Utility vote may signal end to cumulative voting.

Utility vote may signal end to cumulative voting 

Pacific Enterprises stockholder meeting probable test case

The parent company of Southern California Gas and Thrifty discount drug and discount stores, Los Angeles-based Pacific Enterprises Inc., has scheduled a special stockholder's meeting Thursday to vote on an amendment to its articles of incorporation that would "eliminate all mandatory cumulative" shareholder voting rules.

If its shareholders vote as expected, Pacific will be among the first companies in California to abandon cumulative voting rules since last year's passage of Assembly Bill 1929 made it legal.

(Cupertino-based Apple Computers was the first of the major companies to end the practice, voting two weeks ago.)

But Pacific's shareholders meeting will not go off this week without raising the ire of Sam K. Weinstein, Western Regional Director of the Utility Workers of America union, the man who narrowly missed election to Pacific's board of directors in May through the self-same cumulative voting process.

"Pacific is attempting to insulate itself from any kind of shareholder pressure," Weinstein said. "This is not a labor issue. This is a stockholder rights' issue. The rights of the shareholder are being systematically stripped away."

Weinstein has drawn the support of T. Boone Pickens' organization, the United Shareholders Association (USA), in his fight against Thursday's vote. USA director Ralph Whitworth fired off a statement last week saying, "Revoking the right to cumulative voting means that every shareholder in Pacific Enterprises will be forced to dilute proxy votes among the entire board. Without cumulative voting, management is protected from accountability to shareholders, who, after all, do own the company."

Under traditional majority voting procedures, the shareholder is limited to one vote for each candidate. Cumulative voting allows stockholders to "shotgun" their vote. For example, the shareholder of a company with a 15-member board of directors would normally be entitled to 15 votes. Under cumulatively voting rules, a shareholder could vote 15 times, or "shotgun" their 15 votes, for a single candidate.

Which is exactly what happened last May when Weinstein took a run at Pacific's board. Through an Employee Stock Ownership Plan (ESOP) instituted in the late 1950s, members of the Utility Workers of America union had accumulated about 2.7 million shares of Pacific's 64.3 million shares outstanding.

With the workers and a smattering of independent shareholders shotgunning their cumulative votes for Weinstein, Weinstein garnered 40.2 million votes for election to Pacific's board, falling about 850,000 votes short of election.

At a cost of about $260,000 Pacific had successfully staved off Weinstein's quest for the board seat, but by an uncomfortably close margin for management's taste.

After the election, Weinstein was ebullient, saying that "it doesn't make a heck of a lot of difference. The fact is that it was so close that there isn't going to be a problem for us to come back next year and win."

That was before the Sept. 26, 1989 passage of Assembly Bill 1929.

Drafted by the California State Bar Association, and authored by state Assemblyman Bob Epple, the bill "relating to corporations" was intended, in total, to make California-registered companies less susceptible to hostile takeovers.

The theory is that cumulative voting makes California companies appeal to corporate raiders, who would seek to accelerate hostile takeovers by electing officers to a board without owning a majority of the stock.

"Its intent is not to remove the rights of the shareholder but that is the effect of the bill," said Weinstein.

Previously mandated by California law, cumulative voting became optional for California-registered companies on Jan. 1 with AB 1929.

It could spark a move en masse away from cumulative voting by the 50 to 100 companies registered exclusively in California, including major firms such as Rosemead-based SCEcorp, parent of Southern California Edison, San Francisco-based Pacific Gas & Electric Co. and Palo Altobased Hewlett-Packard.

"Utility companies operating in California are required to register in California, which is why the utilities all have cumulative voting rules and are among the largest companies affected by the law," explained Bill Wood, president of Pacific Enterprises.

(Most companies based in California are registered in other states which have never had cumulative voting mandates. Delaware, for example, has no such voting. Given the choice between majority and cumulative voting, majority rules with corporations; of the Fortune 500 companies, just 64 have cumulative voting, according to San Francisco-based Investor Responsibility Research Center.)

Pacific's management maintains the cumulative system is undesirable, allowing special-interest groups too much access to its board.

"We think that the shareholders are best represented if you don't have a director who represents a small special-interest group," said Wood. "Constituency representation, special interests, are not necessarily the best way to run a corporation. It is not necessarily good for the shareholders."

Weinstein's viewpoint is different.

"The very makeup of Pacific's board includes people affliated with companies that do regular business with Pacific Enterprises and its subsidiaries," said Weinstein. "That in our opinion represents a greater conflict of interest then someone like myself who represents independent shareholders."

Pacific director Wood refutes Weinstein's claim.

"Sam Weinstein represents his union, not the shareholders," said Wood. "If you look at the board of directors, their qualifications speak for themselves."

Outside members of the Pacific board are: Joseph N. Mitchell, chairman and CEO, EDM Equities Inc.; Rocco C. Siciliano, chairman and CEO American Health Properties Inc.; Hyla H. Bertea, vice president, The Dalebout Association; James F. Dickason, chairman and CEO of Newhall Management; Robert R. Dockson, chairman Calfed Inc.; Ignacio E. Lozano Jr., editor-in-chief La Opinion; and James H. Zumberge, president, University of Southern California.

Weinstein said that Pacific should be subject to more public scrutiny than most companies because of its utility holdings, about 53 percent of the company's assets, suggesting that a worker's representative on the board would help to accomplish "public-interest input."

Representing about 6,000 of the 9,000 workers of Southern California Gas & Electric, Weinstein said he would temper the company's aggressive diversification drive. Pacific has been criticized for acquiring 1,044 Thrifty drugstores, Big 5 Sporting Goods, Bi-Mart Discount Stores, Pay'n'Save drugstores and Gart Bros.

"Employees should be represented on this board," said Weinstein. "Even though employees own a minority interest in the company, they have a majority interest in the company's future. Whatever happens at Pacific, they'll have to work there. The union feels that Pacific should not be in the retail business at all because they [the retailers] can use revenues from Southern California Gas Co., a monopoly, to support their retail operations. If they decide to cut costs in the utility because of a bad managent decision to diversify, the employees are affected. When they tighten their belts, we are the waistline that gets tightened."

According to New York-based proxy solicitation firm Georgeson & Co., contracted by Pacific Enterprises for about four years, the amendment to end cumulative voting is likely to pass.

"Most institutional holders, who generally vote against proposals they deem as anti-takeover, do indicate that they favor eliminating cumulative voting," said Andrew Jones, director of Georgeson. "Cumulative voting is obviously not deemed as an anti-takeover proposal by institutional investors. We are encouraged by the results of our recent, on-going solicitation."

Last week, Weinstein's union released a proxy statement urging shareholders to vote against the switch from cumulative voting. Although he said it's likely cumulative voting will be eliminated by Pacific, he vowed to continue to fight.

"We see the possibility of educating shareholders and reversing that vote," he said. "We are also exploring the possibility of federal legislation."