With election change


Shareholder proposal would select directors annually

November 07, 2006|By Paul Adams | Paul Adams,Sun reporter

Constellation Energy Group's board says it won't oppose a shareholder proposal requiring directors to be elected annually, bucking a national trend among publicly traded companies to oppose similar measures on the grounds that they could leave boards with fewer experienced members.

The company's decision concerns a proxy proposal at its annual meeting next month. The annual election of all board members is seen by some shareholder groups as a way to make directors more accountable.

Constellation directors now are broken into three classes, with each class serving staggered three-year terms. Requiring all directors to face election annually would, in theory, make it easier for shareholders to express dissatisfaction if they disapprove of board actions

Constellation will put the declassifying measure up for shareholder consideration just weeks after announcing it was scuttling its proposed merger with FPL Group Inc. of Florida. The more than $12 billion merger was caught up in a fiery debate over rising electric rates at Constellation's Baltimore Gas and Electric utility.

"It's fair to say this is a unique approach by management that is shareholder-friendly in that they are not recommending against it," said Robert McCormick, vice president for Glass Lewis & Co., which advises institutional shareholders on issues put up for vote at public companies.

Proposals to declassify boards have become increasingly popular among shareholder groups, who want to see boards more accountable for their decisions.

About 55 such proposals have been made this year, with all but a few opposed by the boards they were aimed at, said Shirley Westcott, managing director of policy at Proxy Governance Inc., a shareholder advisory firm in Vienna, Va.

When they come up for consideration, such measures pass with an average of 68 percent of the vote, she said. By year's end, she said, fewer than half of the companies listed in the S&P 500 will still have boards broken into classes with staggered terms.

"It's useful in practical terms in that shareholders can weigh in on what they actually think of directors [annually]," she said.

The Constellation proposal was brought forward by the Brotherhood of Electrical Workers Pension Benefit Fund, which owns more than 4,000 shares of the company's stock. The measure was detailed in a regulatory filing posted with the Securities and Exchange Commission yesterday.

In arguing for the proposal, the fund said it would allow shareholders an opportunity to "register their views" on the performance of the entire board, rather than just the one-third who face election annually under the current system.

Constellation had planned to declassify its board as part of its merger with FPL. But even with that deal off the table, the company saw no reason to oppose the pension fund's proposal.

"In our view, each structure has its advantages, and we felt the best approach was to let shareholders decide," said Larry McDonnell, a Constellation spokesman.

Even if shareholders pass the measure at next month's meeting, Constellation's board would have to take action to amend its corporate charter to make the change. The charter amendments would have to be voted on at the company's 2007 annual meeting before the change could be made.

The proposal won't make it much easier for shareholders to oust board members, who are elected by a plurality of votes and are difficult to remove without cause. But by withholding votes for particular board members, shareholders can send a strong signal to management when they are dissatisfied.

"It's symbolic more than anything," said Westcott, the Proxy Governance managing director.

Both governance systems have advantages and disadvantages, Westcott and other experts said.

Classified boards, for instance, ensure that no more than half - or in Constellation's case, a third - of the directors can be removed at any given time. That means there are always some experienced directors left behind in the event the incumbents are voted out.

Directors that are guaranteed a three-year term also may be more likely to disagree with management than those who know they face the possibility of removal each year, some argue.

However, that argument "doesn't make a lot of sense" because directors continue to be difficult to remove, said McCormick, the Glass Lewis vice president.


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