Shareholder activists are using the governance restrictions imposed on companies participating in the Wall Street bailout as a weapon to wrestle still more concessions out of those companies in the coming proxy season.

The Treasury Department’s Troubled Asset Relief Program places numerous curbs on executive compensation, from caps on severance packages to clawback provisions considered more stringent than those contained in the Sarbanes-Oxley Act. Hundreds of financial institutions, including the nations’ largest banks, are clamoring for access to TARP’s $700 billion, compensation restrictions and all.

Now, however, pension funds and other activists are using TARP’s requirements as the model to push for even harsher reforms. The result is likely to be a long, bitter, uncomfortable proxy season for corporations of all stripes.

“We thought the executive compensation limitations were not as strong as they should be,” says Ed Durkin, corporate affairs director for the United Brotherhood of Carpenters and Joiners of America. “We want them to put in more challenging restrictions.”

The carpenters’ union is one of several taking aim at the financial sector. Along with a half-dozen other labor unions, it is filing shareholder proposals at dozens of companies that have signed on to TARP to adopt even tougher compensation restrictions and policies. The coalition—including the carpenters, electrical workers, laborers, sheet metal workers, and bricklayers—is similar to one that previously lobbied for stronger auditor independent rules and a majority vote standard for director elections.

The Laborers’ International Union of North America, for example, has submitted resolutions to JPMorgan Chase, Bank of America, and KeyCorp, and will probably submit proposals to one or two additional companies, although they have not yet been filed. The International Brotherhood of Teamsters has submitted similar proposals to American Express and SunTrust Bank. The carpenters have filed 16 similar proposals with most of the large banks participating in TARP and figures to submit another 10 or so.


“This is not something we are limiting to TARP, particularly the banks,” adds Daniel Pedrotty, director of the AFL-CIO Office of Investment. “But now there is greater interest in banks.”

The campaign comes at a difficult time for companies. Most are suffering through the recession with lower revenues; the financial and auto sectors have seemed particularly tone-deaf to shareholder discontent, paying out huge salaries and bonuses while their stock prices have tanked. Activism against bloated executive pay has swelled in recent years and is likely to reach a crescendo this spring.

The resolutions differ company by company, but generally demand the same broad concessions:

limit senior executive bonuses to an amount no greater than one times the executive’s annual salary;

require that a majority of long-term compensation be awarded in the form of performance-vested equity instruments, such as performance shares or performance-vested restricted shares;

freeze new stock option awards to senior executives, unless the options are indexed to peer group performance so that relative, not absolute, future stock price improvements are rewarded;

mandate that senior executives hold at least 75 percent of their equity compensation for the full term of their employment;

prohibit accelerated vesting for all unvested equity awards held by senior executives;

limit severance payments to an amount no greater than one times the executive’s annual salary;

freeze the accrual of retirement benefits under any supplemental executive retirement plan maintained by the company for senior executives.

“We recommend they go above and beyond TARP,” says Louis Malizia, assistant director of the Teamsters’ capital strategic department. He says his union singled out American Express and SunTrust Bank because they are long-time holdings in the portfolio.

At least some targeted companies seem to be fighting back. SunTrust, for example, has reportedly asked the Securities and Exchange Commission for a no-action letter so it can exclude the measure from its proxy statement, according to Carol Bowie, who leads the Governance Institute at RiskMetrics.


Below is an excerpt from the AFL-CIO's proposal for JP Morgan Chase, urging its board to adopt a policy requiring senior executives to retain 75 percent of the shares acquired through the company’s compensation plans.

Resolved, the shareholders of JP Morgan Chase (the “Company”) urge the Board of Directors to adopt a policy requiring the Named Executive Officers (“NEOs”) to retain 75 percent of the shares acquired through the Company’s compensation plans, excluding tax-deferred retirement plans, for two years from the termination of their employment (through retirement or otherwise), and to report to shareholders regarding the adoption of this policy before the Company’s 2010 annual meeting. The policy also should prohibit hedging techniques that offset the risk of losses to executives.


Equity-based compensation is an important component of the senior executive compensation program at our company. According to the company’s 2008 proxy statement, equity-based awards, including stock and stock option awards, accounted for between 43 percent and 75 percent of the total compensation for the NEOs during fiscal 2007. Of the $94.9 million in compensation earned by the five NEOs, $54.5 million, or 57 percent, came from stock awards and stock options.

Requiring senior executives to hold a significant portion of the shares acquired through the company’s compensation plans for at least two years after their termination of employment would tie their economic interests to the long-term success of the company, and motivate them to focus on the company’s long-term business objectives and better align their interests with that of shareholders. The absence of such a requirement may enable these executives to unduly focus their decisions and actions towards generating short-term financial results at the expense of the company’s long-term success. The current financial crisis has made it imperative for companies to reconsider and reshape executive compensation policies and practices to discourage excessive risk-taking and promote long-term, sustainable value creation.

Several well-regarded business organizations support “hold past retirement” policies. The Aspen Principles, endorsed by both The Business Roundtable and the Council of Institutional Investors, recommend that “senior executives hold a significant portion of their equity-based compensation for a period beyond their tenure.”

Further, a 2002 report by The Conference Board endorsed a holding requirement, stating that the long-term focus promoted thereby “may help prevent companies from artificially propping up stock prices over the short-term to cash out options and making other potentially negative short-term decisions.”

Our company requires senior executives to hold at least 75% of the equity awarded to them during their employment. We believe that the NEOs should be required to hold equity awards for at least two years after termination to ensure they share in both the upside and downside risk of their actions while at the company.

We urge shareholders to vote for this proposal.


AFLCIO TARP Proposal (2008).

Through a spokesman, SunTrust declined to comment for this story. But Bowie says SunTrust is asking for a no-action letter based on all the usual corporate arguments: that the reforms address the ordinary business of the company and therefore can be excluded; that the proposal has been substantially implemented already; that the single Teamster proposal is actually nine separate proposals; and so forth.

“Proposals like this, especially when they are new, will elicit attempts by some companies to see if they can get excluded,” Bowie says.

Beyond TARP

The activists argue that if a company is applying for TARP funds, by definition it isn’t working well and therefore needs stronger medicine to correct its governance—hence the shareholder proposals that go well beyond TARP, and even what the unions have demanded in previous years. For example, prior proxy seasons saw calls to cap severance pay at three times a senior executive’s annual salary, and now that figure is only one time’s the annual salary.

“If they are receiving government money, more stringent standards are justified,” says Jennifer O’Dell, assistant director of corporate affairs for LIUNA. She also notes that TARP ignores the issue of accelerated vesting of equity awards, which her group and other union activists want to ban altogether.

“TARP was not as aggressive as it needed to be,” Durkin adds.


Much of the success or failure of these proposals will depend on how proxy advisory firms such as RiskMetrics recommend their clients vote. Bowie says her firm has not yet determined where it stands on the issue. “Most of the time, [shareholder resolutions] are evaluated on a case-by-case basis,” she stresses.

The unions, however, are not just targeting TARP recipients for the 2009 proxy season. They are also filing compensation-related proposals with other financial and non-financial firms. For example, LIUNA is planning five to ten “pay for superior performance” measures, including one at beleaguered construction company KB Home.

The AFL-CIO is also focusing on a number of compensation-related matters at non-TARP companies, including shareholder advisory votes on executive pay packages. Another calls on top executives to hold incentive equity awards after they leave the company.

For example, one proposal urges JP Morgan Chase’s board to adopt a policy requiring senior executives to retain 75 percent of the shares acquired through the company’s compensation plans (excluding tax-deferred retirement plans) for two years after they leave the company.

Another new AFL-CIO resolution targets so-called “golden coffins,” calling on companies not to make large payments to heirs of top executives who die while under contract. Targets include Comcast, Lockheed Martin, Charles Schwab, General Dynamics, Occidental Petroleum, and Danaher.

The American Federation of State, County, and Municipal Employees is filing at least two compensation proposals at companies, some of which received TARP funds. One, similar to the AFL-CIO proposal filed with JPMorgan Chase, asks for a policy that would require top executives to hold a substantial number of the shares they receive from incentive awards until two years after they leave the company. Another would subject bonuses to three-year vesting to assure continued good performance.