Legg Mason Inc. shareholders Tuesday sent a strong message to three directors who awarded executive bonuses during a nonprofitable year by withholding about 40 percent of the votes for their re-election.
Although John E. Koerner III, Cheryl Gordon Krongard and Scott C. Nuttall, who sit on the compensation committee, garnered majority votes to retain their board seats, shareholders withheld an average of 48 million of 120.9 million shares cast for each director - a high percentage of withheld votes, according to one proxy firm.
Two other board members each received more than 95 percent of the shares cast.
"It's a vote of no confidence against the compensation committee for giving out large pay awards that were not based on performance," said Richard Ferlauto, director of corporate governance and pension investments at the American Federation of State, County and Municipal Employees, which along with two proxy firms recommended that shareholders withhold votes against the trio. AFSCME's pension fund owns 900 shares of Legg.
Withheld votes of greater than 20 percent of shares were recorded for about 8 percent of all director nominees this year, according to PROXY Governance, a proxy advisory service. Only a few companies have had withhold percentages of greater than 40 percent, the firm said.
Legg declined to comment on the votes withheld for the trio on the compensation committee.
While executive pay has been a source of concern for shareholders in recent years, the issue has gained renewed urgency amid tough economic times.
"Any company in financial services has to be aware that executive pay is a hot button issue for the public. Any board that fails to be sensitive to that has to expect backlash from their shareholders," said Stephen M. Davis, executive director of the Millstein Center for Corporate Governance and Performance at Yale University School of Management.
"We're in the context of job losses, people lost income either because their jobs have ended or pay is going down or they've seen their savings decimated, and in that context, there is increasing public interest in seeing that companies are in the same boat as the average American," he added.
RiskMetrics Group and Glass Lewis & Co., which provide guidance on proxy proposals and corporate governance issues, had recommended that shareholders essentially vote against the three members of the compensation committee because they objected to the panel's rationale for granting bonuses to executives, including chief executive Mark R. Fetting, whose total incentive pay was valued at $1.36 million for the year ending March 31, half of what he received the previous year.
Roger W. Schipke, a Legg director and chairman of the compensation committee, defended the bonuses, saying the committee balanced the company's results during the "extraordinary market environment" with the need to retain management talent. He noted that executives put Legg in a profitable position after wiping out toxic investments in its money market funds and cutting expenses. Legg reported a net income of $50.1 million, or 35 cents per diluted share in the three months ending June 30.
"We felt we could not turn our backs on the good things that they had done," Schipke said at Legg's annual meeting at the Center Club at the top of the firm's Inner Harbor headquarters in Baltimore.
Although Legg lost $1.9 billion for the year ending March 31, Schipke noted the loss primarily came from two charges related to propping up its money market funds that were invested in the toxic investments and write-downs for impairment of goodwill and intangible assets.
Without those charges, the company would have been profitable and would have produced a bonus pool large enough to pay the awards, Schipke said.
In general, Fetting said after the meeting that he is not surprised by shareholder concern over executive compensation in an environment where policymakers in Washington are trying to restrict pay for top executives. He also noted that institutional shareholders have always had an interest in the issue.
But he said the company struck the right balance in recognizing its financial results while retaining its top talent.
Shareholders also approved a proposal to elect directors by a majority vote, instead of using a plurality vote standard, which means nominees must receive more "for" votes.
The Legg board recommended against the nonbinding proposal.
While acknowledging the importance of the vote, Fetting said the board will have to deliberate on the issue, while not committing to changing the election rules.
A second shareholder proposal that would have amended Legg's Executive Incentive Compensation plan to promote a long-term perspective on pay failed to get enough votes.