July 23, 2008 9:37 AM PDT

Glass Lewis advises against re-electing 3 Yahoo directors

Posted by Dawn Kawamoto

An advisory service to institutional investors issued a recommendation Wednesday that its clients vote against the re-election of three Yahoo directors.

Yahoo Chairman Roy Bostock and directors Ron Burkle and Arthur Kern, all of whom sit on the compensation committee, received a thumbs down from influential institutional investor Glass Lewis & Co.

Glass Lewis, as well as RiskMetrics and Proxy Governance, issue recommendations to their clients on how to vote on proxy matters. These clients include mutual funds, pension funds, and asset management companies, which often hold large blocks of stock in various companies.

Glass Lewis is advising its clients to vote against Bostock, Burkle, and Kern because of the level of compensation awarded to Yahoo executives and also because of the controversial employee severance plans Yahoo put in place should there be a change of control at the company.

On the issue of dinging the three compensation committee members, Glass Lewis wrote in its report:

Nominees BOSTOCK, BURKLE and KERN all served as members of the compensation committee in fiscal year 2007, during which time the Company paid more compensation to its top executives but performed worse than its peers. The members of the compensation committee have the responsibility of reviewing all aspects of the compensation program for the Company's executive officers. It appears to us that members of this committee have not effectively served shareholders in this regard. Further, we are concerned that the committee approved the adoption of the Change in Control Severance Plans with potential brobdingnagian payouts, potentially discouraging a takeover.
Additionally, Mr. Bostock serves as chairman of the nominating and corporate governance committee. At last year's annual meeting, Messrs. Bostock, Burkle and Kern each received over a 31 percent vote against their re-election. In our 2007 Proxy Paper, we recommended voting against each of these directors due to the Company's excessive compensation practices. We believe this raises concerns about whether the nominating and corporate governance committee is fulfilling its duty to shareholders considering that all three directors remain on the board. Moreover, we find it disconcerting that Messrs. Bostock and Kern continue to serve on the committee charged with overseeing governance issues for the Company.

Despite issuing a recommendation for investors to vote against the re-election of Bostock, Burkle, and Kern, in practical terms the three will likely retain their board seats no matter how the vote turns out.

Yahoo, under its bylaws, requires any director who receives more than a 50 percent "against" or "withhold" vote to automatically submit their resignation to the board for consideration. The board can either accept the resignation, or reject it.

Yahoo's current board would likely reject a resignation by these three directors, should they get more than a 50 percent "against" or "withhold" vote. That's because Yahoo's board and investor activist Carl Icahn recently reached a settlement, ending Icahn's proxy fight before the company's August 1 shareholders meeting, where board members will be elected.

Yahoo, under the settlement, is giving Icahn a seat on the board after the shareholders meeting, and it will then appoint two additional directors to its expanded board of 11 members, pulling from Icahn's former slate of dissident directors and Jonathan Miller. So, the lineup would essentially be eight members of Yahoo's current board and three in the Icahn camp.

So, the applecart could potentially take a tumble if Bostock, Burkle, and Kern each fail to get a majority of the votes cast and the board accepts their automatic resignations. That would leave five members on Yahoo's current board and three in the Icahn camp--potentially narrowing the margin Icahn would need to swing votes his way on company issues. As a result, Yahoo's current board would likely reject any resignations should they arise.

Glass Lewis, however, was not without concerns involving Icahn. In its report, the advisory service noted:

Carl Icahn, chairman of Icahn Enterprises G.P. and CEO of Icahn Capital LP, currently serves on a total of seven public company boards. His total number of directorships will expand to eight once he is appointed to Yahoo's board. We believe that the time commitment required by this number of board memberships may preclude Mr. Icahn from fulfilling his responsibilities to this Company's shareholders. We believe shareholders should monitor Mr. Icahn's ability to devote sufficient time and attention to the Company.

Meanwhile, RiskMetrics is expected to issue its recommendation to its clients either later Wednesday or Thursday, a company spokeswoman said. And Proxy Governance is expected to issue its recommendation by Friday, a spokesman said.