Irani ouster at Occidental opens path for reforms
In a bold step forward for shareholder activism, long-time executive chairman Ray Irani was removed from his seat on Occidental Petroleum’s board at the company’s annual shareholders meeting on May 3 by a crushing three-fourths majority vote by investors.
While eight of the board’s 10 members were re-elected, 76 percent of shareholder votes opposed Irani’s re-appointment to the board, ending his 23-year grip on power at the oil and gas company. Irani was forced to surrender the CEO position two years ago largely due to shareholders’ criticism of his disproportionate compensation package.
CEO Stephen Chazen’s re-election to the board, by way of contrast, received support by nearly 99% of the votes, reflecting an undeniable vote of confidence in him.
‘It showed that investors have just had enough of Irani and viewed the latest machinations [regarding the board’s seeking to replace Chazen as CEO] as a power play by him,’ says Jack Zwingli, leader of information services for Farient Advisors. ‘That certainly raised concerns among institutional investors as to why they would be moving him out and it came across as Irani influencing the decision and investors seeing Irani as still holding the reins of power and moving his successor out.’
Irani had been scheduled to retire from the board by the end of 2014, in accordance with an agreement with shareholders reached in 2010. In an April 8 news release, Occidental announced the board’s decision that it was time to begin seeking a successor to Chazen but denied there was any ‘fight at the top.’ The decision had been unanimous, the statement said, with all conclusions regarding CEO succession planning having emerged from many meetings of only independent directors, with Irani not in attendance.
Investors were clearly skeptical of Irani’s non-involvement. Proxy advisory firms Institutional Shareholder Services and Glass Lewis had recommended against Irani’s re-election to the board.
One major shareholder that went against the tide by voting in favor of Irani’s re-election was the California State Teacher’s Retirement System (CalSTRS), which owned 3.1 million shares, or 0.39 percent of Occidental’s total shares outstanding, as of April 28. But CalSTRS supported Irani only because Irani was due to retire in 2014, the pension fund said in an April 30 statement that cited the 2010 agreement for Irani’s retirement.
CalSTRS was explicit, however, in saying that ‘the board should continue to honor our agreement by placing the permanent separation of the roles of CEO and chairman to a vote of the shareholders’ at the annual meeting in 2014.
Meanwhile, CalSTRS has been at the forefront of shareholder activism, joining hedge fund Relational Investors in March to call for Timken to split into two companies, separating its steel and ball-bearings businesses to unlock significant value for shareholders. That non-binding proposal, which has garnered recommendations by both ISS and Glass Lewis, comes up for a vote at Timken’s annual meeting on May 7. That proposal and Irani's removal from Occidental's board show shareholder activism increasingly moving to encompass decisions that until now have been seen as under the authority of management.
In its April 30 statement, CalSTRS had also praised Occcidental for changes the company is making to its governance structure and compensation plans. Over the last two years, since removing Irani as CEO, Occidental has been bringing its compensation programs in line with industry best practices, by including provisions for stock retention requirements, clawbacks and minimum performance thresholds, says Zwingli at Farient.
‘With Irani out of the picture, the reforms put in place will be much more likely to have teeth and be followed through on,’ he says. Roughly ‘38 percent of executive pay is now based on long-term performance-based pay, and is tied into total shareholder returns.’
The targeted total compensation for Chazen is about $16 million this year, in line with what Farient would have estimated for a company of Occidental’s size and consistent with peers in the $18 million to $19 million range, says Zwingli.
Another governance change is the board’s decision to set 68 as a maximum retirement age for the CEO. Although Chazen, who is 66, is slated to be replaced next year, Zwingli says it wouldn’t surprise him if the board extends Chazen’s term until he turns 68.
‘This does take the pressure off the company to have a successor by the end of next year, but it doesn’t buy them a lot more time,’ he says. ‘So succession planning will continue to be a big issue for the board.’
Edward Djerejian, one of the re-elected board members and a former U.S. ambassador to Syria and Israel, will take over as independent chairman, while former U.S. Energy Secretary Spencer Abraham will become vice chairman.
Irani will continue to be a major shareholder with roughly 8.1 million shares, more than 1.0 percent of Occidental’s total shares outstanding, and a stake that could increase based on the departure package that Irani secures, as reported by the Wall Street Journal.