Shareholders Press Cisco to Reform Exec Pay

Networking giant Cisco Systems is no stranger to competitive market and technology challenges. It’s now facing a new type of challenge, one from its shareholders.

At Cisco’s (NASDAQ: CSCO) annual general meeting today, shareholders led by Christian Brothers Investment Services (CBIS) challenged the firm’s management on the issue of executive pay.

The CBIS shareholders put up a proposal for an advisory vote on an annual referendum process by which Cisco shareholders would vote on senior executive compensation issues.

The issue is particularly poignant this year as Cisco’s revenues are down on a year-over-year basis, while executive compensation is on the rise. The shareholders argued for a more direct link between performance and compensation.

Cisco’s management team opposes the CBIS proposal, which is co-sponsored by the Sisters of the Holy Names of Jesus and Mary, U.S.-Ontario Province. But they don’t control all the shares and could be outvoted by disgruntled shareholders.

“As investors in Cisco, we have received earnings that help us to support our members in some of the poorest places in this world where the inequities of our current economic system are most dramatically exposed,” Sister Mary Pat LeRoy of the Sisters of the Holy Names said during the meeting. “We see executive compensation as a justice issue for our time.”

The shareholder groups noted in their proposal that they do not believe that existing stock exchange rules furnish shareholders with sufficient mechanisms for providing input to boards on senior executive compensation.

According to the groups’ numbers, Cisco CEO John Chambers received total compensation this year of $14.2 million, a 16 percent jump over last year, even as Cisco’s net income and revenues were down and more than 2,000 employees were laid off.

“While the wonderful gift of TelePresence — and it truly is wonderful — is creating the human network, we believe that the unprecedented concentration of wealth in the hands of the few is quickly becoming a contentious and emotionally charged moral issue that is tearing at the social fabric of our country,” LeRoy said.

For his part, Cisco CFO Frank Calderoni told shareholders that Cisco’s management position was to reject the group’s proposal. In its shareholder proxy on the CBIS proposal, Cisco stated that the company’s compensation committee is in the best position to determine the proper structure of executive compensation.

Not all Cisco shareholders agreed with Cisco’s assessment.

“The shareholder proposal by Christian Brothers Investment Services is too close to call at this time,” Calderoni said as votes were being counted during the meeting. “Cisco shareholders are clearly divided on this issue as evidenced by the closeness of the vote tally today.”

No dividend from the human network?

In addition to the question of executive compensation, Calderoni took on the question of whether or not Cisco would pay a dividend to its shareholders.

Cisco currently holds more than $35 billion in cash, but has not made dividend payments to its shareholders.

“To date, Cisco has not deemed payment of a dividend to be the most appropriate use of Cisco’s resources given alternative uses for cash to potentially increase long term shareholder value,” Calderoni said. “Current market conditions lead us to believe that cash is best deployed on acquisitions to boost our technology portfolio to enable long-term growth.”

In recent weeks, Cisco has made acquisition bids for the set-top box unit of China’s DVN, SaaS security from ScanSafe, wireless technology from Starrent and an expanded video-conferencing business from Tandberg.

Chambers contended that most of the acquisitions Cisco has undertaken over the years have been successful.

“We have a lot of challenges at Cisco, but the ability to acquire in a market where most people struggle to make acquisitions successful is one of our core competences,” Chambers said. “But you’ll notice what separates us from most of our peers — we don’t focus on our competition.”

The networking space received a major jolt earlier this week with HP’s proposed acquisition of 3Com. But Chambers didn’t seem rattled.

“We don’t focus on a competitor,” he said. “In fact, a competitor is just a way of keeping score.”

Update corrects that Sister Mary Pat LeRoy is a member of the Sisters of the Holy Names of Jesus and Mary, U.S.-Ontario Province, not CBIS, as originally stated.

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