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Be in harmony with shareholders.

Be in Harmony With Shareholders

When I became Chief Executive Officer of Lockheed Corp. in January 1989, I assumed responsibility for a major aerospace company with $10 billion in annual sales. Some of its better-known products and programs include the Trident Fleet Ballistic Missile; the Hubble Space Telescope; NASA space shuttle operations; aircraft like the C-130, P-3, SR-71, F-117 Stealth Fighter, and our recently won F-22 advanced tactical fighter. Lockheed is a company whose broad business base and advanced technology give it one of the defense industry's healthiest portfolios.

Nonetheless, as I discovered in my first few months as CEO, Lockheed was, quite candidly, far less evolved in its relationship with its shareholders, especially its institutional shareholders. This oversight was made painfully clear when Dallas investor Harold Simmons launched a major battle for control of the corporation.

It is not that we were disinterested or unaware of our institutional shareholders; our efforts were merely misdirected. We had focused on communicating with financial analysts, assuming that they would carry our message to the institutions. But they didn't - nor should we have expected them to do so. Moreover, our previous shareholder proxy experiences had been fairly benign.

So, we sailed into that 1990 proxy contest naively thinking we were in harmony with the majority of our shareholders.

The storm hit at our 1990 annual meeting. We were deluged with five proxy issues - ranging from confidential voting to Simmons's slate of directors. We simply weren't prepared for the onslaught, though analysis of past voting trends on at least two proposals - confidential voting and opting out of Delaware 203 - showed that sentiments of institutional shareholders were rapidly changing.

During the six-week proxy contest, we learned more about our institutional shareholders than we had in the previous 10 years. Gradually, I understood that they were sending two different messages: first, their candid comments on the specific issues; second, more subtle "pay attention to us" themes. When the ballots were counted, a number of large institutional holders went against us. We never should have gotten ourselves into a position in which these institutions felt they had to vote against us to get our attention.

Ultimately, we won on the proposals, and we had learned some valuable lessons, which we began acting on immediately.

Right after the meeting, we wrote to each of our top institutional shareholders asking for his or her thoughts on the process for adding new directors to the board, which we had committed to do at the annual meeting.

We also initiated an entirely new shareholder relations program, with meetings and personal contacts throughout the year. We conducted quarterly meetings in major cities for analysts, shareholders, and investors to review operations and financial results and occasional presentations by the presidents of our four business areas. We also targeted major conferences sponsored by the financial community. We created issue-oriented newsletters for our shareholders. We used third parties to survey our shareholders for additional feedback. And we, in turn, fed back to our board of directors information and insights from our extensive institutional contacts.

Further, we developed a program within Lockheed to heighten awareness among middle management of the importance of creating shareholder value.

Last, but not least, we met or exceeded all the commitments we made to our shareholders at the annual meeting. For example, we took several major governance actions: We adopted confidential voting, opted out of Delaware 203, revised golden parachutes, improved termination benefits for salaried employees who might lose their jobs due to a hostile takeover, and amended our shareholder rights plan ("chewable pill") to allow consummation of a qualifying buyout offer. We also conducted an exhaustive search for outside board members, with direct input and participation from our shareholders, and named four new directors before the end of the year.

Despite all these actions, Harold Simmons hit us with another proxy battle in 1991. This time, however, we were determined to find a less costly way to fight. Picking up on some of our institutional shareholders' ideas, we proposed that both Simmons and we forgo newspaper advertising and vastly reduce the number of proxy mailings - especially noxious to many shareholders. Simmons' camp agreed, and this saved us several million dollars. Most important, in this second confrontation with Simmons, we were able to build on the now well-established relationships and communications links with our institutional shareholders. And we continued to consult with them "early and often."

One of the interesting issues during 1991 was the "right" of a major shareholder to board representation, which is closely related to the issue of cumulative voting. We found a wide spectrum of institutional attitudes - from a rigid policy in favor of automatic representation for major shareholders to one that evaluates each situation based on individual qualifications and other factors.

Of those few who had rigid policies we asked, "Is this a policy that could evolve over time and circumstances or is it an immutable principle?" We pointed out that we were not automatically opposed to putting major shareholders on the board but maintained that the qualifications of the individual must be taken into account.

In the final analysis, even the institutions with the most-rigid policies said they would side with management's view, and we believe that the vote on the representation issue would have been overwhelmingly in our favor. Clearly, Simmons must have seen the handwriting on the wall: On March 18, he gave up his battle for control of Lockheed, selling off most of his stock.

Looking back at our success in the proxy contest, I see two critical factors of note for corporate directors and senior management. First, and foremost, I believe we were able to establish our credibility, above all, by generating a strong 1990 performance. It was strong in financial terms, in terms of positioning Lockheed for future new business and also in terms of progressive corporate governance.

Second, through our year-long efforts with our institutions, I think we convinced them of our genuine commitment to improve relationships and communications and to build shareholder value.

Issues will always arise between a corporation's management and its shareholders. From our perspective, what is fascinating is the spectrum of views and attentiveness to issues among our institutional shareholders. Even widely divergent viewpoints are all right, as long as we both recognize that some issues are still in formative stages; and old issues may need reconsideration due to changes in circumstances or business conditions.

I am particularly concerned about stereotyping each other: for example, industry as a collection of overpaid, lax executives seeking only to entrench themselves; institutions as wild-eyed reformers intent only on exercising power and trying to run the company from the outside. Successful working relationships eschew such thinking.

We at Lockheed intend to continue on the path of interaction and dialogue as a route to genuine progress on issues of mutual concern. I think the institutions learned from our proxy experience. I know Lockheed did.

DANIEL M. TELLEP / Lockheed Corp. During a bruising six-week proxy contest with Harold Simmons in 1990, Daniel Tellep says, "We learned more about our institutional shareholders than we had in the previous 10 years." That learning experience led to a significant evolution in the company's approach to its shareholder relations, which he describes below. Tellep joined the aerospace leader in 1955 as principal scientist for the X-17 missile reentry flight experiments, and was elected as Lockheed's Chairman and CEO in 1989.
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Title Annotation:Special Section: Being a Global Leader; views of Daniel M. Tellep, Chairman and CEO of Lockheed Corp.
Publication:Directors & Boards
Date:Sep 22, 1991
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