Nabors shareholders are looking for payback

November 22, 2011, 4:33 PM UTC

By Eleanor Bloxham, CEO of The Value Alliance and Corporate Governance Alliance

FORTUNE — Excessive CEO pay has been a Nabors Industries trademark. And some shareholders want their money back. They are seeking damages from former CEO Gene Isenberg and current CEO Anthony Petrello as well as members of the board of directors in a federal class action lawsuit filed by the Erie County Employees Retirement System.

Former CEO Gene Isenberg made over $108 million in the last three years, and as he exits the CEO post to become chair of the energy drilling company, Nabors’ (NBR) board is granting what Gary Strauss has suitably called a “platinum kiss,” a handsome thank-you estimated to be $100 to $165 million for his services. Some question whether Isenberg had to be paid this sum.

Although the cases are not identical, there are some parallels between the Nabors case and the shareholder cases brought against Disney (DIS) involving a $140 million severance payment to president Michael Ovitz.

Nabors’ shareholders may make similar arguments questioning the nature of the exit and the board’s independence and process. Disney shareholders lost their case but the final ruling set a new bar for directors when approving these kinds of exit packages: “If a director acts with conscious disregard — in other words, a looking away — rather than a deliberate intent to violate his duties, he can still be held liable for acting in bad faith,” plaintiffs’ attorney Steven G. Schullman told the New York Times back in 2006.

This may place retired Nabors director Marty Whitman and some of the other directors on the hot seat. The Street shared this anecdote from Philip Weiss, Argus Research senior analyst:  “Marty [Whitman] told me that he and Isenberg both went to Yale Business School together and so he was an old friend, and you kind of give him whatever he wants.”

A Nabors spokesperson did not respond to a request for comment for this article.

Footloose and fancy-free spending?

Outsize pay looks to be just a part of the freewheeling spending culture at the firm, which has recently come under investigation by the SEC. The investigation comes five months after the Wall Street Journal looked into Nabors executives’ private use of corporate jets.

Nabors’ stock price has declined 33% over the last five years,  and shareholders have tried to get the company to rein in its spending sprees and bring its governance up to snuff. But their actions have landed on near-deaf ears in the Nabors’ boardroom.

In April, shareholders sent a strong rebuke, with a majority voting against Nabors’ pay practices, a culmination of many years of shareholder proposals to address pay issues. But it took some time for shareholders to develop that consensus: the shareholder compensation proposals in 2010 did not pass.

In an it-could-have-been-worse scenario, shareholder efforts in 2009 reportedly resulted in a drop in Isenberg’s severance payout to $100 million from approximately $330 million, an amount that would have exceeded the company’s 2011 nine-month earnings from continuing operations.

Shareholders have also tried to bring governance reforms to the firm. In April, they voted in favor of a shareholder proposal requiring annual majority rule votes for all directors, which Nabors has said they will abide by. Nothing radical there, but a step forward that will bring Nabors into the current age of corporate governance: Ted Allen, a director at the proxy advisory firm Institutional Shareholder Services, recently pointed out that 70% of large cap companies have already adopted a majority vote standard.

Nabors shareholders also sent a strong rebuke against the company’s governance practices with a majority vote against one of its two director nominees, Myron M. Sheinfeld.

Nabors’ board is not legally compelled to abide by the majority vote against Sheinfeld’s election, and it has decided to keep him on the board. But this is somewhat difficult to fathom as many directors often view less than a majority vote against a given director’s election as a vote of no confidence by shareholders. Sheinfeld earned $423,000 in income last year as a Nabors director to supplement his income as counsel with the law firm of King & Spalding LLP. If you didn’t have to give up your seat, would you give up that income?

So what more can shareholders do?

Pushing for reforms as well as damages in and outside of the lawsuit may make sense. For example, shareholders could make their views known on the use of CEO contracts.

Contracts are often at the heart of excessive pay packages. The reason contracts are so often problematic is that CEOs tend to be sharper negotiators than boards — and CEOs are often negotiating from a position of strength. If they lack a quality succession plan, boards often have to try to attract a CEO when the timing is not optimal from a negotiating standpoint.

As part of settlement terms of the case — or separate from it, shareholders could also consider putting forth a measure next year to allow nominations of directors by shareholders, also known as proxy access.

Does the board need new blood?

Nabors’ board has earned GovernanceMetrics International’s distinction for worst pay practices, but it managed to avoid the worst board of the decade prize, and it did not make its recent list of at-risk companies. Clearly, however, compensation is the symptom. Shareholders will have to be patient and will need to keep pressing if they want to develop a cure.

In his 2005 decision in the Disney shareholder case, Chancellor Chandler served up a stern warning to boards of directors according to a report by Reuters: “If neither the courts nor the markets are able to restrain executive compensation … the result will be imposition of regulatory controls.

Those words were prescient and may reverberate in the Nabors case, and beyond.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (, a board advisory firm.