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January 29, 2009

Intel Agrees to Shareowner Vote on Executive Compensation
    by Robert Kropp

Endorsement adds another corporation to a growing number opting for engagement in a year when issue commands public attention. -- In response to a shareowner proposal, Intelís Board of Directors endorsed the implementation of an Advisory Vote on Executive Compensation for its 2009 shareowner meeting.

The sponsors of the resolution, led by Walden Asset Management, a Boston investment management firm, then withdrew the resolution in order to facilitate further engagement.

"We've been in contact with Intel on this issue for years now, and this year we filed a shareowner resolution," said Tim Smith, Senior Vice President at Walden. "The Board got back to us and said they had agreed to put the executive compensation proposal into effect in 2009."

Chuck Mulloy, corporate spokesman for Intel, said, "In our view, the proxy proposal on executive compensation is a reasonable thing to do. So we took the suggestion and will go forward with the advisory vote. There's no good reason to wait for Congressional legislation to have this kind of dialogue on such an important issue."

Congress is likely to pass legislation to mandate annual non-binding shareowner votes on executive compensation, and according to Smith, the SEC may promulgate rules on compensation without waiting for legislation. In her testimony before the Senate Banking Committee, Mary Schapiro, the new SEC chair, declared her support for shareowner votes on executive compensation.

"There certainly is more openness in boardrooms regarding this issue, for a number of reasons. But the floodgates have not yet opened. Lots of companies are fighting back, rather vigorously," Smith said. "However, there is more engagement on this issue this year than ever before."

The Troubled Assets Relief Program (TARP) require recipients of its funds to comply with compensation guidelines that include prohibitions on unnecessarily risky incentives and golden parachute payments, the elimination of tax deductions for salary over $500,000, and the return of bonus and incentive pay based on materially inaccurate information.

Shareowner advocates with stakes in the financial companies benefiting from TARP have introduced proposals that contend that TARP guidelines do not go far enough. Other advocates want companies not covered by TARP to adopt its guidelines for executive compensation.

Anticipating that the economic crisis has focused investor and regulatory attention on executive compensation, RiskMetrics Group, a provider of risk management and corporate governance services, devoted much of its 2009 proxy voting updates to the issue. Its policy guidelines on executive compensation have been expanded to align with the provisions of the US Treasuryís rules under TARP.

Calling RiskMetrics an influential adviser on proxy voting for institutional investors, the Harvard Law School Corporate Governance Blog advised corporate management to reassess their compensation policies in advance of the 2009 proxy season.

Shareowner advocates have submitted executive compensation resolutions at about 100 corporations in 2009.

The American Federation of State, County and Municipal Employees (AFSCME), an institutional shareowner with more than $850 million in assets, has submitted 36 shareholder proxy proposals in 2009, many of which seek advisory shareowner votes on executive compensation.

John Keenan, strategic analyst for corporate governance and investment policy at AFSCME, told, "Ingersoll-Rand has agreed to a shareholder advisory vote relating to executive compensation in 2009. In addition, we have proposed new initiatives relating to bonus banking, holding equity shares, and golden coffins."

As an example of the practice of bonus banking targeted by some shareowner proposals, Keenan pointed to the case of Stan O'Neal, former CEO of Merrill Lynch. Fired after the Wall Street firm took an $8.4 billion write-down of securities backed by subprime mortgages, O'Neal walked away with a $250 million bonus.

In support of the shareowner proposal to require departing executives to retain their equity holdings for at least two years, Keenan used the example of Angelo Mozilo of Countrywide, who faced investigations by the SEC and federal prosecutors into his exercises of stock options that allowed him to sell $130.6 million dollars worth of stock as Countrywide's fortunes worsened and it laid off 12,000 workers.

The "golden coffin" payout to executives, in which severance packages, vested shares, salaries, bonuses, and pensions continue to be paid even after they die, represents the ultimate disconnect between executive pay and performance. The Amalgamated Bank, the only fully union-owned US bank still in operation, submitted a shareowner proposal urging The Shaw Group to seek shareowner approval for executive agreements that award unearned salary, bonuses, and other compensation to senior executives upon their death.

Upon the death of Chair and CEO J.M. Bernhard, The Shaw Group would pay his estate a lump sum cash payment comprised of unearned salary, incentive bonus, and full vesting of outstanding equity awards valued at over $20 million. In addition, Bernhard would receive a retention payment currently valued at approximately $18 million contingent upon his agreement to not compete with the company for a period of two years after his death.

The Amalgamated Bank's proposal on "golden coffin" payouts passed with 67% of shareowners' votes.

The record number of shareowner proposals filed in 2009 suggests that support for limits on executive compensation is growing in influential sectors of society. As Congress contemplates legislation, the SEC prepares to reclaim its mandate to protect investors, and the Obama administration indicates its support for the issue, it is likely that more corporations will follow Intel's lead and engage with shareowner advocates on the issue.

The floodgates may not have opened yet, as Tim Smith of Walden was quick to point out. That a company as high-profile as Apple continues to oppose AFSCME's proposal on executive compensation, even after the proposal won a majority of votes at the company's 2008 annual shareowner meeting, indicates that work remains to be done before executive compensation is aligned with social and fiscal reality. But 2009 appears to be the year in which an issue of importance to socially responsible investors for years will finally gain new levels of success.

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