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Lucent Sees the Light in Board Shift

Governance gadflies applaud a long-awaited move toward annual elections for the board of directors.

It took five years, but Lucent (LU) is finally getting on board with director accountability.

Reversing field, the telecom gearmaker is now advocating a measure that calls for shareholders to elect directors annually. The plan, which will come up for a vote at Lucent's annual meeting Feb. 18, would end staggered board elections at the New Jersey company and enable holders to remove board members without cause. Lucent shareholders narrowly backed a similar nonbinding resolution in each of the past two years, only to have the company ignore it.

Until now, that is. Corporate governance watchers applaud annual board elections because they say they keep directors focused on shareholder interests -- always a welcome state of affairs in a market wracked by scandal. The change comes as Lucent seeks to rebound from a number of setbacks of its own over the last few years, ranging from accounting missteps to business blunders. On Wednesday, Lucent shares fell 6 cents to $3.08, putting them up some 150% on their 52-week low.

Critics of staggered elections say they make directors less accountable to shareholders, since typically only a third of the board comes up for a vote every year. Though Lucent's proposal opens up the possibility that shareholders could clean out the boardroom with one sweep, in more practical terms supporters say annual elections can at least serve as report cards for director performance.

"Forcing directors to stand for election every year makes them focus more sharply on the interests of shareholders," says Gregg Taxin, a proxy critic with Glass Lewis & Co. "It also gives shareholders a chance to comment on the job being done by the director."

Shareholder rights gadfly Evelyn Davis first introduced the proposal at Lucent's annual meeting in 1998. Davis, who has made the same proposal to dozens of major companies over the years, has argued that staggered elections reduce shareholder value by thwarting takeover bids and making it difficult for large investors to gain board positions.

Over time, the annual elections proposal has caught on with governance reformers who have long sought more board accountability. In the face of Lucent's opposition, shareholders voted 51% and 59% in favor of the proposal at the past two annual meetings.

"Looks like Lucent may have listened to its shareholders," said one industry observer.

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Another proposal listed in Lucent's preliminary proxy, filed Tuesday, is an extension request for the company's proposed reverse stock split.

Last year, when Lucent faced delisting from the

New York Stock Exchange

for not meeting the $1 minimum price-per-share threshold, the company

sought approval for a stock consolidation move. According to the plan, which expires the day after the coming shareholder meeting, Lucent has the option to convert as many as 30 shares into one share. If the extension is approved, Lucent could reduce its 4.2 billion-share count to as little as 140 million shares. The contraction would also boost the share price, though Lucent shares have already nearly doubled since investors approved the maneuver in February.

Lucent has previously said that it would use a reverse split ratio that would bring the share price close to the $20 range. In a research note to clients Wednesday, Morgan Stanley analyst Alkesh Shah says the potential of a reverse split could be "mildly positive" for the stock because it would lift shares above the $5 level and make Lucent available to a wider range of investors, some of whom are barred from stocks trading below $5.

The proxy also details CEO Patricia Russo's pay in fiscal 2003, showing a $3.2 million performance bonus. Last year, Russo, who was given a $55 million pay package to rejoin the company, topped all telecom executives in pay.

Lucent says Russo earned the 2003 bonus, largely by overseeing steep cost cuts and more efficient supply chain processes. The penny-pinching helped improve Lucent's expenses and led to its first quarterly profit in years. But by nearly all other measures, the company's overall performance has been worse than its competition, says Glass Lewis' Taxin.

"Lucent's revenue was down 31% year over year," says Taxin. That compares to a 5% average decline for 49 tech and networking companies tracked by Glass Lewis. "And at very large companies, revenue was up 3%, so her performance bonus certainly can't be for revenue growth," says Taxin.