Say on pay triggers proxy campaign at Occidental

Say on pay, while non-binding, has some serious teeth. Just ask Occidental Petroleum. In May a majority of shareholders refused to support the oil-and-gas giant’s executive compensation package, citing a lack of performance metrics and generally excessive totals.

That was no idle warning shot. Not waiting for the details of proxy access to be clarified, on July 30 two disgruntled shareholder groups, the California State Teachers’ Retirement System (CalSTRS) and activist hedge fund Relational Investors, sent a letter to Occidental’s board announcing their intention to oust four of the company’s 13 board members. The activists declined to comment on which directors will find themselves under fire at the 2011 annual meeting, and who will be on the dissident slate, although it is rumored that all four are members of the compensation committee and Relational principal Ralph Whitworth has announced he will be among the replacement candidates.

The two groups collectively own more than one percent of Occidental stock, an interesting fact in light of the proposed sliding ownership threshold of one, three and five percent for proxy access. Investor groups, such as the Council of Institutional Investors, have argued vigorously for such a scale, claiming that even the largest public pension funds, like CalSTRS, on average only own about 0.3 percent of any company’s stock.

Top on the dissident shareholders’ list of grievances is chairman and CEO Ray Irani’s compensation package, which, according to the July 30 letter, ‘functions essentially as a corporate giveaway program.’ In terms of pay for performance, the dissidents argue that performance targets are set ‘excessively’ low and awards ‘excessively’ high in comparison to Occidental’s peers.

Irani’s pay is indeed considerable. As mentioned in Tuesday’s Corporate Secretary Week e-newsletter, a recent Wall Street Journal article, ‘The decade’s top 25 earners’ put Irani in the number-three slot with a take-home payout of $847 million in the past ten years, $34.4 million of which he earned last year.

Whether or not Occidental’s targets are way off the mark, so to speak, is of course another matter. Occidental has been performing well by some measures - in the past five years its stock prices have climbed about 95 percent and share prices have remained relatively stable since CalSTRS’ and Relational’s campaign announcement.

The other issue at stake, according to the dissidents, is Occidental’s CEO succession plan, or lack thereof according. Irani is 75 years old and despite exceeding the mandatory retirement age, he signed an employment agreement in 2007 that extends his tenure through May 2015.

‘The only explanation we can envision for the continued major governance failings that have characterized the board’s stewardship is that the board, as currently composed, suffers from entrenchment and ossification, which renders each of its members incapable of functioning as vigorous and independent shareholder representatives,’ the letter reads.

On this front Occidental announced that its president and chief financial officer Stephen Chazen has been promoted to chief operating officer and that James Lienert, EVP for finance and planning, will succeed Chazen as CFO.

This has not appeased investors. ‘The Occidental board has repeatedly failed to announce and implement a chairman/CEO succession plan, and that’s why the recent appointment of Stephen Chazen as COO is a long overdue positive first step, CalSTRS spokesman Ricardo Duran says. ‘However, CalSTRS feels it is reactive to issues brought to them by shareholders outside the boardroom where as a vigorous board would have been proactive,’ he adds.

Relational Investors declined to comment further, as did Occidental.
 
How this will play out will prove an interesting case study in shareholder communications. The vote will likely come down to Occidental’s 20 largest institutional investors, which as of December 2009 together control 45 percent of the total stock. The activists believe other investors share their sentiment, citing the lack of any organizational effort behind the failed say-on-pay vote. Plus, as they say timing is everything and the announcement, as the letter reads comes ‘just at a time when such abuses strike at the rawest societal and investor nerves.’

By Katie Feuer