Telecom Investors: Can You Hear Us Now?
Editor's note: This is the fourth story in an occasional series exploring the rise in shareholder activism and its impact on U.S. corporations amid the economic downturn. The first explored reasons behind the trend. The second detailed efforts by investors to rein in soaring executive compensation. The third looked at the battle being waged to get shareholder proposals on company ballots.
Shares of
Sprint-Nextel
(S) - Get Report
have tumbled more than 70% since 2005, as the third-largest U.S. wireless operator has seen customers flee to rival carriers.
For his effort overseeing such performance, then-Chairman and CEO Gary Forsee lost his job -- but gained a small fortune. He saw his 2007 salary nearly double to $40 million, including stock and option awards, from the year before. In addition, he will receive nearly $84,000 a month for the rest of his life thanks to a separate pension he negotiated when he was hired according to the company.
While much of the shareholder outrage this season has
focused on banks and financial companies
like
Citigroup
(C) - Get Report
and
Merrill Lynch
(MER)
decimated by the housing and credit crunch, telecom CEOs are among the most notorious for the widening gap between pay and performance year after year. And while financial executives have enjoyed a long run of prosperity, CEOs and directors at telecom companies have largely presided over flagging business while raking in increasingly generous pay in the wake of the 2001 tech bubble and
WorldCom
scandal.
"The telecom industry has had more chances to put itself back together, while this problem has just surfaced in the financial industry," says Paul Hodgson, senior research analyst with The Corporate Library, an independent group focused on corporate governance and executive pay.
Boards explain the widening gap between pay and performance by arguing that they need to attract and hold onto key talent. They point out shareholders don't need an advisory vote to communicate their problems directly to the board.
Boards Have 'Failed'
Telecom executives certainly haven't had it easy over the better part of the last decade. They had to deal with the tech bubble's burst in 2001, followed by consolidation and declining revenue in the sector, as they contended with the challenge of finding ways to grow as wireless phone usage grew and leveled out.
As a result, some telecom CEOs may have been more concerned with meeting short-term metrics and targets in order to ensure bonus payments, further hindering stock price and company growth, Hodgson says.
"It's possible that if these companies concentrated more on the long term in the first place, they wouldn't be so concerned over the short term," he says. "They need to turn things around now before they can think of a long-term strategy. When many of the compensation policies were originally planned out, it looked like the sector would ride high for years. There were a lot of fixed-pay policies and it's difficult for boards to turn backwards and get rid of it all."
In the years following the WorldCom debacle, in which CEO Bernie Ebbers fraudulently covered up the company's performance by falsely inflating revenues in order to boost share prices, telecom shareholders failed to unite and attack perceived problems.
"One of the issues is that shareholders don't have many tools to do much about pay," says Dan Konigsburg, corporate governance analyst with Standard & Poor's. "They have a pretty blunt instrument -- to vote out someone they don't like -- but that is not used too often."
The AFL-CIO, the union umbrella representing 10 million workers, says that members are increasingly frustrated, having watched deferred wages through pension funds with several telecom companies disappear.
"The boards have fundamentally failed in watching over management, and shareholders need tools to hold them accountable," says to Dan Pedrotty, director of the office of investments. "Boards are going to keep getting this wrong if they're not held accountable."
Verizon Offers Shareholders a 'Say'
Shareholders now seem to have been bloodied enough to fight back against footing the bill for high-priced exits, given the kind of windfalls executives like Sprint's Forsee received -- whether they left voluntarily or were forced out.
At their 2007 annual gathering,
Verizon
(VZ) - Get Report
shareholders approved a say-on-pay proposal with a slim majority vote of 50.2%, a move that would give them a nonbinding vote on salaries for CEO Ivan Seidenberg and four other executives.
In November, Verizon said it will adopt the advisory vote, giving shareholders a voice in executive pay starting in 2009. The AFL-CIO, which highlighted Verizon as the poster child for pay for failure on its Executive PayWatch Web site in 2007, called the move "a strong victory for investors."
However, an 8% drop in share value over the last year has forced shareholders to again turn up the heat on Verizon for the May 1 meeting, especially as Seidenberg's salary continues to rise. Outspoken shareholder activist and frequent
CNBC
guest Evelyn Davis is urging Verizon's board to abandon all future new stock option awards to senior executives, citing recent scandals and earnings manipulations at financial institutions. Additionally, the Association of BellTel Retirees is asking shareholders to vote for the separation of the roles of chairman and CEO.
"How can the CEO be his own boss?" the supporting statement in the proxy reads. "When the CEO is chairman of the board, there is an ambiguity about who is working for whom -- and a built-in barrier to replacing a poorly-performing CEO."
Qwest, AT&T Shareholders to Vote
This season, telecom proxies are littered with proposals urging greater shareholder involvement in the process.
The separation of the chairman and CEO positions is also a key issue for
Qwest
(Q)
shareholders. The company's stock has fallen more than 90% after it was mired for years in legal troubles stemming from accounting scandals with Enron and charges of insider trading against former CEO Joseph Nacchio.
One proposal for Qwest's annual shareholder meeting on May 22 calls for an independent director as just one step to correct "the many ills of Qwest" by holding the CEO more accountable. "The independent chairman could demand accountability from the other members of the board of directors who the proponent believes are so highly compensated they fail to be reasonably independent," wrote Qwest shareholder Gerald Armstrong in the company's 2008 proxy.
In a separate proposal, three Qwest shareholders are rallying to have tax gross-ups, which are payments a company makes to an employee to cover tax charges on assorted expenses, and the waiver of share price targets in performance-based stock option grants included in the total value of compensation that would trigger shareholder ratification.
The trio offers up former CEO Richard Notebaert's severance package as an example, as shareholders could have been on the hook for $63.5 million if he had been terminated, as opposed to the $14.5 million he received by voluntarily resigning.
At
AT&T's
(T) - Get Report
annual shareholder meeting Friday, every stockholder proposal was narrowly defeated, but still showed that activism against excessive compensation may be gaining traction. Proposals for an advisory say-on-pay vote and to exclude pension investment gains from performance-based compensation both garnered more than 40% of the vote.
Two other shareholder-spearheaded proposals received less support, but perhaps enough to send a message to AT&T's board going forward, shareholder activists say.
AT&T shareholders have been fuming about executive pay for years, with their argument finding support from The Corporate Library's 2006 report "Pay For Failure: The Compensation Committee's Responsible." It cites AT&T as one of the most affected companies by the broken link between long-term value growth and long-term incentive awards.
According to the study, former AT&T CEO Ed Whitacre received $85.2 million in compensation from 2001 through 2005, as total shareholder return was negative 40.3%.
"The company hired Whitacre when telecoms were riding high and everyone was in demand," Hodgson says. "They basically threw money at him. When the industry took a nosedive, since so little of his bonus was performance related, they had to keep paying him. It was similar at Verizon when Seidenberg took over."
Initiatives against excessive pay are spreading from the wireless carriers like AT&T and Verizon to handset makers, such as
Motorola
(MOT)
, who have say-on-pay proposals on their proxies this spring. One shareholder proposal on Motorola's statement argues that corporate governance arrangements "do not provide shareholders with enough mechanisms for providing input to boards on senior executive compensation."
At the very least, the trend should push companies to better explain the decisions that go into determining pay for executives, Hodgson says.
"Most boards are well aware if two-fifths of their shareholders have a problem with the pay, and they either have to explain themselves better or do something about it," he says.
Konigsburg says that as little as 10% of shareholder votes against pay will get a board's attention, given the headaches it can create in the media. He adds that the biggest issue will be how the company interprets it.
"There are a lot of unanswered questions," he says. "People don't know how it's going to work. It depends if shareholders want to throw out the book on pay, or if they want it more connected with performance."