WaMu directors face vote

A union-affiliated pension advisory group says Washington Mutual Inc. shareholders should withhold votes from two directors seeking re-election to the company's board because of their roles in managing subprime lending risk and setting compensation for top executives.

If CtW Investment Group can sway a majority of shares cast at the April 15 annual meeting to its position, the directors -- Mary Pugh and James Stever -- under WaMu's bylaws would be required to submit their resignations.

"We felt it was important to focus our attention on the directors most culpable for failures in risk management," said CtW research director Richard Clayton.

CtW representatives and WaMu executives and board members met last Friday to discuss the group's earlier letter asking for information about WaMu's board; that letter warned that it might recommend that shareholders withhold votes for certain directors.

"The board has recommended in the company's proxy statement that its shareholders support all its nominees because of their record of skill, diligence and deep understanding of our company," WaMu said in a statement Thursday, following the release of CtW's letter to shareholders. "They know what we need to do to address the challenges that lie ahead and restore value to our shareholders."

CtW's latest letter says, "Washington Mutual's misreading of the risks inherent in the housing bubble led the company to shift its origination, holding and servicing operations away from fixed-rate, conforming mortgages and toward riskier subprime, adjustable rate and Alt-A products that presented much greater risk of default in the event of home price declines."

CtW targeted Pugh because she is chairwoman of the finance committee, which is responsible for risk management. The group says Pugh is not an independent director because her Seattle-based money-management firm has done business with WaMu, collecting more than $1.1 million in fees since 1999.

It also notes that Pugh's firm was warning clients of a housing-market slowdown in the fourth quarter of 2006, but "she appears not to have taken action as finance committee chair either to reject plans that would exacerbate downside exposure to house price deflation, or to encourage more aggressive efforts to reduce such exposure."

WaMu was getting similar warnings from another source -- William Longbrake, vice chairman of enterprise risk management -- that housing was headed for a worse than anticipated downturn, CtW said.

CtW also targeted Stever, a retired U S West executive who serves as chairman of the WaMu board human resources committee, "for attempting to insulate executive bonuses from the consequences of this risk management failure."

At issue is a recent Securities and Exchange Commission filing by WaMu disclosing criteria for awarding bonuses to top executives for 2008. One of the criteria would be operating profit excluding the effects of loan-loss provisions (except for credit cards) and expenses stemming from foreclosed real-estate assets.

While WaMu has argued that those factors will be included in an evaluation of executives' performance, CtW said it found WaMu's arguments "unconvincing."

CtW's affiliated unions in Change to Win hold less than 1 percent of WaMu stock. But Clayton said its members also participate in state and local-government pension plans and can influence those that hold WaMu shares. In addition, the group is making its case to institutional investors and proxy advisory services, which provide research to clients and recommendations on how to vote their shares.

Proxy advisers routinely consider director performance even if there's no challenge, but " 'Vote no' campaigns are something we take a look at," said Scott Fenn, managing director of policy at Proxy Governance Inc.

Meanwhile, investment research firm CreditSights warned in a report Thursday that WaMu could be facing even greater provisions for loan losses in 2008 than it now expects and may need to raise additional capital to maintain regulatory capital levels and financial ratings

WaMu stock fell 97 cents to $10.53 a share in trading Thursday. A year ago it was trading at $41.11.