Kmart Gets Red Light on Specialty Stock Plan : Retailing: Shareholders rebuke management’s proposal to raise $600 million by selling shares in other units.

Kmart management was dealt a major defeat Friday when it failed to win shareholder approval for its controversial plan to sell stock in its specialty retail units.

The setback signals the growing clout of shareholders and is seen by some analysts as a stinging rebuke to the leadership of Kmart Chairman Joseph Antonini. The vote came one day after Kmart reported that May sales dropped 2.5% in stores open at least one year. Kmart lost $974 million for the 12-month period ended Jan. 26.

Kmart, based in Troy, Mich., wanted to sell 20% to 30% of its equity in Builders Square, OfficeMax, Borders-Waldenbooks and Sports Authority chains. The proposal was a bid to raise $600 million to $900 million to bolster its slumping discount stores.

The plan drew fire from several powerful pension funds, including the California Public Employees Retirement System, which wanted Kmart to sell 100% of the units. Critics said the Kmart proposal would not have raised enough money to help the discount stores and would not give shareholders an adequate return.

According to a preliminary count, the proposal received 184.7 million votes, or 61% of the shares voted, but it needed an absolute majority of the company’s 416 million shares outstanding to pass. About 27.8% of the company’s outstanding shares failed to vote.

“We are obviously disappointed that our specialty retail stock proposal failed to get the affirmative vote of the majority of our outstanding shares,” Antonini said.

Some analysts say the vote was a stinging message to Kmart.

“Shareholders sent a message of no confidence in management,” said Kurt Barnard, a New York-based retail economist. “Kmart’s board of directors are on the spot because they have to find a way to raise capital to make Kmart more competitive. Wal-Mart is eating Kmart’s breakfast, lunch, dinner and midnight snack.”

Barnard said Antonini’s future as Kmart’s chief may now be in jeopardy. Antonini, 52, became chief executive and chairman in 1987.

“This is an extraordinary slap to the face of Kmart’s management,” Barnard said. “ . . . It’s a new chapter in shareholder relations.”

Activist investors are becoming more critical of compensation systems that reward top managers even when their companies are faring poorly. One investor at Friday’s meeting drew cheers when he suggested that Kmart executives cut their pay and benefits to reflect the drop in earnings. Antonini responded that executive compensation was already linked to the company’s performance.

Kmart said it will consider new options for raising money for its discount chain in the wake Friday’s developments. The board is scheduled to hold its next meeting June 21.

Kmart shares rose 50 cents to $16 on the New York Stock Exchange on Friday. The stock has plunged from $22 earlier this year.