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May 20, 2004
Companies Ignore Majority Votes on Shareowner Resolutions
    by William Baue

Some high-profile companies are taking advantage of the non-binding nature of shareowner resolutions.

Proxy voting is beginning to look like the last presidential election in this country, where a majority vote did not necessarily decide. Yesterday, 54 percent of voting Intel (ticker: INTC) shareowners supported a resolution asking the company to expense stock options. Intel's response? No expensing. Today, 68 percent of voting Gillette (G) shareowners supported a resolution asking the company to repeal its classified (or "staggered") board elections in favor of annual elections. Gillette's responded the same way it has to the majority votes of the last two years (64 percent in 2003, 56 percent in 2002): no annual elections.

"It's always difficult for a board to disagree with a viewpoint held by a significant number of shareholders," said Eric Kraus, Gillette's vice president of communications. "However, it's the board's duty to reach its own independent decision on what's in the best interest of the company."

"On the issue of classified boards, they believe shareholder interests are best served by retaining the staggered board structure," Mr. Kraus told

In other words, Gillette informed its investors that shareowner resolutions are akin to a suggestion box.

"At today's annual meeting, one shareholder asked, 'What's the purpose of having shareholders if you don't listen to them?'" said Julie Tanner, corporate advocacy coordinator for Christian Brothers Investment Services (CBIS), which filed the resolution with fellow socially responsible investing (SRI) firm Walden Asset Management. "A Gillette representative explained how resolutions are only recommendations made to the board."

"I think some of the shareholders were surprised this is the case," Ms. Tanner told

These shareowners might also be surprised to know that their votes for or against directors, who are nominated by the board, are token as well. Only one shareowner vote is required to confirm the election of a director nominated by the board, even if all other shareowners "withhold" their support (shareowners are not allowed to vote "against" a director candidate.) The US Securities and Exchange Commission (SEC) is currently considering a proposal to allow shareowners access to the proxy to nominate directors, but some reports suggest that corporate pressure is prompting the Commission to water down the proposal.

Gillette is not the only company to ignore the majority will of shareowners on the issue of annual board elections. In four out of the last five years, a majority of shareowners have supported annual board elections at Raytheon (RTN) and Sears (S), where 77 percent and 68 percent of voting shareowners supported the resolution this year, respectively.

Similarly, Intel is not the only company to ignore the majority will of shareowners on the issue of stock option expensing. Wells Fargo (WFC--58 percent), Texas Instruments (TXN--57 percent), HP (HPQ--55 percent), and IBM (IBM--54 percent) all ignored majority votes, as did Raytheon (65 percent).

"Intel has been one of the most, if not the most, vocal opponent to expensing of options and the FASB," said Lynn Turner, former chief accountant for the SEC and managing director of Glass Lewis, a proxy research firm. Mr. Turner refers to the recent Exposure Draft released by the Financial Accounting Standards Board (FASB), which sets financial reporting standards that are officially recognized as authoritative by the SEC, requiring the expensing of stock options.

"Now their investors have weighed in and told management they need to expense the value of the options they grant," Mr. Lewis told "Management's response indicates they are out of touch with the owners of the business."

Bill Calder, an Intel spokesperson, begged to differ.

"This was a close vote, and we think it shows that people remain evenly divided on the issue, similar to last year, when [the resolution] was defeated with 47 percent of the vote," Mr. Calder told "It's always important to listen to stockholders, but it's equally if not more important give stockholders an accurate representation of the true condition of the company, which is what we're trying to do."

Intel joins other high tech companies in claiming that it is impossible to assign an accurate expense on stock options, since it is unknown what the stock price will be when the options are exercised. However, option expensing advocates point out that current practice assigns a dollar value of zero to options, which is much more inaccurate than generally accepted methods of estimating the expense of options.

Intel also joins other high tech companies in adopting a "wait and see" approach.

"It would be imprudent for us to try to make this change now, midyear, when the accounting regulatory body may have a new rule that somehow comes out different than what we implement," said Mr. Calder.

Such uncertainty has not prevented the software giant Microsoft (MSFT) expensing options. Nor has it prevented the 575 other companies, including 41 percent of the S&P 500 based on market capitalization, from voluntarily expensing options, according to a April 29, 2004 report by Bear Stearns, an investment banking and brokerage firm.


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