Proxy Season 2011: Progress or Procrastination?
by James Hyatt
Depending on whom you ask, when it comes to shareholder activism and corporate governance issues this year’s proxy season is a glass half full, a glass half empty, or a glass completely shattered.
Provisions of the 2010 Dodd-Frank financial reform bill, and related moves by the Securities and Exchange Commission, mean that shareholders for the first time will be able to weigh in on a number of issues.
The SEC in January adopted final rules that required shareholders get a “say-on-pay” vote on executive compensation and an opportunity to indicate how often they’d like such a vote.
Or, as Paul Hodgson, senior research associate at the Corporate Library, wrote in his Ratings Haiku V:
To say on pay or
Not to say on pay? Three years?
Or each blossom time?
The new rules apply starting with shareholders’ meetings on or after Jan. 21, 2011.
Many companies are recommending an every-three-year vote (one recent tally of 150 proxy statements found 82 companies recommending triennial, 47 annual), but there are exceptions. Apple Inc. directors, for example, are proposing that the advisory vote be conducted annually. (But, as previously noted here, Apple’s board opposed a shareholder proposal to adopt a written CEO succession planning policy. Apple CEO Steve Jobs has had a liver transplant and this January announced he was taking a medical leave of absence.)
Proxy advisory service ISS recommends an annual vote, and in January, a group of 39 institutional investors with more than $830 billion in assets called for annual votes. “The discipline of an annual vote will encourage Boards to be more responsive and accountable on compensation,” said Timothy Smith, senior vice president of Walden Asset Management, one of the group’s members. And a number of major mutual funds have indicated they’ll support an annual vote.
Already this year shareholders have rejected a triennial schedule at Costco Wholesale (52.8% for an annual vote), Johnson Controls (58.6% for every year), at Monsanto (62.2% for an annual vote), and at Jacobs Engineering (66%). Monsanto subsequently announced it would conduct an annual say-on-pay vote.
A January analysis by the Latham & Watkins law firm observed that annual say-on-pay votes “may take some of the pressure off director elections” by directing attention to pay issues, while “less frequent votes may allow an unpopular pay practice to continue too long without timely feedback.” Triennial votes, it suggested, “will provide shareholders sufficient time to evaluate the effectiveness of short- and long-term compensation strategies.”
The new rules also require advisory votes on executive compensation (a majority of Jacobs Engineering shareholders also voted against the company’s compensation practices) and on golden parachute provisions where mergers are in the works, although small public companies with a public float of less than $75 million don’t have to adopt such votes until 2013 annual meetings. The Dodd-Frank legislation forbids brokers from giving proxies to vote shares without instructions from beneficial owners on matters relating to executive compensation; the change will cut down on the size of the vote and remove corporate leverage in voting broker proxies on pay issues.
Noted attorney Martin Lipton and colleagues, in a recent memo on governance, declares “This latest round of reforms is remarkable not because it has ushered in bold new ideas for improving governance, but rather because of the extent to which it has one-sidedly embraced the shareholder rights agenda and further expanded the ability of shareholders to direct corporate decision-making. As a result of the Dodd-Frank Act and other reforms, boards will increasingly need to solicit shareholder views and support for a range of decisions – including executive compensation and director nominations—that have traditionally been a core responsibility of boards.”
In Mr. Lipton’s view, “we have reached a point of serious debate…as to whether the scales have tipped too far in empowering shareholders and preventing boards and management from managing for the long term.”
Even if proxy access rules are struck down, Mr. Lipton says, “it is likely that activists will pursue shareholder proposals and bylaw amendments to impose proxy access on a company-by-company basis.” Despite the legal uncertainties, he suggests, “companies will need to engage constructively and proactively with shareholders and, in the cases where directors nominated by shareholders are successfully elected, boards will need to work to minimize the potential for adverse effects on board stability, collegiality and effectiveness.”
He urges boards and compensation committees to “review compensation policies with great care, being mindful of pay-for –performance principles while also seeking to avoid policies that will encourage excessive risk-taking.”
He has commented several times on the increased problems in recruiting corporate directors, given regulatory and investor emphasis on “director independence at the expense of other skills and qualifications.” Such factors “preclude the candidacy of insiders with extensive, day-to-day knowledge of the company” as well as industry experts with “naturally developed relationships and affiliations in the sector.” He concludes “given the importance of expertise, there should be no complaint about adding additional inside directors to a board so long as a majority of the board consists of ‘independent’ directors.”
On the hurry-up-and-wait side:
The long-sought proxy access rules, adopted by the SEC last year, are frozen pending an aggressive legal challenge by the U.S. Chamber of Commerce and the Business Roundtable.
The SEC has adopted a rule allowing shareholders with at least three percent of ownership for at least three years the right to have their own board candidates listed on the proxy ballot without the need for an often-expensive proxy fight. The Chamber/Business Roundtable lawsuit asserts, among other things, that the SEC exceeded its authority, violated companies’ First and Fifth Amendment rights, erred in appraising the costs of proxy access, ignored evidence of adverse consequences of the rule, and ignored state laws on proxy access. The SEC filed its response in January, and the case will be herd by the U.S. Court of Appeals for the D.C. circuit April 7.
A useful analysis of major arguments in the case has been published at the Conference Board’s Governance Center Blog.
An amicus brief supporting the SEC rule has been filed by the Council of Institutional Investors. CII executive director Ann Yerger says proxy access will “make companies more responsive to their shareowners and more vigilant in their oversight of management.” And a group of 36 law professors, who hold varying views on many corporate governance and legal issues, have filed a brief arguing the SEC rule doesn’t violate the First Amendment.
While corporate pay and proxy issues are dominating the blogs and legal commentary, the 2011 proxy season will include a wide range of environmental, social and governance issues. The Interfaith Center on Corporate Responsibility, whose members last year filed 308 shareowner resolutions, and withdrew dozens more after conducting dialogues with companies, has tallied 159 resolutions filed so far, SocialFunds.com reported in January.
In an interview with SocialFunds, ICCR executive director Laura Berry noted that at least 25 resolutions address corporate political spending, reflecting concern over the 2009 U.S. Supreme Court decision in the Citizens United case. Other resolutions seek disclosure on indirect political spending by corporations through trade associations, address labor practices in agriculture, and examine healthcare access and how pharmaceutical companies can address neglected diseases, she said.
On the snarky side, one critic is boldly declaring “corporate governance is dead.” John Richardson, who blogs on governance, risk and human rights issues at Global Investment Watch, declared at year end that “Corporate Governance as we know it is dead. Gone. Pfffft. As 2010 comes to a close, we must all come to terms with the fact that this old clunker has seen its day. Its rusted hood ornament and fins are of a bygone era, an artifact of another time.”
After tracing the mid-2000s history of governance issues, and noting the various mergers in the proxy advisory world, Mr. Richardson declares “…the arcane discussions about executive pay, director responsibility and risk are proving to be ever more irrelevant in a world concerned about the influence of the corporate enterprise on society and the environment. Corporate Governance as a tool for addressing these problems has lost its edge. While these discussions remain important to the initiated, its backward-looking approach and its failure to influence the ills of global corporate conduct speaks to its ultimate irrelevance.”
His rant prompted James McRitchie of CorpGov.net to respond: “Richardson appears ready to throw in the towel even before the most significant reform, proxy access, has even been implemented.” He cites increased numbers of issues submitted to corporate annual meetings and declares “if individuals embrace the importance of corporate governance in both their equities and in how their institutions vote, half the battle will be won. Corporate governance is far from dead.”
Dead or not, governance continues to intrigue researchers. The conservative Manhattan Institute for Policy Research has launched ProxyMonitor.org containing information on all shareholder proposals submitted for a vote between 2009 and 2010 at the 100 largest American public companies.
The Institute’s initial analysis of the proxy statements finds that “a substantial percentage of shareholder proposals have little to do with corporate performance or increasing share value. Issue-advocacy groups with social agendas that go beyond shareholder protection as well as labor unions with interests that sometimes conflict with those of the average shareholder are major sponsors of shareholder proposals. Also striking is the large role in shareholder activism played by ‘corporate gadflies,’ individuals who repeatedly initiate shareholder proposals despite having only small holdings in a wide variety of companies.”