By Emilia Sibley, Communications Coordinator

Throughout 2006 and into 2007, the dynamic between shareholders and companies has been changing.

Companies are finding that building relationships with their shareholders through longer-term dialogue is a valuable strategy. Companies are giving more consideration to activist investors that hold millions in stock, but carry a social agenda as well shaped by their wish to see rising stock prices and greater company efficiency. Here are the spotlight issues for 2007:

Backdating Stock Options

Stock options are simply the right to buy stock tomorrow at today's lower price. They are rewarding only if the company's stock goes up, which in turn (theoretically) motivates executives and aligns their interests with shareholders. While they were originally meant as a reward based on performance, many people now view them as just another way CEO’s are exceptionally rewarded.

Backdating stock options is legal so long as the company produces honest documents, informs the company's shareholders, and accurately reflects backdating practices in earnings and in taxes. In doing so, a company will lose the tax deduction that Congress set in the 1950s; hence the temptation to falsify documents.

Backdating stock options today is a hot-button issue, although it is uncertain whether companies in 2007 will repeat the blunders committed at Comverse or UnitedHealth given the repercussions they face. At UnitedHealth, for example, the Chairman and CEO William McGuire and its senior general counsel resigned on Oct. 15th, and the company is now facing a formal investigation by the SEC.

Executive Compensation Packages

Former CEO of Home Depot, Robert Nardelli, and the company’s board could not come to terms over Nardelli’s compensation, which equaled $38.1 million last year. Nardelli denied the board’s request for a clearer link between his stock rewards and the stock price amid the widespread call by institutional shareholders for greater accountability and transparency of all directors. Nardelli resigned January 2, 2006 but not first without receiving a $210 million golden parachute.

The Securities and Exchange Commission (S.E.C.) ruled last July for the first time that companies must disclose in a clearly drawn table the various types of CEO compensation and the total amount, but revised its decision on December 26, 2006. Instead of including the entire CEO stock options package, a company is now only obligated to report the amount the executive exercises each year. While the S.E.C.’s recent reversal is perceived as a victory for corporations, it also draws greater attention to the debate on executive compensation.

Today, as shareholders increase their demands for a greater link between performance and compensation, many companies are seeking reprieve from the technical challenges and costs of Sarbanes-Oxley.  Stephen Davis, author of The New Capitalists: How Citizen Investors are Reshaping the Corporate Agenda, predicted in an interview with Forbes Magazine (“The New Capitalism”, 11/30/06) that the 2007 proxy season would be marked by a “grand bargain” between corporations and activist shareholders over precisely this issue.

Energy Efficiency

In 2007, many shareholders will push their company to capitalize on the innovative market of environmentally friendly products and processes. Others will show concerns that their corporation will be caught flatfooted if greenhouse gas (GHG) regulation passes at the federal level within several years down the line.

In one current case, shareholders filed three separate resolutions asking TXU Corp. the following: 1) to report how the company was addressing the growing pressure on carbon plants to reduce CO2 emissions; 2) to report how it expects to maintain its competitive advantage given the rise in energy efficiency programs in Texas; and 3) to lower CO2 emissions below its 2004 level.

For an estimated $10 billion, TXU hopes to build 11 new coal-burning power plants in Texas that would supply 9,100 megawatts of power, but would increase the company’s carbon dioxide emissions from 55 million tons in 2004 to 133 million tons in 2011. NYC Comptroller William C. Thompson Jr. called TXU’s move to build the plants “glaringly short-sighted and unsustainable.”

Majority Voting

Shareholder resolutions calling for a majority system of voting to elect candidates to the board are on the rise for the 2007 proxy season. Direct elections allow shareholders to have genuine, not symbolic, say when electing board directors. Shareholders in support of the resolutions cite the need to improve shareholder democracy and corporate governance. At the least, they claim it will facilitate board-shareholder dialogue.

Critics of majority voting claim it does nothing to improve corporate governance because dispersed shareholders still have no concise way to gauge the performance of incumbent candidates; they have to sift through hundreds of documents. Shareholders exercising an “against” vote could cause vacuums in the board if there is not enough “for” votes to elect officers. The debate will continue in 2007.

Political Contributions

Amid political scandals in 2006, shareholders asked companies to disclose their donations to political parties, committees, or organizations. Shareholders in 2007 will continue to seek assurance that their company has fully evaluated the reputational and legal risks associated with political giving. Many shareholders simply want to know what kind of political leanings the company has, and whether those leanings jeopardize the company’s bottom line.

The McCain-Feingold bill of 2002 prohibits corporate soft dollar donations to national party committees. Unintended with its passing, however, was the increase in corporate contributions to trade and political organizations called by their IRS code, 527. These organizations cannot directly support a candidate, but ultimately do so via advertisements focusing on political issues.

Since the Federal Election Commission (FEC) does not regulate 527s, tracking and disclosing corporate donations to 527s is a tricky business, and one that will surely be brought up by shareholders further in the coming proxy season.

KLD NEWS: KLD recently announced the launch of a new partnership with Glass Lewis, a proxy advisory firm. KLD now supplies SRI proxy voting guidelines, which Glass Lewis’ will implement through its online vote agency system, ViewPoint.

To read the press release, click here.