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TIAA-CREF Announces U.S. Shareholder Initiatives for 2002 On Stock Options, Auditor Independence, Other Issues

Submitted by: TIAA-CREF

Categories: Corporate Governance

Posted: Apr 01, 2002 – 11:00 PM EST


Apr. 01 /CSRwire/ - NEW YORK - TIAA-CREF, the premier pension system for educational and research institutions, today announced its corporate governance initiatives for 2002, including a major push to secure the right of shareholders to approve stock option plans, as well as efforts to encourage auditor independence.

To date, CREF, the public equity investment arm of TIAA-CREF, has submitted 19 shareholder resolutions to U.S. companies for 2002, including 13 advocating shareholder approval of all material equity compensation plans. Some plans are currently exempt from stock exchange shareholder approval requirements. Four of the companies have agreed to put all future plans to shareholder vote, so the resolutions submitted to them were withdrawn, as were four resolutions at companies where discussions continue. Shareholders at Mentor Graphics will vote on the resolution at the company's May 7 annual meeting.

To TIAA-CREF's disappointment, the Securities and Exchange Commission (SEC) staff recently sanctioned the omission of resolutions on shareholder approval by Adobe Systems and Cadence Design. Two other companies that, like Adobe and Cadence, have made very substantial use of stock option plans not approved by shareholders-Autodesk and Synopsys-also have asked the SEC for permission to omit the proposal. The SEC decision is based on the staff's view that the resolution raises "ordinary business issues" and does not raise a "significant policy issue."

"We are in strong disagreement with the SEC staff view, and will appeal on this issue to the full Commission" said Peter C. Clapman, TIAA-CREF Senior Vice President and Chief Counsel, Corporate Governance. "It is clear that dilution from stock option plans is a major concern for institutional and small investors," said Clapman, "and that the recent movement by some companies to deny shareholders their proper role in approving such plans is a substantial blow to shareholder rights." He noted that sharply rising levels of dilution resulting from stock option plans and controversy over whether the over-use of stock options, which normally do not entail an accounting charge under current rules, leads both executives and employees to focus excessively on short-term stock price considerations.

CREF recently filed its first resolution on auditor independence issues, requesting the company to report to shareholders on:

- consideration of a policy for automatic rotation of the audit firm;
- the nature and frequency of board review of the relationship with the outside auditor;
- the number of former audit-firm employees working for the company and any prohibitions or restrictions on the hiring of employees from the audit firm;
-- the type of non-audit services provided by the audit firm to the company, and the extent to which the company has implemented restrictions on such services.

CREF has initiated discussions with 13 companies on auditor independence issues and is prepared to file resolutions if the discussions are not productive. This initiative, begun over the last month, may result in shareholder votes on the issue late this year.

TIAA-CREF's core concern in its U.S. corporate governance program is the independence and vigor of the board of directors. Most discussions with companies achieve progress without the need to resort to shareholder resolutions, but CREF has proposed resolutions urging board independence policies at three companies this year. Two proposals have been withdrawn following addition of independent directors and other policy changes. A resolution at American Power Conversion is pending; the company is seeking sanction from the SEC to omit the resolution from the ballot.

CREF also filed two resolutions on the dead-hand poison pill, both at companies that had been approached previously but had not yet removed the dead-hand language. This language prohibits directors elected in a proxy fight from redeeming the pill and allowing a takeover offer to proceed. One of the resolutions has been withdrawn, and the other is pending. Since 1998, TIAA-CREF has asked 58 non-Delaware companies to remove such provisions and 57 have done so. Larger companies in the TIAA-CREF portfolio no longer are adopting dead-hand pills, although there remains some willingness among certain small-cap companies to adopt this preclusive takeover defense, which TIAA-CREF regards as manifestly unfair to shareholders.

Stock Option Approval Policy

Under "broad-based" exceptions to stock-exchange shareholder approval requirements, increasing numbers of boards have implemented stock option plans without seeking shareholder approval. The SEC estimates that one-fifth of publicly traded companies maintain equity compensation plans that have not been approved by shareholders.

TIAA-CREF and other institutional investors for several years have encouraged the New York Stock Exchange and NASDAQ to strengthen shareholder voting requirements. The NYSE established a task force in 1999 that articulated a reasonable compromise on this issue, but the NYSE has been unwilling to implement the proposal unless NASDAQ adopts a similar standard. The NYSE task force compromise would limit the amount of potential dilution from plans that have not been approved by shareholders to 10% of the equity compensation plan shares that have been approved by hareowners. To date, NASDAQ has declined to accept this standard. "SEC Chairman Harvey Pitt has urged the exchanges to take action, and we are hopeful that NASDAQ may soon move forward on this issue," said Clapman.

All companies that TIAA-CREF has had discussions with regarding option plan approval policies maintain significant stock option plans that have not been approved by shareholders. Option grants under these plans, most of which have been in place for only a few years or less, run up to 40% of shares outstanding.

TIAA-CREF is a leading financial services organization with approximately $270 billion in assets under management. In addition to being the premier pension system for education and research institutions, TIAA-CREF offers mutual funds, annuities, and trust services to the general public, and is the leading manager of state-sponsored college savings programs.

For more information, please contact:

Patrick Connor TIAA-CREF
Phone: (212) 916-5769


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