Microsoft Shareholders Follow Company Line

They approve disputed directors and proposals, but the company won't release vote totals.
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Microsoft

(MSFT) - Get Report

shareholders agreed Tuesday to give the company's nonemployee directors a raise, despite charges by some that their pay would be too high.

Shareholders also elected the directors nominated to the company's board, including two directors who had generated opposition from proxy advisory firms. Because there were no other candidates, shareholders opposing their election could only withhold a vote, rather than vote against the person.

Microsoft did not disclose the final vote tallies at its annual shareholders meeting Tuesday, making it impossible to determine if the two controversial directors received fewer votes than others. Microsoft will include the final counts in its upcoming 10-Q filing with the

Securities and Exchange Commission

.

Microsoft's refusal to disclose those results contradicts what is considered the best practice in corporate governance, said Pat McGurn, vice president and director of corporate programs at Institutional Shareholder Services. "The common practice is to announce the preliminary results these days," McGurn said. And "there are some companies that regularly put them out as press releases."

Both ISS and Glass, Lewis & Co., who advise institutional shareholders on proxy matters, recommended withholding votes for Director Jon Shirley because he sits on the board of directors audit committee but is not fully independent according to their definition. Shirley is a former Microsoft executive, and his son works for Microsoft.

Shirley no longer will sit on the audit committee, the company announced in a statement on committee assignments released after the annual meeting. Audit committee members will be James I. Cash Jr., former James E. Robison professor at the Harvard Business School; William G. Reed Jr. (who will be chairman), former chairman of Simpson Investment Co.; and Charles H. Noski, former vice chairman of

AT&T

(T) - Get Report

and newly appointed corporate vice president and CFO of

Northrop Grumman

(NOC) - Get Report

.

Glass, Lewis also advised withholding votes for another director, former Labor Secretary Ann McLaughlin Korologos, because she also serves on the board of seven other companies. Glass, Lewis sets a limit of five board seats for company CEOs and seven for non-CEOs, while the Council of Corporate Investors has a policy that directors should not sit on more than five seats.

A proposal by Microsoft to give raises to its nonemployee board members, called excessive by Glass, Lewis and some shareholders, won a majority vote. In line with its effort to replace options with stock as compensation, Microsoft proposed to replace 20,000 options awarded to nonemployee directors with an annual award of 10,000 shares of stock plus 25,000 shares of stock when a director is first elected to the board.

Separately, without shareholder approval, Microsoft raised the cash compensation for directors to $50,000 in fiscal-year 2004, which began in July, from $35,000 in fiscal year 2003, and started paying directors for acting as committee chairs and attending meetings.

On the basis of the current stock price of about $26, a new director would receive $650,000 in stock plus at least $310,000 a year in stock and cash. Microsoft believes the total value of that compensation is in the midrange of what directors at other similar-sized companies receive, a company spokesperson has said.

Shares of Microsoft were off 17 cents, or 0.7%, to $25.83 in recent trading Tuesday.

In a question-and-answer session with shareholders, CFO John Connors repeated his now-standard reply to inquiries about the company's dividend policy, saying he had nothing to announce. Microsoft will not adopt any changes to its dividend policy until the company resolves outstanding legal issues, including antitrust charges from the European Union to be debated in hearings that begin Wednesday, Connors said.

Since its last annual shareholders meeting a year ago, Microsoft instituted its first dividend, a nominal payout of 8 cents a share, in its fiscal year 2003 and doubled it to 16 cents a share in September. But Microsoft's cash hoard continues to grow, surpassing the $50 billion mark in the most recently completed quarter.

Meanwhile, Microsoft stayed mum at its annual shareholders meeting about its one-of-a-kind program allowing employees to sell out-of-the-money stock options to J.P Morgan Chase. Institutional Shareholder Services, the other proxy advisory firm, has argued that the exchange program is a material enough change to Microsoft's stock option plan that it should go to a shareholder vote -- which Microsoft has resisted.

Without such a move, the influential ISS has threatened to recommend shareholders withhold votes on directors in the next election. That threat has some teeth because a director with a 35% no-vote in 2004 could allow a qualified shareholder to put its own candidate on the proxy in 2005 under rules now under consideration by the SEC.

On Monday, McGurn said Microsoft executives have told ISS they're looking forward to having a discussion on the subject after its shareholder meeting and quarterly financial reporting process is over. Although Microsoft is moving ahead with the stock option program, the company still could put it before a vote of shareholders without calling another meeting, McGurn said.

Shareholders also shot down a proposal Tuesday by shareholder Sheila Kippley, of Cincinnati, Ohio, requesting that Microsoft refrain from making direct charitable contributions. Microsoft did disclose that only about 2% of shareholders supported that proposal.