RiskMetrics recommends re-election of current Yahoo board

Yahoo's current board of directors received an endorsement Thursday, when influential advisory service RiskMetrics Group recommended to its institutional investor clients to vote for all of Yahoo's directors at the upcoming annual shareholders meeting.

That recommendation runs counter to one issued the day before by Glass Lewis & Co., another institutional investor advisory service that makes recommendations to pension funds, mutual funds and asset management companies on how to vote on issues contained within companies' proxies. Glass Lewis, as well as investor activist Eric Jackson, is calling on Yahoo investors to vote against or withhold votes for several of the Internet search pioneer's directors.

RiskMetrics advised its clients to vote "for" all nine current directors, although Robert Kotick has indicated he will not run for re-election at the company's August 1 shareholders meeting. That decision came as part of a settlement agreement with Yahoo and investor activist Carl Icahn, who dropped his proxy fight with the company and, in turn, will have two members from his designated list of potential candidates and himself appointed to the company's expanded 11-member board.

Although RiskMetrics endorses the re-election of Yahoo's current board, it's not without concerns over Yahoo's handling of its merger talks with Microsoft.

According to RiskMetrics report to its institutional investors, it drew this conclusion regarding Yahoo:

We believe that Yahoo!'s compensation practices, in particular the newly-adopted severance plans, as well as the way the board handled the negotiations with Microsoft at the initial stage, are concerning. Many investors believe these issues would warrant changes at the board level. However, given Mr. Icahn's lack of a plan for a standalone Yahoo! and a replacement candidate for CEO Yang, a complete overhaul of the board with full a slate from Mr. Icahn was widely regarded as unlikely. On July 18, 2008, Legg Mason CIO Bill Miller, a major Yahoo! shareholder, stated the following: "In general, we believe it is appropriate for large shareholders to have representation on corporate boards if they so desire. Mr. Icahn's slate includes people experienced in technology, advertising, capital markets and governance." We believe the settlement appointing Mr. Icahn as a significant shareholder representative as well as two of his selected nominees with relevant industry experience have achieved what most shareholders called for. We also believe the newly-formed board will be able to address the issues highlighted above. Therefore, we recommend that shareholders support the incumbent directors that are standing for re-election.

Although RiskMetrics is calling for the re-election of Yahoo's current board, Glass Lewis on Wednesday advised its clients to issue "against" votes for Yahoo chairman Roy Bostock, Ron Burkle, and Arthur Kern.

And dissident Yahoo shareholder Jackson is asking investors to not only withhold votes for those three directors, but also for Eric Hippeau.

Jackson noted that he holds Bostock and Burkle the most responsible for the failed talks with Microsoft, as well as holding the two directors and Kern responsible for an above market compensation plan for Yahoo executives.

Despite the Glass Lewis and Jackson recommendations for withholding votes or voting against the named Yahoo investors, one proxy solicitor noted its unlikely any one of those directors will be subject to the 50 percent threshold that would trigger an automatic tendering of their resignation to the other board members who are re-elected.

"They won't get to a 50 percent "withhold," in part because Icahn has decided to go with the board," the proxy solicitor said.

And even if that were to happen, under Yahoo's policy, which is similar to those used by a majority of S&P 500 companies, the remaining board could refuse to accept the tendered resignation, thereby keeping the director in question on board.

Among the S&P 500 companies, 72 percent have adopted policies that would require directors to automatically tender their resignation if they fail to be re-elected by at least 50 percent of the votes cast.

But despite this policy among a number of large corporations, only a handful of cases have come up over the last few years where that threshold was crossed, said Patrick McGurn, with RiskMetrics Group's ISS Governance Services unit. And of those cases, McGurn does not recall a board accepting a tendered resignation from a director who had triggered that automatic resignation.

"Investors think long and hard if their (withhold or against) vote could potentially unseat a director," McGurn observed.

And in looking at the Yahoo case specifically, McGurn said he would be surprised if the withhold votes for the current directors reaches into the double digits.

"Withhold votes are usually used to communicate something to the board. But in this case, investors had lots of opportunities to voice their concerns," McGurn observed.