Sun shareholders call for action

Sun's shareholders aim to pass two proposals. One would tie the option-exercising ability of executives to performance metrics. The other would give investors a say on Sun's decision to retain its "poison pill" anti-takeover measure.

Weighing in on these issues is an influential proxy service, Institutional Shareholder Services, or ISS, which has been advising clients who hold Sun shares to support the two initiatives. ISS has advised thousands of pension managers and portfolio managers on how to vote on various proxy matters.

Sun rarely faces shareholder initiatives, which are non-binding. But the company may engender further investor ire if these proposals pass and then are not implemented.

Four Sun directors have already landed on the ISS hot list. ISS has advised its clients to withhold votes for three board directors who sit on the compensation committee: Ken Oshman, John Doerr and Stephen Bennett.

In fiscal 2005, the board granted Sun founder and chief executive Scott McNealy a $1.1 million discretionary bonus, even though he had not hit performance targets warranting a regular cash bonus, according to the company's proxy filing.

"The 1.1 million discretionary bonus to Mr. McNealy raises concern, especially in light of the company's continued poor performance as evidenced by negative one...three...and five-year total shareholder returns," ISS stated in its client advisory report. "There appears to be a disconnect between the pay practices and the company's performance."

In addition to advising clients to withhold votes for compensation committee members, ISS has asked that votes be withheld for board member Michael Lehman, a Sun audit committee member they have characterized as an "affiliated outsider."

ISS has also advised clients to support a shareholder proposal from the Service Employees International Union, which has called for performance metrics to be applied to executives' ability to exercise their options. This initiative also wants Sun's board to grant executive options at a price higher than the market value when granted.

"The proposal requests that a significant portion of future stock option grants to senior executives shall be performance-based. ISS believes that this is not unduly restrictive," ISS stated in its report, adding, "We could not directly link any of the stock option grants to performance metrics."

An individual investor, William Steiner, has submitted his own shareholder proposal on Sun's anti-takeover measures. Sun has a "poison pill," or shareholder rights plan, that would flood the market with additional shares should an unsolicited buyer attempt to take over the company. The poison pill drives up the company's acquisition price, making it prohibitive.

Steiner's proposal calls for Sun to cancel any current or future "poison pills," unless it submits them as separate ballot items and shareholders are allowed to vote. Sun's board wants to retain the pill, saying it puts the company in a better position to defend itself against unfair offers.

ISS supports Steiner's proposal, noting: "Because poison pills greatly alter the balance of power between shareholders and management, shareholders should be allowed to make their own evaluation of such plans."

"Our shareholder rights plan is in place to protect shareholders in the event of unsolicited takeover attempts. The plan doesn't prevent or deter negotiations between potential suitors and the board. Rather, it encourages those that are willing to negotiate with the board in good faith," Sun's spokeswoman said, citing the proxy.

Other technology titans, such as Hewlett- Packard, have faced similar shareholder proposals on both "poison pills" and executive compensation. Still others, such as Apple Computer, have faced shareholder activism over methods for accounting for options in their financial books.

Sun, however, believes its existing shareholder rights plan and stock option compensation arrangements are suitable.

"Sun is not opposed to performance-based stock options," a Sun spokeswoman said, citing the company's proxy. "We essentially already offer performance-based stock options in the form of short-term cash bonuses and long-term stock option grants."

She added that the company believes that options granted at market price are inherently performance based because the recipient does not benefit unless the stock price rises.

"This proposal would limit our ability to establish a competitive compensation package and that could place Sun at a competitive disadvantage in attracting and retaining top talent," Sun's spokeswoman added.