Sun investors just say no to 'poison pill'

Sun, which rarely faces shareholder initiatives, has come under increased fire by many investors, who have become more vocal about the state of the company and its handling by senior executives and the board . During Thursday's meeting, investors voiced displeasure with his compensation as compared with the company's performance.

Sun investors approved the "anti-poison pill" initiative by an overwhelming 84 percent. But a second shareholder proposal to rein in executive options failed to pass by a slim margin. The second initiative, which was raised by the Service Employees International Union (SEIU), received 42.8 percent of the votes.

"The support for the (anti-poison pill) proposal was outstanding. The proposal received more support than the re-election of one of Sun's directors," said John Chevedden, a representative for Sun investor William Steiner, who put forward the proposal. "The average approval rate is usually around 60 percent."

The anti-poison-pill proposal called for removing Sun's current poison pill option and reinstituting it only if put to a shareholder vote on a separate ballot. Sun had asked investors to reject the proposal, saying the proposal would limit the company's ability to negotiate a "fair price" if an unsolicited buyer came knocking.

A poison pill is triggered when an unsolicited buyer acquires a certain number of shares. The poison pill is designed to flood additional company's shares into the market, making the purchase of Sun a cost-prohibitive move without the Sun's support.

Although the anti-takeover proposal passed, it is nonbinding.

"Sun's board will take the vote into account in determining what course of action will maximize Sun's ability to preserve and protect stockholder value in the event of an unsolicited takeover attempt," said Stephanie Von Allmen, a representative for Sun.

Chevedden said he would not be surprised if Sun's large shareholders pressure the board to accept the initiative, given its wide margin of support.

Pay for performance
Meanwhile, SEIU's proposal to tie the exercising of options to performance-based metrics for Sun executives failed to pass. But SEIU's presentation received a strong applause from the more than 100 people in attendance, many of whom were senior citizens.

"Sun's compensation system has the potential to reward mediocre performance...Over a five-year period, Sun has had a negative 39 percent average overall return for investors," said Jason Ward, a research analyst with SEIU, which owns approximately 154,000 shares.

Sun's share price has largely traded in the $3 to $4 range for the past several years, far behind key indices and the stocks of many competitors. The company has struggled to turn things around after four years of slow sales . Also on Thursday, the company's chief financial officer announced that he planned to retire when the fiscal year ends in June 2006 .

The SEUI proposal also wanted Sun's board to grant executive options at a price that is higher than the current market value at the time they are granted. Sun's board, however, has previously said it believes that would restrict the company's flexibility to remain competitive in its hiring practices.

When the Sun board granted McNealy a $1.1 million discretionary bonus in fiscal year 2005, even though he did not hit the performance targets to warrant a regular cash bonus, investor ire was particular incensed.

"We are disappointed with the signals the company sent today. We had hoped the company would come to the annual meeting knowing they were under fire for a mismatch between company performance and executive compensation and indicate they got the problem and were looking into changing it," said Steven Weingarten, public markets director for SEIU.

"But instead...CEO McNealy said he thinks the company is a poster child for responsible compensation strategy. I think they are a poster child, but for the opposite--for CEOs taking home lavish paychecks while investors take a bath."

He added that the SEIU plans to request discussions with Sun's board of directors.

The right man for the job?
McNealy, however, defended the discretionary bonuses he and his executives received, even though they failed to hit the metrics required to receive a regular cash bonus.

"We set the bar (for the regular bonus) very, very high," McNealy told shareholders.

He added that although that bar was not reached, the company had stabilized revenues, improved cash flow and operating income, and beefed up product lines over the last three years.

McNealy also noted many of their stock options, issued as a form of performance-based compensation, are now under water. As a result, the discretionary bonuses served to help retain executives.

"This company is a poster child for fair and responsible compensation," McNealy said, noting employees have been going above and beyond in their performance.

Nonetheless, one investor asked McNealy whether he felt he was still the man to run the company, and how much he felt he was personally "at fault" for the company's present state.

"I feel I am 100 percent, plus a million, responsible. I am in charge and the buck stops here," he said, pointing to Sun's accomplishments, before adding, "Problems are not solved in a day or a quarter."

The founder added that over Sun's history, his popularity has gone in cycles with investors.

"I'm a hero. I'm a chump. I'm a hero. I'm a chump," McNealy recounted for investors. But before the meeting's end, McNealy said he believed the next five years would offer bright days for the company.