NYSE foot-dragging & Consol Energy’s legal bill…

Proxy season is a wonderful, if imperfect, window into how companies, managers and boards think, and into some of the context that shapes the decisions they make. Look no further than the proxies filed yesterday by NYSE Euronext (NYX) and Consol Energy (CNX).

At NYSE, we have a classic case of corporate foot-dragging. Last year, shareholders overwhelmingly passed a proposal encouraging the board to allow anyone to call a special meeting of stockholders if they hold at least 10% of the company’s shares. The measure got the nod from more than 73% of shareholders, according to the 8-K it filed on May 2. That’s a pretty stunning figure in the grand scheme of things.

Yet, nearly a full year later, the board hasn’t even come close to implementing the measure. In fact, quite the opposite — it’s opposing another shareholder proposal to do the same thing in this year’s proxy, from the same investor (a Kenneth Steiner, who’s mentioned in a Crain’s article on activist investors, and may be the subject of a 1997 New York Times piece). The arguments in favor are pretty straightforward: Shareholders want it and the power would provide a check on potentially “insulated” management (hmm…).

The board, in trotting out its renewed opposition, sounds more like a bored grade-school teacher than the elected representatives of the shareholders who passed last year’s measure by a significant minority, even using some of the same language it used last year. The NYSE professes that it is “strongly committed to good governance practices and is keenly interested in the views and concerns of our stockholders” but complains that calling a special meeting “is not a matter to be taken lightly,” and that “the possibility of numerous special meetings” runs the risk of “significant cost, management distraction and diversion of financial resources” and maybe even run-ins with regulators (though the reasoning there is pretty far-fetched). Basically, they’re saying that the proposal wouldn’t be good for stockholders, who clearly don’t know what’s good for them.

This may be a good place to note, as Steiner does, the NYSE board still hasn’t adopted majority-voting proposals approved overwhelmingly by shareholders two and three years ago. This time, at least, the company says the board

“intends to submit a proposal at the 2013 annual meeting seeking stockholder approval for amendments to our charter and bylaws to permit stockholders to call special meetings, subject to an ownership threshold and conditions that are more appropriate for NYSE Euronext than the terms specified in the Steiner Proposal. “

In other words: Study it, water it down and kick the can down the road. Granted, except in specific circumstances, directors are supposed to exercise their judgment and act in the best interest of all the shareholders and of the companies they run, rather than slavishly execute whatever a majority of stockholders approve. (The same should be true of lawmakers, but that’s another blog post…) Still, this wasn’t a squeaker, and the board’s haughty tone suggest we may be seeing an example of what economists like to call the agency problem at work.

On the flip side, at Consol Energy, we see the context that directors work within, and how it might lead to decisions that — from the outside, at least — look a little skewed. In disclosing company transactions with related parties in its proxy filing yesterday, Consol notes that last year alone, it paid $576,200 to law firm Phillips, Gardill, Kaiser & Altmeyer PLLC, and another $2.2 million to law firm Bowles, Rice, McDavid, Graff & Love PLLC. The brother of one director is a member of Phillips, Gardill, while the daughter of another director “recently became a partner” at Bowles, Rice.

Spending nearly $2.8 million on legal advice at firms with family relationships to board members smacks of mutual back-scratching; given the number of lawyers in this country (cue your own joke here), you’d think they could find someone without a conflict.

But Consol also provides some context — something we find all too rarely in corporate filings, which are usually written as if the companies are going through the motions rather than actually trying to inform investors. Specifically, Consol notes that the payment to Phillips, Gardill amounts to “approximately 1.26% of the total amount paid by the Corporation to all law firms retained in 2011.” The payment to Bowles, Rice “represented approximately 4.85% of the total amount paid by the Corporation to all law firms retained in 2011.” That implies a total legal bill — for outside law firms alone — of something like $45.8 million.

We’re still not thrilled to see a major company spending millions at law firms (or other vendors and service providers) that have family ties to the board. Still, you can see why directors get a little jaded — what’s $2.8 million when you’re talking about a legal tab 16 times that high? Of course, it could be more significant to the law firms, or to the individuals, and that in turn could sway their judgment — all hypothetical, to be sure, but that’s the risk, and for shareholders it’s a risk nearly impossible to evaluate.

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