Holder Group Wants to Boot Two WaMu Directors
Dissident shareholder CtW Investment Group has set its sights in its next target --
Washington Mutual
(WM) - Get Report
.
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)
.
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. "
Shareholders 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.
Critics, including CtW, are questioning WaMu's compensation packages for its top executives, including Killinger, in light of the hard times that the bank has fallen on as the housing crisis worsened.
While Killinger declined to accept a cash bonus for 2007 and other executive bonuses were significantly cut, critics are wondering why the company didn't include
more objective targets to measure credit performance
among the four components on which this year's cash bonuses will be based.
WaMu recommends that shareholders vote for the directors because of their record of "skill, diligence, and deep understanding of our company," it said in a statement. "They know what we need to do to address the challenges that lie ahead and restore value to our shareholders."
"With board oversight, WaMu took significant steps to reduce interest rate risk and to tighten credit risk management in recent years," the company said. WaMu "also moved aggressively to address the challenges created by the historic deterioration in the credit markets since mid-2007."
In addition, "the 2008
compensation plans establish appropriate incentives for management to improve performance, including credit performance, and hold management accountable if it does not. This is precisely what the board did in 2007 when management compensation was reduced dramatically," WaMu said.
CtW has been vocal about what it perceives as abuses at several other financial firms sideswiped by the housing crisis.
Earlier this month, the group told shareholders of
Morgan Stanley
(MS) - Get Report
two directors at its annual meeting. CtW also believes that the New York-based brokerage firm's top dog, John Mack, shouldn't serve as chairman and CEO at the same time.
Last year, CtW took aim at
Countrywide Financial
(CFC)
for its
excessive compensation practices
with regards to its CEO Angelo Mozilo.
Countrywide -- perhaps the poster child for the demise of the subprime mortgage industry last year -- agreed in January to be sold to
Bank of America
(BAC) - Get Report
for $4 billion.








