A San Francisco-based proxy research firm threw another monkey wrench into the mix on Monday, recommending El Paso Corp. shareholders oust three incumbents and reduce the company’s 12-member board of directors. However, Glass, Lewis & Co. LLC (Glass) noted that if shareholders voted to keep its current 12-member board and were to elect three dissident nominees, the “board might well benefit from the ongoing involvement and oversight.”

The 31-page proxy paper on El Paso issued by the proxy research firm had few positive comments about the current state of the company, giving it a “failing grade” for its recent performance. Among other things, Glass analyst Kevin Cameron said that the executive officers and CEO “received pay far in excess of the performance they turned in for 2002.” He noted, however, that the executives did not receive any cash bonuses nor stock option grants last year either.

“Nevertheless, the performance of the company…was so poor as to render the base and long-term incentive compensation received by the executives as grossly excessive,” wrote Cameron. Glass used six criteria for its measurements, including the company compared with average performance, CEO compared with averages, shareholder wealth, and business performance.

El Paso is in the proxy fight of its life with a dissident slate of energy professionals led by major shareholder Selim Zilkha, a former board member himself. Cameron said the “choice between the incumbent board (three of whom are not standing for re-election and four of whom were added to the board since this proxy fight began) and Mr. Zilkha’s slate is not an easy one.”

The incumbent directors and some of their predecessors “have swung wildly at every pitch, investing significant sums into unrelated lines of business, from many of which the company now seeks an exit.” And, “with all this wild swinging, there has been, and remains, some significant risk that the company will strike out: its balance sheet is over-leveraged, its costs too high and its management team in some substantial disarray.”

Zilkha’s proxy fight offers a “compelling story,” said Cameron, but in the end, offers a “relatively vague going-forward plan.” A “troubling aspect” of Zilkha’s coup attempt is that it is being financed in part by Oscar S. Wyatt Jr.,” said the report. “We worry that investors may not be best served by a board that might feel beholden to Mr. Wyatt when and if it negotiates the sale of company assets to him or seeks to settle the company’s claim for his debt obligation.”

In the meantime, the incumbent board has improved substantially, according to Glass. “It has removed an overpaid and under-performing chief executive officer. It has made significant progress in selling non-core businesses and de-levering the balance sheet.”

The paper recommends shareholders vote for all but three El Paso incumbent board members: John Bissell, who serves on El Paso’s audit and compensation committees; Joe B. Wyatt, who chairs the compensation committee and sits on the governance committee; and Thomas R. McDade, a senior partner in a law firm that has provided legal services to El Paso and who earned $150,000 in fees for these services in 2002. McDade served on no committees last year. Glass recommended the other nine executives, including interim CEO Ronald Kuehn, be re-elected.

“In particular, the members of the compensation committee who approved [former CEO William) Wise’s compensation during the period from 2000-2003 have hardly distinguished themselves,” according to the report. “Moreover, the board’s track record of linking pay to performance is disappointing, at best” and a concern as the company searches for a new CEO.

Besides Bissell and Wyatt, three other members of the compensation committee include James L. Dunlap, J. Michael Talbert and John Whitmire, who all joined El Paso’s board this year.

In other news, the proxy fight began to resemble a story line on the TV series Survivor, but it will be another week before shareholders know who is getting voted off the island.

In advertisements that ran in the Houston Chronicle over the weekend, Oscar Wyatt criticized El Paso’s settlement with California and three other western states last March, which resulted in a hefty fourth-quarter loss (see Daily GPI, April 1). The $1.7 billion agreement seeks to resolve all regulatory and legal actions related to El Paso’s sale and delivery of gas and electricity to the region from September 1996.

In his advertisement, Wyatt apologized for selling his company Coastal Corp. to El Paso in 2000, noting that his former employees had seen their retirement funds plummet since the sale. Wyatt said he was “doing everything I can to make amends.” The Houston businessman also specifically questioned the western settlement, pondering what the company had done “that justifies a $1.7 billion settlement except to settle their own personal liabilities with corporate funds?” Wyatt said a $200 million settlement would have been reasonable, and suggested that a new management team would review the transaction once it was in place.

As expected, El Paso responded in statements on Monday, defending its western settlement and specifically lambasting Wyatt.

“Wyatt’s ad is riddled with falsehoods and outrageous statements.” El Paso wrote. “While posing as a savior for El Paso’s shareholders and a champion of corporate governance, Wyatt’s actions speak much louder than does his paid advertisement. We believe this letter is an example of Wyatt’s seller’s remorse because he no longer controls Coastal.”

As it ripped apart Wyatt’s credibility, El Paso also detailed past activity by Wyatt while he was Coastal’s chief, and noted that “shareholders of El Paso should ask themselves whether these are the actions of someone committed to good corporate governance, as Wyatt claims in his advertisement.”

In a response late Monday, Zilkha said, “Using the Fear Factor is no way for El Paso’s management to garner support for its nominees nor is it a way to earn the confidence of its shareholders. I believe El Paso shareholders will see it for what it is — an act of desperation by a regime struggling to maintain its lucrative position.”

To read more of the Glass report, visit the company’s web site at www.glasslewis.com/index.php.

The annual shareholder meeting is set for 2 p.m. CST June 17 at the George R. Brown Convention Center in Houston.

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