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January 22, 2009
Teamsters Proposal to Limit SunTrust Executive Pay excluded by SEC
    by Robert Kropp

Shareowner advocates criticize Commission for inconsistent decisions and drift away from mission to protect investors.


For most of the eight years that the Bush administration has been in office, shareowner advocates have decried an increasing tendency on the part of the Corporation Finance Division of the Securities and Exchange Commission (SEC) to side with requests by corporations that shareowner proposals be excluded from consideration at annual shareowner meetings.

Shareowners have become so concerned over the trend of exclusion by the SEC that 60 investors wrote to then-President-Elect Obama recently, asking for strong leadership from the White House and Congress to encourage the SEC to "retract the staff-created prohibition on resolutions that ask companies to evaluate the financial impacts of identified issues."

With the Obama administration's espousal of transparency, shareowner advocates view the 2009 proxy season as an opportunity to engage companies on the issue of corporate social responsibility. Investors with stakes in the financial institutions that have benefited from the Troubled Assets Relief Program (TARP) have met their ownership responsibilities by introducing proposals that require transparency of those institutions in the areas of executive compensation and economic security.

Unfortunately, shareowner advocates have met with opposition from the same firms that willingly accepted bailout funds from taxpayers. And in at least one case thus far, the Corporation Finance Division of the SEC has seen fit to side with a recipient of TARP funds.

The Atlanta-based SunTrust Banks received $4.9 billion of TARP funds after its profits declined by 26% in the third quarter of 2008. Firms that receive TARP funds are required by law to comply with compensation guidelines for their top five executives. The guidelines include prohibitions on unnecessarily risky incentives and golden parachute payments, the elimination of tax deductions for salary over $500,000, and the return of bonus and incentive pay based on materially inaccurate information.

A shareowner proposal submitted by the International Brotherhood of Teamsters sought to limit executive compensation at SunTrust (and at about 25 other financial firms that are TARP recipients as well) more strictly by requiring that SunTrust enact a minimum five-year vesting period on all options, a prohibition on vesting acceleration, and a requirement that all executives hold at least 75% of all shares gained as compensation for the duration of their careers.

Louis Mazilia, assistant director for capital strategies at the Teamsters, told SocialFunds.com, "In light of the economic meltdown, we felt that excessive compensation was incentivizing executives to go beyond preserving shareholder value and into the realm of pro-risk behavior. These executives came with their hands out to the American taxpayer, asking for revitalization of the financial institutions that under their stewardship lost incredible amounts of value. We thought the executive compensation restrictions under the Emergency Economic Stabilization Act of 2008 (EESA) didn't go far enough."

SunTrust responded by giving notice to the SEC of its intention to omit the proposal from consideration at its 2009 annual meeting of shareholders. According to the company, Rule 14a-8 under the Securities Exchange Act of 1934 authorized it to exclude the TARP Proposal from the Company's proxy statement for 4 reasons: it addresses the ordinary business of the company; it is false and misleading; its terms have been substantially implemented by the company; and it constitutes nine separate proposals.

Contending that "it is well-established that shareholder proposals concerning the executive compensation of senior executives are appropriate for inclusion in proxy materials," the Teamsters submitted that "the company has failed to satisfy its burden of persuasion and should not be granted permission to exclude the proposal."

The Corporation Finance Division of the SEC concurred with SunTrust's argument that the proposal was excludable, issuing the opinion that while the intent of the proposal is that the executive compensation reforms urged in it remain in effect so long as the company participates in TARP, the proposal appears to impose no limitation on the duration of the specified reforms and is therefore "vague and indefinite."

"We are scratching our heads over how the SEC failed to get into the merits of the proposal," said Mazilia of the Teamsters, "Because on the surface the SEC didn't agree with any of the other objections that the company raised. The SEC decision seems to demonstrate a quick trigger on the Commission's part and without much thought of the consequences."

Reflecting upon previous SEC decisions made in response to shareowner proposals submitted by the Teamsters and other labor unions, Mazilia said, "We have found real inconsistencies. The SEC says it treats every case on its own merits, and doesn't rely on precedents. But we all rely on precedents. We've seen cases when a proposal for an independent chairman of the board was granted a no-action, while hundreds of other similar proposals got through."

"With the new Administration, we hope the Commission will be regulation minded, enforcement minded, and with a new direction set by the new chairperson," Mazilia said.

The new direction espoused by Mazilia and other shareowner advocates is, in fact, no more than a return by the SEC to its original mission. The Commission itself describes its responsibility in these words: "The SEC requires public companies to disclose meaningful financial and other information to the public. Only through the steady flow of timely, comprehensive, and accurate information can people make sound investment decisions."

 

 
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