Annual meeting season for the banking industry reached a crescendo at the end of last month, with high-profile shareholder gatherings at Washington Mutual, Citigroup, Merrill Lynch, and elsewhere.

As one might expect in light of the credit crisis, banks found the meetings to be decidedly sub-prime experiences.

The worst drama unfolded at Washington Mutual, which swung from more than $3 billion in profits in 2005 and 2006 to a $67 million loss in 2007. Still, WaMu’s board announced in March that it would exclude the bank’s huge mortgage losses last year when calculating executives’ bonus payments in 2008.

Outraged shareholders promptly launched campaigns to withhold support from virtually any WaMu director they could find. The American Federation of State, County, and Municipal Employees Union targeted the bank’s human resources committee, consisting of James Stever, Stephen Frank, Charles Lillis, Phillip Matthews, Margaret Osmer McQuade. All three major proxy advisory firms (RiskMetrics, Glass Lewis & Co., and Egan Jones) recommended withhold votes against various directors as well.


“I have never seen a set of meetings so raucous,” says Richard Ferlauto, AFSCME’s director of corporate governance and a perennial thorn in the side of Corporate America. “We have been looking at the banking sector for years and the risk-management oversight of all of the major financial institutions. We have felt there is a disconnect between pay and performance.”

Sure enough, at its April 15 meeting, WaMu agreed that its compensation formulas would indeed include “credit-related targets” when calculating executive bonuses. Mary Pugh, head of the board’s finance committee who was heavily blamed for the bank’s exposure to risky mortgages, resigned shortly before the meeting. A non-binding shareholder resolution to separate the chairman and CEO roles also won a majority of support, clearly rebuking current Chairman and CEO Kerry Killinger.

Other banks headed off shareholder wrath by making various concessions ahead of time. Citigroup announced that its audit committee chairman, Michael Armstrong, would step down from that post; all 14 Citi directors went on to re-election at the April 22 meeting—where security guards confiscated fruit from attendees, for fear they might throw it at the board.

Likewise, Merrill Lynch’s early move to placate shareholders paid off as well. In February, Merrill’s board amended its bylaws to adopt a majority vote standard for uncontested director elections; at the meeting itself, the company promised it would declassify its board starting with the 2009 meeting. The four directors up for re-election this year all retained their seats easily at the April 24 meeting, the company says.

The worst drama unfolded at Washington Mutual, which swung from more than $3 billion in profits in 2005 and 2006 to a $67 million loss in 2007.

Wachovia and Bank of America, on the other hand, endured strong shareholder opposition but still limped to victory. At BoA’s meeting, all eight shareholder resolutions were defeated, including a say-on-pay proposal and another non-binding resolution to give shareholders the right to call a special meeting. Each received 44 percent of the votes—an impressive turnout, but still short of a majority. Wachovia shareholders re-elected the whole board with more than 90 percent of the vote, and a say-on-pay resolution won only 30 percent support.

“Wachovia is seen as less problematic than other companies,” says Ferlauto. “They are seen as improving on pay, going in the right direction.”

Say-on-Pay’s New Problem

Indeed, Ferlauto and others admit that say-on-pay votes (to give shareholders an advisory vote on executive compensation packages) now face a new hurdle: They have become so popular so quickly, that any vote less than 50 percent is seen as a failure. Historically, any shareholder proposal that won even a respectable fraction of support would jolt a board, and usually send the company scrambling to reach some sort of accommodation.

Say-on-pay votes only began to appear in shareholder resolutions in great numbers last year, and the 30 to 40 percent support many resolutions received was considered a moral victory, Ferlauto says. This year, however, only two companies (Apple and Lexmark) have seen majority support. Eight won majority support last year.

“We thought this would be a break-out year,” Ferlauto concedes. He says he expected more resolutions to cross the 50 percent barrier. Citi, for example, had a say-on-pay resolution that garnered only 38 percent support.

“I’m disappointed [say-on-pay] hasn’t done better than last year,” says Michael Garland, CtW Investment Group’s director of value strategies. “I would have thought it would do better.”

Activists attribute the shortfall partly to less retail voting stemming from the debut of e-proxies, as well as to institutional investors who are less inclined to oppose management and no shareholder advocating aggressively for a vote at an individual company (such as Carl Icahn tangling with Blockbuster last year, which did see a say-on-pay resolution win majority support).

Still Garland insists that activists made more strides behind the scenes. The public campaigns launched by groups like his prior to the annual meetings led to private, constructive dialogue with banks in general. He characterizes the dialogue with Bank of America and Wachovia as “very good.” He says both companies realize that investor confidence was shaken and they need to improve.

“We walked away from our meeting with Wachovia feeling there may have been failures, but the board is doing their job,” he adds.

He says the boards of Citi and Merrill Lynch were able to buy more time because they changed their top leadership within the past few months. “Their boards are addressing their weaknesses,” he adds.


Others admit that the lack of victories is discouraging, considering 2007 was a year of financial institutions taking massive write-downs, slashing dividends, and doling out huge severance packages to disgraced, departing executives.

“It is amazing,” concedes Shirley Westcott, managing director of Proxy Governance. “I don’t know the explanation.”

The meeting season “was mixed,” concedes Daniel Pedrotty, director of the AFL-CIO Office of Investment. “More could have been done, but shareholders are pleased with the outcome.”