Saturday, July 27, 2002
Call for Kroger Co. elections brushed off
Shareholders' wishes not always company's command
By James McNair, firstname.lastname@example.org
The Cincinnati Enquirer
In the usual corporate hierarchy, the CEO takes orders from the board of directors, while directors take their direction from the company shareholders. Right?
In what some might perceive as an act of defiance, Kroger Co. directors have brushed off for the fourth year in a row a shareholder resolution calling for directors to be elected annually. It was no slim majority that approved the change June 27: 68 percent of voting shareholders sided with it.
The directors' response? We like it the way it is.
But the directors at Kroger and other corporations have an out: Most shareholder resolutions are non-binding, meaning that the board can take them under advisement.
To continually ignore the majority will of shareholders at a time when shareholders are looking for more board accountability takes a level of corporate arrogance not thought dared in this post-Enron environment, said Louis Malizia, assistant director of corporate affairs for the International Brotherhood of Teamsters, which introduced the resolution.
Kroger's lack of action might seem to be an isolated example of shareholder contempt, but is actually quite common among publicly traded corporations. According to a rundown by the Council of Institutional Investors in Washington, D.C., shareholders at 30 major companies approved resolutions calling for annual election of directors. The list includes Kroger rival Albertson's, Bristol-Myers Squibb, Merck, Lucent Technologies, Goodyear Tire & Rubber, FirstEnergy, Southwest Airlines, Sears and Boeing and, for the third straight year, Federated Department Stores of Cincinnati, 88 percent of whose voting shareholders favored yearly votes.
There's pressure in the post-Enron environment for companies to be responsive to shareholders on these sorts of issues, said Patrick McGurn, director of corporate programs for Institutional Shareholder Services in Rockville, Md.
For the most part, corporations stick with the status quo. Corporations typically break up their boards into three classes of directors, each elected for three-year terms in staggered years. They say the arrangement ensures board continuity and stability. Some are candid enough to point out that so-called classified boards ward off the wholesale removal of directors by shakeup-minded shareholders.
I can only say that management thinks that they know best for the company, said Bruce Beebe, editor of Directorship, a corporate governance newsletter in Greenwich, Conn. There has typically been a lot of M&A (mergers and acquisitions) in the retail sector, and this could be a way of protecting themselves from a hostile takeover.
In Kroger's case, the Teamsters resolution was non-binding, meaning that the board did not have to act on it. Unmoved by the heavy sentiment in favor of annual elections, directors took no further action after the shareholders meeting. Company spokesman Gary Rhodes said directors couldn't eliminate the classified board if they wanted to. Regulations approved by shareholders in 1986 would first have to be amended, Mr. Rhodes said, and that would require a shareholder proposal and the approval of 75 percent of all outstanding shares.
The necessary step to declassify the board would be a proposal to change the regulations, and no shareholder has ever proposed a change to the regulations, he said.
Mr. Rhodes said Kroger has explained the procedure to the Teamsters, which says it represents more than 70 percent of Kroger warehouse workers and distribution drivers, including those employed by contractors.
Mr. Malizia, the Teamsters' spokesman, said the move wouldn't be necessary if Kroger had shareholder interests at heart. He said the Teamsters might reword its resolution next year and call for a rule change.
It's something we will consider, he said.
The Teamsters and other pension funds and shareholder activists say they want annual elections to hold directors more accountable for company performance. Although corporations with staggered board terms argue that annual elections would be disruptive, groups that monitor corporate governance were not aware of any instances where shareholders, armed with an annual ballot, went hog-wild in tossing out directors.
Many companies, in fact, embrace annual elections among them General Electric, Home Depot, Hershey Foods and Johnson & Johnson. Moreover, some companies acknowledge shareholder sentiment in favor of annual votes and draft binding measures to change underlying regulations.
One such company was KeyCorp. After shareholders voted in 2000 and 2001 in favor of annual elections, the Cleveland-based bank introduced a measure in 2002 to lift the rule calling for a classified board. A rule change required the approval of 75 percent of the company's outstanding shares.
The measure was voted on at KeyCorp's May 23 annual meeting. Only 37 percent of the shares were voted in favor of it.
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