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Settling for Reform

The settlements in August came about three months after another significant agreement involving Hanover Compressor (HC). The most groundbreaking provision of that settlement allows shareholders with more than 1% of outstanding shares to nominate candidates for two new independent director positions.

Among the first securities cases to include corporate-governance provisions in a settlement was the historic Cendant (CD) suit at the end of 1999, according to McGurn of ISS. In the largest monetary settlement in history, at $2.83 billion, Cendant agreed to get shareholder approval before repricing stock options, ensure that the majority of its board would be independent within two years of final approval of the settlement, and ensure that the board's audit, compensation and nominating committees will be composed of only independent directors.

Such provisions have picked up in popularity in the past couple of years, largely as fallout from the rash of corporate scandals at companies such as Enron and WorldCom.

It's a "post-Enron situation where people are keenly attuned to the idea that corporate abuse is only going to be stemmed by this type of corporate governance," says Bruce Simon, an attorney with the Burlingame, Calif.-based firm Cotchett Pitre Simon & McCarthy, who represented California State Teachers' Retirement System in its suit against Homestore.

Few shareholder suits go to trial; the vast majority are settled first. But it may appear that more are settling recently simply because more were filed in the period after the dot-com and stock market bust in March 2000 and subsequent rash of corporate scandals. Most shareholder suits settle after 2 1/2 years, experts say.

That said, a lawsuit is usually not the first choice -- but rather the last resort --for institutional shareholders to win changes in corporate governance.

"You'd rather be reaching these things through dialogue and the board of directors," said ISS' McGurn.

But he noted that in Siebel's case, the company took an adversarial stance when it faced shareholder measures on expensing stock options and tying executive compensation to performance at its annual meeting in June. (A majority of shareholders voted down the measures.)

"Frankly, it shows these people pick up a lot of interest in reform when a lawsuit is involved," McGurn said. "To me that's a little bit sad. You'd like to see companies and boards doing governance reform because they believe it's the right thing to do."

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