Holder Group Wants to Boot Two WaMu Directors

Dissident shareholder CtW Investment Group has set its sights in its next target -- Washington Mutual(WM Quote).

The Washington-based organization is urging shareholders of the nation's largest thrift to vote against two nonexecutive director nominees, Mary Pugh, chairwoman of WaMu's finance committee, and James Stever, chairman of its human resources committee, at the annual meeting next month.

Pugh is head of fixed-income money manager Pugh Capital Management, where WaMu is a client. Stever is a retired executive of former telecommunications company US West, which was eventually acquired by Qwest Communications(Q Quote).

CtW alleges that as heads of the Seattle-based company's committees responsible for risk management oversight and compensation plan design, the two directors "bear responsibility for Washington Mutual's failure to recognize and act in a timely manner on the risks to shareholder value presented by the housing bubble," it said in a letter to other WaMu shareholders that was also released to the public.

In addition, CtW is alleging that the two directors played a part in "attempting to insulate executive bonuses from the consequences of this risk management failure."

CtW works with pension funds associated with Change to Win, a federation of unions representing nearly six million workers in the U.S. The pension funds own approximately 4.6 million shares of WaMu's common stock.

"Removing Ms. Pugh and Mr. Stever will meaningfully enhance the Washington Mutual board's risk oversight and independence, as well as ensuring that executive compensation decisions reflect an appreciation for risk management and the alignment of executive and shareholder interest, without destabilizing the company as it faces an especially risky and challenging market," the letter said.

CtW takes issue with Pugh's perceived lack of independence as a director. According to the letter, the finance committee chairwoman's own firm had been warning of a housing downturn since early 2006.

Pugh "was likely aware of the significant risk Washington Mutual had taken on by orienting its operations toward the riskiest mortgage products," the letter said. "Yet she appears not to have taken action as Finance Committee Chair either to reject plans that would exacerbate downside exposure to house price deflation, or to encourage more aggressive efforts to reduce such exposure."

CtW said the human resources committee's decision to exclude credit costs from the calculation of executives' performance targets is "grossly inappropriate."

During a meeting held between CtW and several WaMu board members, as well as CEO Kerry Killinger last week, Stever "stressed the difficulty of determining an objective target for credit loss and foreclosure cost mitigation, and the importance of retaining talented executives."

"We find these arguments unconvincing," the letter said. "[S]hareholders rightly insist that executive performance be measured by rigorous, objective criteria and not simply left to the judgment of directors who may be only too wiling to excuse disappointing performance by senior executives they have known for years."

WaMu's stock has lost roughly 70% of its value from one year earlier after being plagued with writedowns and credit costs as home prices declined. Also hurting the firm have been borrower defaults on subprime and home-equity loans, and the seize-up in the secondary markets for mortgage-backed securities. WaMu posted a fourth-quarter loss of $1.87 billion, or $2.19 a share, missing the average analyst estimate by 83 cents.