A CalPERS-sponsored proposal to "declassify" the board by electing all the company's directors every year, rather than on a rotating schedule that has each seat coming up for election every three years, has been placed on the agenda for stockholders to vote on during the company's May 14 annual meeting.
"A staggered board has been found to be one of six entrenching mechanisms that are negatively correlated with company performance," said CalPERS, which owns 330,000 shares of Standard Pacific stock, or less than 0.5%, in its stockholder proposal.
Standard Pacific's stock has not only underperformed compared to the rest of the Russell 3,000 index, but compared to other home builders in the index as well, CalPERS pointed out in its corporate governance fact sheet on the company.
"You need a change, and when you have a staggered board you really can't do that," said CalPERS spokesman Clark McKinley. "You can't hold the whole board accountable year after year, so it's very difficult to make any change quickly."
That's one reason why the board structure should remain the same, said Standard Pacific management in its note urging stockholders to vote against the proposal. The staggered board structure makes it more difficult for the company to be taken over quickly.
Management went on to state further in the note: "By preventing an immediate change in control of our board, our classified board structure ensures that if anyone seeks to acquire control of the company, the board has time to evaluate alternatives that may provide superior value to the stockholders, and encourages the potential acquirer to negotiate with the board to reach terms that are fair and in the best interests of all stockholders. In fact, ... 'classification may improve the relative bargaining power of target managers on behalf of their constituent shareholders' [according to an academic study]. This increased negotiating leverage possesses added significance because the stocks of home builders, including ours, have recently traded at historically low valuations."
Standard Pacific's management listed other reasons to oppose the change in directors' terms as well, including a need for institutional knowledge and industry expertise, as well as the fact that "the freedom to focus on the long-term interests of the company and its stockholders leads to greater independence and better governance."
"For the reasons stated above, the board believes that declassifying the board would be detrimental to the interests of the company and its stockholders," it said in opposing the change.
CalPERS has other "concerns" about Standard Pacific's board structure as well, including that the company has not agreed to CalPERS request to remove the company's 80% supermajority voting requirements by shareholders from its articles and bylaws. "Only a small minority of companies in the Russell 3000 have voting thresholds of this magnitude," the CalPERS governance fact sheet said.
"It's very difficult to get that [80% vote]; it's practically impossible," said McKinley.
In other information released by Standard Pacific related to its annual meeting, it announced that in the wake of former CEO Stephen Scarborough's sudden retirement on March 20, the company is reducing how much it pays executives under the company's "change of control program" to meet market norms.
Under the change, when "the company terminates an executive officer without cause or an executive officer terminates his or her employment for good reason (generally consisting of adverse changes in responsibilities, compensation, benefits, or location of work place)" he or she will get a lump sum payment of two times annual base pay, two times his or her average annual bonus and incentive compensation over the last three years, continuation of the company's life, health, and disability insurance for two years, a car allowance, and any cash-in-lieu payments.
When Scarborough retired after 27 years with the company, he received three times his base salary and average annual bonus as well as the continuation of benefits subject to caps for three years.
The "challenging" market conditions are also leading Standard Pacific to alter its bonus programs. While the base salaries are frozen at 2006 levels, it plans to link bonuses to more than the company's pretax income.
"While the committee continues to believe in the importance of this direct linkage and will continue to provide these executives an opportunity to earn a percentage of consolidated pretax income, it also believes that, for the duration of the current downturn in the home building industry, it is important to link annual bonus compensation to other metrics that are designed to focus executives on the achievement of business objectives that will be necessary to correctly position the company for an eventual market turnaround."
So, for the company's regional presidents and Scott Stowell, the company's COO, bonuses will "incorporate three components: (1) a percentage of consolidated pretax income, (2) a target bonus of up to 150% of the executive's base salary, and (3) a discretionary bonus. The target bonus will be payable based 40% on the achievement of a targeted number of net new orders, 30% based on the achievement of a targeted inventory level, and 30% based on a targeted revenue level. The target levels for each of these components is derived from the company's business plan. The target bonus will be adjusted up or down based on the extent to which actual performance exceeds or falls short of the target. No target bonus will be paid if certain minimum thresholds are not achieved."
Other proposals up for vote during the shareholder meeting in May include:
--Vote to re-elect two existing directors: Douglas C. Jacobs and Larry D. McNabb.
--The issuance of 1,274,000 more shares of stock that the company said it needs to provide equity incentives to executives.
--Another stockholder proposal calling for the company to adopt quantitative greenhouse gas emissions goals. Standard Pacific's board is asking shareholders to vote against the proposal, saying they already have many environmental initiatives underway and that being forced to meet these goals would hamper its profitability.