel for the California Public Employee Retirement System (CalPERS) for a decade in the 1980s and 1990s when it became active in corporate governance reform advocacy.

Apria's announcement came two days before the end of the public comment period to the Securities and Exchange Commission (SEC) on the very issue of shareowner access to the proxy for nominating directors.

"I think the significance of Apria's announcement is certainly heightened, given the SEC is considering amending their rules to allow shareholder nominees for director to be placed on the corporate ballot," said Mr. McRitchie.

Mr. McRitchie co-filed with the Committee of Concerned Shareholders a rulemaking petition with the SEC in August 2002 that initiated the Commission's reconsideration of its regulations governing shareowner access to the corporate proxy.

"The Business Roundtable, representing corporate CEOs, doesn't want any additional changes in the area, even though they supported an open ballot in 1977," Mr. McRitchie told "Institutional investors are almost unanimous in supporting an open ballot--they differ primarily on what the threshold [or percentage of company stock held by nominating shareowners] should be and that difference is heavily weighted by how far they think they need to compromise."

Apria set a five percent threshold, requiring one or more shareowner to own that much of the company's common stock for at least two years in order to nominate director candidates on the company's proxy ballot. CalPERS, which manages $138 billion in assets, and the Council of Institutional Investors (CII), which represents investors with $3 trillion in assets, both suggested a five percent threshold to the SEC.
"The five percent ownership threshold is high and would present an even more difficult challenge at huge corporations, such as ExxonMobil (XOM)," said Mr. McRitchie.

A three percent threshold is favored by two major labor unions: the AFL-CIO and the American Federation of State, County and Municipal Employees' Pension Plan (AFSCME). The Social Investment Forum (SIF) and Responsible Wealth, which represents "a network of hundreds of affluent Americans," advocate a one percent threshold.

In his comment letter to the SEC, Mark Latham of the Corporate Monitoring Project made a suggestion that would allow companies to pick which threshold suited them best.

"Regarding the complex issue of determining the rules for director nominees to appear in the company-paid proxy, one strategy to consider is letting shareowners decide this by vote at each company," Mr. Latham wrote.

Mr. Latham suggested that the SEC could define two or three standardized thresholds of access to the proxy instead of imposing a single "one-size-fits-all" threshold.

"If the Commission receives too much pressure from CEOs, Latham's suggestion might be a reasonable compromise," said Mr. McRitchie.

Apria's policy could represent the first step in setting Mr. Latham's suggestion in motion, if other companies follow suit and declare their own thresholds and rules for shareowner nominated candidates to appear in company proxies.

"I do expect Apria's model to be modified and copied, especially if corporate governance rating systems such as those of Institutional Shareholders Services, GovernanceMetrics, Moody's Investors Service and Standard & Poor's give a higher rating to Apria because of its actions," said Mr. McRitchie. "I believe they should; it certainly fits the market's judgment that firms with fewer management entrenchment devices should be assigned a higher value."

Mr. McRitchie, who is an Apria shareowner, sent a personal thank you note to Mr. Koppes. "I'm always delighted when a board moves toward democracy; it's even better when I own a little stock in the company," said Mr. McRitchie.


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