A leading shareholder proxy service on Tuesday recommended that El Paso Corp. shareholders vote out the current management team and elect a slate of energy professionals proposed by a dissident stockholder group. Only Selim Zilkha, who leads the dissident group, was not recommended because he was a board member and adviser to the company until last year.
Institutional Shareholder Services (ISS) advised investors to elect eight of the nine directors proposed because the group “appears well balanced and seems to possess the necessary industry experience to minimize disruption in the event of a board change.” The new board, said ISS, would be “unencumbered by the legacy of past mistakes.”
In its report, ISS recommended shareholders withhold their vote for Zilkha because he was a member of El Paso’s board when many of the decisions were made regarding acquisitions, energy trading and marketing and its entry into telecommunications. Zilkha served as a director of El Paso from November 1999 to February 2001, and as an advisory director from February 2001 to June 2002. From January 1998 to November 1999, Zilkha was a director of Sonat Inc., which eventually merged with El Paso.
“Mr. Zilkha in his role as one of the directors approved these decisions and is therefore equally culpable,” ISS wrote.
ISS noted that while the incumbent El Paso board had been proactive in some matters, other decisions were merely reactive. For instance, when former Chairman and CEO William Wise stepped down earlier this year and four new directors were added to the board, ISS called it “an exercise in damage control.”
ISS, headquartered in Rockville, MD, has provided proxy voting and corporate governance services for more than 15 years. It serves more than 950 institutional and corporate clients worldwide. Its core business is analyzing proxies and issuing research and vote recommendations for more than 10,000 U.S. and 12,000 non-U.S. shareholder meetings each year.
In response to the ISS report, El Paso Corp. stated that it believed ISS had “reached the wrong conclusion” regarding the upcoming board election, set for June 17 in Houston. “Given El Paso’s sizeable retail shareholder base and the fact that most larger institutions make their own decisions, El Paso believes that ISS’ position will sway few votes,” it said.
El Paso interim CEO Ronald L. Kuehn Jr. said ISS had “focused on the past and did not consider the future. We believe ISS failed to recognize that with our current board of directors, El Paso is taking all the right actions to restore value and position the company for the future.” El Paso also is continuing its search for a new permanent CEO.
“El Paso believes its high-caliber board is the best team to lead the company into the future,” the statement said. “We believe that shareholders do not want to see our progress derailed by a whole new board that we believe would seriously disrupt the steady improvements that El Paso is making.
“Notwithstanding ISS’ flawed evaluation, we believe our shareholders share our concerns regarding the risks of replacing our entire board with a slate of nominees that has no well defined business plan for El Paso and that has selected one of its own as CEO without undertaking a process to select the best possible candidate for this critical post.”
Meanwhile, Zilkha also sent a letter to shareholders Tuesday urging them to “support the election of his world class nominees, with their wealth of industry specific experience, commitment to restoring credibility, determination to regain shareholder value, and proven leadership in corporate governance, to the board of directors of the company.”
Zilkha believes that the incumbent board has “created the financial equivalent of the ‘perfect storm’ in which El Paso Corporation now finds itself — a condition brought about by risky investments, excessive borrowing, dubious accounting practices and egregious executive compensation.”
Although Zilkha himself was serving on El Paso’s board when many of the decisions now haunting the company were made, he said in his letter that the current board had “allowed management to invest in highly speculative ventures outside of the basic strengths of the company. For example, they approved large investments in energy trading, merchant electric power generation and telecommunications.”
In the past three years, said Zilkha, the board had “repeatedly” approved “new strategies with the stated purpose of reducing debt and focusing on long-term growth. Yet each strategy has been an abject failure, resulting in still higher debt and additional ‘non-recurring charges.’ As a result, El Paso’s stock price has declined precipitously and the incumbent board cut your dividend.”
When asked whether the ISS report would hold sway over El Paso shareholders, analyst John Olson with Sanders Morris Harris in Houston said he simply did not know. “From the media reports, it seems that it holds a significant amount of power. It is a new phenomenon and it alters the chess game to some degree.”
Olson would not wager what would happen to El Paso’s board at the June 17 meeting, believing that “it will all come out in the wash.” However, Olson added that he believes there are “grounds for compromise” by the two sides, which may become apparent before the meeting.
Zilkha and the proposed El Paso board will host an investor presentation from 9-10:30 a.m. EDT on Wednesday in New York. The listen-only broadcast may be accessed within the United States at (800) 500-0177. The access code is 264128.
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