Things may be changing at Archer Daniels Midland, but not enough to satisfy all its shareholders
A year is not a long time in the shifting sands of corporate governance. So the Archer Daniels Midland Company's continuing odyssey from antediluvian fief to model for the millennium is a near phenomenon. But just what kind of phenomenon remains an open question. Facing down a torrent of pressure from America's heavyweight shareholder activists since getting nabbed for price-fixing in June 1995, ADM has studied its governance framework and instituted reforms.
Progress? Perhaps yes. But critics say it's not enough.'This meeting, sir, runs according to my rules,' ADM chairman and CEO Dwayne Andreas snarled at a pension fund activist at last year's meeting. Compare that with his contrite apology to shareholders at October's big event a year later. 'I am the one in charge here,' Andreas said on that occasion. 'And, as Harry Truman said, the buck stops with me.'
We don't know what impression Andreas expected this to make but Peter Collins, investment communications manager for the Florida State Board of Administration, has this response: 'I don't think I should applaud you for doing what is expected.'
Florida's $70 bn pension fund teamed up this year with California Public Employees' Retirement System (Calpers) on a proxy proposal for board independence at ADM. This Decatur, Illinois-based company, the world's largest corn miller and oilseed processor, is capitalised at almost $10 bn, with over $12 bn in sales and $1.2 bn in profit last year. Joining in the fray were the United Brotherhood of Carpenters with a proposal on directors' liability and the New York City Fire Department Pension Fund, which sought confidential voting.
'ADM is a huge and extraordinarily successful company,' asserts John Wilcox, chairman of Georgeson & Co, ADM's investor relations counsel and proxy solicitor. 'No-one paid attention to ADM's governance practices and institutional shareholder activists didn't have the company on their radar screens until the Justice Department investigation began last year.'
'A year and a half ago, ADM did not fall within our performance screens because the stock was doing so well,' confirms Kayla Gillan, who succeeded Richard Koppes as Calpers' general counsel in August. 'The company came to our attention because of a criminal investigation. Now it turns out their stock was doing well because of admittedly illegal activity.'
According to Gillan, Calpers turned its microscope on ADM last year asking 'Why is this company in such deep trouble?' The pension fund contacted the company, but was brushed off with: 'If you don't like it, sell your stock.' As Gillan has since argued to ADM management, 'It was not the criminal investigation that really caused shareholders to be upset. That caused concern, but what got shareholders upset was the reaction of the company when we asked what was going on.'
Calpers continued pushing for conversations with ADM, and was further stonewalled. By the time of the shareholder meeting last fall, Calpers was encouraging other investors to withhold votes from ADM's directors. California State Teachers' Retirement System, the New York City pension funds and the Teamsters all joined in to express dissatisfaction, producing a 20 per cent vote against ADM's ballot. Before a packed house of 1,500 - mostly cheering employees - Andreas gushed about earnings and dividends, and banned talk about executives' 'off-the-book' compensation or the Justice Department investigation.
The company responded to the shareholder brouhaha by announcing a corporate governance committee. Co-chaired by Harvard University professor Ray Goldberg, a long-time friend of Andreas, the committee unveiled a raft of changes in January, including board independence, a reduction in the size of the board from its hefty 17 seats, and board committees consisting only of outside directors.
'ADM put the governance committee in place to take the wind out of the sails of shareholders who were starting to complain,' says Ed Durkin, director of special programs at the Carpenters. 'Then they came up with half-measure reforms as a public relations effort,' he complains. Durkin is one of ADM's most pesky gadflies. He was the fateful activist who, when he had his microphone taken away at the 1995 meeting, rebutted: 'This is telling us a lot about how this company is run.'
Calpers thought ADM's new governance committee was a wonderful idea, but when little action ensued, the fund had to keep pushing. The necessity of board independence, Gillan explains, is intuitive: 'If a board's role is to monitor management and hold it accountable, then how can it be effective if it is in fact management or significantly tied to management?'
'Beyond that,' Gillan continues, 'academic studies show that an independent board better ties executive pay to performance, and over the long term performs better for shareholders. But while the vast majority of Fortune 500 companies have a majority of independent directors, ADM's definition of independence is so far away from ours it's laughable.'
However, Calpers was heartened by ADM's decision to attend the Council of Institutional Investors' spring meeting, with the council promising a 'rare forum between the chairman of ADM and the company's largest shareholders.'
The meeting date, April 1, might have foretold the results: ADM's chairman did not show up, although G Allen Andreas, who handles communications with institutional investors, attended along with Georgeson's Wilcox. Instead of a dialogue on corporate governance, Calpers says it got a slide show on ADM's agricultural products, and was not invited to ask questions on governance. 'Not a respectable presentation at all,' remarks Gillan.
According to Wilcox, ADM conducted a serious analysts' presentation at the April meeting. 'Sometimes public pension funds are difficult for a company to deal with because they separate policy decisions from investment decisions,' states Wilcox. 'Companies are used to dealing with analysts and investors interested in the basic business story of the company. ADM took a big picture approach instead of special audience approach. The audience was unimpressed. But is it necessarily a good thing to examine policy questions separately from the underlying business of the company?'
Meanwhile, ADM announced that six of its 17 directors would not stand for reelection, including four management directors. Three new outside directors were nominated to replace them. Wilcox, in a 'quasi-diplomatic' effort to improve the relationship and increase communications between the company and its shareholders, sent the resumes of the nominees to several major shareholders and passed their comments to ADM.
'When we saw who they decided were outside directors, they were all suppliers to ADM, people related to current board members with large amounts of stock, and long-time friends of the chairman,' says Florida's Collins. 'They were not people we considered to be independent.'
The four pension funds soon had proposals ready to include in ADM's proxy statement. As Durkin points out, perhaps the company's next step should have been to get on the phone and start a dialogue. Instead, it asked the SEC to bar the shareholder proposals because Calpers and the other funds did not prove they were shareholders. Gillan's response? 'ADM's attempt to block the proposal and its inaction to improve governance is not a signal to send to two of your largest shareholders.'
The SEC duly ruled against ADM so the proposals stood on management's card and the pensions hunkered down to prepare their campaigns. With just 500 words each on ADM's statement, it was left to shareholder letters to explain the issues further and react to any new events. Proxy solicitor Garland Associates, a frequent Calpers hired gun since 1989, was brought into the board independence camp, while the Carpenters and New York prepared to tackle larger shareholders by themselves.
As the normal time for ADM's proxy statement came and went, with August turning to September and no word from the company about the October 17 meeting, George Garland geared up for a 'short-fuse meeting.' 'The less time the dissidents had to campaign, the better for ADM,' he says. 'ADM would want to do a slam-dunk in a short timeframe, panicking shareholders into signing their cards and sending them right back. To defend against that, we had to have a stop, look and listen letter ready as soon as their materials hit the Street.'
Wilcox pooh-poohs the idea that ADM delayed to interfere with the dissidents' campaign. 'The company was late because of complex disclosure issues surrounding the Justice Department investigation. The possibility of a settlement kept getting put off, and ADM did not want to mail off proxy materials because it might have to send them again due to new announcements.'
The flag finally dropped on September 26, just three weeks before the meeting. ADM's proxy statement accompanied a succinct letter from Dwayne Andreas discussing 'substantial changes' in the board of directors, but no mention was made of the shareholder proposals buried in the statement.
Calpers and Florida immediately fired off their stop, look and listen letter, while the Carpenters were already raring to go with a six-page shareholder letter explaining its proposal to make directors financially liable for acts of gross negligence. 'Our proposal needed more explanation than board independence,' Durkin says. 'Director liability is a long-term, complex issue which will take several years to play out, and we think it makes sense to propose it in tandem with the other governance proposals.'
Less than a week later, Calpers and Florida launched their aggressive shareholder letter, calling ADM's definition of board independence a 'watered-down version' and 'too shallow'. The letter quoted a 1995 Business Week article describing Andreas' outburst over 'rules' at last year's meeting. 'If the shareholder meeting runs according to the chairman's rules, how does the company run?' the pension funds asked. For the first time, Calpers and Florida posted proxy materials on the Internet.
Then came a long-awaited offer. ADM suggested a talk with the dissidents, and on October 7 G Allen Andreas, director nominee Mollie Hale Carter and John Wilcox made the trip to meet Calpers and Florida, the Carpenters and New York City in separate meetings at the CII. Colouring the junket was the news that Institutional Shareholder Services supported the board independence proposal.
'This was a more constructive meeting,' says Gillan. 'They said they were in concept supportive of an independent board, and were only quibbling over the definition. But when a company gets a proposal from us and supports us in theory, it contacts us, we talk about it, and we resolve it. It doesn't have to go to a proxy vote. {ADM} admitted a lesson had been learned, and said it wanted to continue the dialogue.'
'The meetings were useful for the company to hear shareholder concerns,' according to Wilcox. 'Shareholders could hear that the company was genuinely concerned about board independence and wanted to work with shareholders. They were unsuccessful in settling the proposals, but at least the meeting helped start a dialogue and create understanding.'
Even while the meetings were going on, ADM was mailing a reminder letter with what Garland calls a barb, this time singling out the board independence proposal for special attention. 'The extraordinary characteristics of our business require special credentials in our board of directors,' wrote Andreas, going on to cite discussions with the independence proposal's sponsors and adding a placatory, 'We welcome all views on board qualifications and governance standards for ADM.'
The fireworks really got going the week of the meeting, as ADM announced a serious blow: it pleaded guilty and accepted a $100 mn fine for price fixing, the largest ever in a criminal anti-trust case. Calpers responded with a searing press release and a last minute call to support its cause, which Garland 'blitz-faxed' in the few days left before the meeting, noting that a lot of the votes didn't come in until the last moment.
Augmenting the uproar was controversy over a 'mystery nominee' to ADM's board, first reported by the Investor Responsibility Research Center in August. David Swanson, CEO of Countrymark, a grain company in a pending joint venture with ADM, was not on the official slate and it was unclear when, how or if he would be elected to the board.
Meeting day dawned on ADM's Decatur headquarters, a gymnasium packed with Andreas supporters, and votes pouring in over Churchill Communications' automatic phone system. 'It was 95 per cent employees - an easy crowd for the chairman,' tells Durkin. 'The company still had a very arrogant attitude, and when I first went to speak they didn't want to give me a microphone. Someone stood up and asked me, 'Why don't you sell your stock if you don't like us?' My answer is that we want to make sure management keeps the company on course so that you can have a job.'
Not too unexpectedly, all the shareholder proposals were turned down. Calpers and Florida swung 40.93 per cent of the vote, with over 87 per cent of shares voted. Some 44.75 per cent backed New York on confidential voting, while 12 per cent supported the Carpenters on director liability. Another proposal for board diversity by the pension and health benefits board of the United Methodist Church gained 18.4 per cent support.
Calpers called the over 40 per cent vote a 'clear victory', and one which sends a powerful message to the ADM board that shareholders want change. Indeed, the activist pension funds had a meeting scheduled for November with Dwayne Andreas.
'In the last several weeks there has been a little progress,' Gillan concludes. 'They're telling us they have learned a lot. They acknowledge that they have some communications problems, both internally and with their shareholders. We have advised them to work on that, and suggested they take some dramatic action to regain the confidence of shareholders.'
'ADM's governance is looking a lot healthier,' adds an enthusiastic Wilcox. 'There have been very significant changes as part of an ongoing process. ADM was a group of family businesses 25 years ago. Since then, it has grown extraordinarily to the benefit of all investors.' He says ADM has done a great job of business development, but admits that it's paid less attention to governance issues. 'Now it's paying attention, with fast response and a lot of action.'
All participants are now eager for conversation to continue. 'We would much rather work this out with the company than go to a proxy fight,' Florida's Collins says. 'No-one wants to drag a good company through the mud, and we certainly don't think it's our job to run corporate America from Tallahassee, Florida.'
As for the Andreas family, it will no doubt continue to thrive and multiply. Dwayne's offer to resign was turned down by the board, Michael left in disgrace, Martin continues to supply analysts with the financial inside story, while Allen, who did not respond to Investor Relations magazine's requests for an interview, will probably keep showing up at the CII. Most recently, ADM named three executives to share some of Dwayne Andreas' duties, inciting 'cautious support' from CII while Calpers maintained scepticism.
Negotiating with shareholders may once have been akin to consorting with the devil for these grain barons, but the message that pools of capital like Calpers and Florida should have the ear of top management seems to have been hammered home.