Investors seek pull on HP board
Hewlett-Packard Co. shareholders will vote today on a proposal that would give them more power in a boardroom that has suffered much strife in recent years.
The measure would let HP shareholders nominate their own board candidates and include them on the company’s proxy material. Shareholder activists say the proposal is the first of its kind in the United States in three decades.
It’s no coincidence that they’re trying it at Palo Alto-based HP. The technology firm’s annual shareholder meeting at a Santa Clara, Calif., hotel is the first since a spying scandal erupted in the fall.
“When you lose touch with the voters, this is what happens,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. The company is “not their toy. It belongs to the people who bought the stock.”
HP management opposes the proposal. Shareholders expect to fall short of the two-thirds vote required to change the company’s bylaws.
Still, corporate governance advocates say getting the proposal on the HP ballot was half the battle. A strong showing today could open the door to similar proposals at other companies.
It could also spur federal regulators or Congress to require that companies let shareholders nominate their own candidates and include them on company ballots.
“Folks on Capitol Hill will be looking to see how much support it has,” said Patrick McGurn, executive vice president at Institutional Shareholder Services, which advises on corporate voting issues. “And if the SEC isn’t willing to make it a rule across the board, it may be the next piece of legislation.”
In the fall, HP disclosed that investigators working for the company had improperly obtained telephone records in an effort to uncover who was leaking company secrets to the media. Four people associated with the investigation, including former HP Chairwoman Patricia C. Dunn, face trial in state courts and potential federal charges. A fifth person pleaded guilty to two federal felony charges.
When the dust settled, the company had lost three board members and several executives and paid a $14.5-million fine to the state. Only one new director has joined, Wachovia Corp. Chief Executive G. Kennedy Thompson.
Mark V. Hurd, the company’s CEO since 2005, emerged from the scandal relatively unscathed. He convinced most of Wall Street that the scandal was an aberration, not an indication of a larger problem.
Labor unions, pension funds and other shareholder activists have lobbied to field their own slates of candidates for board seats since Enron Corp. imploded in 2001. The so-called proxy access proposal in front of HP’s shareholders would allow investors to place information about their candidates on the proxy materials sent to all investors. Currently, shareholders must file a separate ballot if they want to run competing directors, which is expensive.
A federal appeals court decision in September involving American International Group Inc. opened the door for shareholder activists to advance proxy access proposals. The Securities and Exchange Commission has indicated it would look at the issue this year.
Shareholders chose to use HP as a test case in part because of its history of boardroom troubles, including the ouster of CEO Carly Fiorina.
“HP has a board that has failed,” said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees, which owns about 1% of HP shares and backed the proposal. “Our goal is to put someone on the board who will establish a better-functioning board. What better company?”
The sides had been lining up well before today’s meeting. Vanguard Group, a mutual fund giant that owns 2.7% of HP shares, has suggested it would vote against the proposal.
“We see no value in giving small shareholders the ability to wage a proxy contest at the company’s expense,” Vanguard spokesman John Demming said.
The California Public Employees’ Retirement System and the California State Teachers’ Retirement System, which together own about 1% of HP shares, support the proposal.
When boards choose their own members, it “encourages entrenchment and directors who become insular and unaccountable,” said Patricia Macht, a public affairs official at CalPERS. “It’s hard to argue that bringing democracy to director elections is not a good thing.”
The state employee retirement funds in New York, Connecticut and North Carolina also back the proposal, arguing that they crafted it to permit only long-term shareholders -- investor coalitions that own at least 3% of the company for more than two years -- to nominate up to two board candidates.
In a letter to shareholders last week, Hurd argued that the proposal would lead to divisive and expensive proxy contests that would discourage directors from serving. He also said such elections could bring in special-interest directors with goals that diverge from those of most stockholders.
Regardless how the shareholder proposal fares, analysts say the meeting provides an opportunity for HP to show that the scandal is behind it.
“HP was one of the corporate governance poster children, in a bad way, for 2006,” said James Post, a Boston University management professor. “This meeting gives stockholders a chance to take the measure of how far the company has come in repairing the damage that was done.”
