What to Watch for this Proxy Season
What should directors expect as the 2012 proxy season approaches? As I discuss in more detail in a new Manhattan Institute report, released March 6, I am focused on four key areas to watch in the upcoming annual meeting cycle: shareholder advisory votes on executive compensation, shareholder proposals involving corporate political spending, shareholder proposals calling for independent board chairmen, and shareholder proposals seeking proxy ballot access for director nominees.
Say on Pay
In 2011, the first year in which shareholder "say on pay" votes were mandatory under the Dodd-Frank Wall Street Reform and Consumer Protection Act, a majority of shareholders voted in favor of executive compensation plans at over 98 percent of large, public companies. Most shareholders also voted for annual review of pay plans.
In fall 2011, the largest shareholder advisory firm, Institutional Shareholder Services (ISS), announced its intention to challenge management to respond whenever 30 percent or more of shareholders had voted against a board-proposed executive compensation plan in the prior year. In my view, ISS’s policy runs the risk of empowering minority investors who may take issue with executive pay in the proxy process for reasons unrelated to share value�including union-affiliated funds, which my research has found are more active in the proxy process with companies whose industries face ongoing labor-organizing campaigns.
Political Spending
Since the Supreme Court’s controversial 2010 decision in Citizens United v. Federal Election Commission, which held that corporate political speech was protected by the First Amendment, the number of shareholder proposals related to companies’ political spending has escalated markedly: Fortune 200 companies faced an average of 18 to 22 such proposals from 2006 through 2009, but that number rose to 30 in 2010 and to 41 in 2011. Only one of these proposals�a 2006 political spending disclosure proposal that Amgen’s management supported�has received support from a majority of shareholders.
In fall 2011, ISS changed its position to be "generally for" this class of proposals. I am skeptical of ISS’s posture because I worry that many of the current shareholder proposals related to political spending could serve mainly to chill corporate political speech, to the detriment of most diversified shareholders.
Chairman Independence
Leaders at the American Federation of State, County, and Municipal Employees and the New York City pension funds have announced that they are targeting several large public companies in 2012 with proposals to separate the position of board chairman and chief executive officer. Such proposals have been rather common, though only four such proposals have received majority shareholder support among Fortune 200 companies since 2006.
While independent board chairmen might in many cases help align management’s interests with those of shareholders, there is a dearth of empirical evidence showing that chairman independence improves shareholder returns, and there are situations in which it may not be ideal for companies to separate the two positions. Historically as well as this year, labor-affiliated investors have been the primary sponsors of these proposals, and I am concerned that they may be pushing chairman independence with an eye toward gaining leverage over management for other purposes, since chairmen-CEOs would understandably be sensitive to proposals that directly weaken their control over the companies they manage.
Proxy Access
In July 2011, the U.S. Court of Appeals for the D.C. Circuit threw out a proposed SEC rule that under certain conditions would have forced public companies to list shareholders’ director nominees on their corporate proxy ballots. The agency responded by amending Rule 14a-8 to permit shareholder proposals seeking proxy access. Already, several such proposals have been submitted, and Hewlett-Packard has announced that it has negotiated a withdrawal of a shareholder proxy-access proposal and would be introducing its own such proposal to shareholders next year.
As with the other proposals discussed, proxy-access proposals potentially give highly motivated investors greater leverage over management. It will be interesting to observe whether most institutional investors welcome this shift or if they, like the D.C. Circuit, will worry about the risk that "unions and state and local governments whose interests in jobs may well be greater than their interest in share value . . . will likely cause companies to incur costs even when their nominee is unlikely to be elected."
This piece originally appeared in Boardmember.com
This piece originally appeared in Boardmember.com