Get Ready For A Red-Hot Season

Many boards grappled with one or more of these issues last season, but that doesn't mean they've gone away. If anything, shareholders feel empowered by their progress. Proxy advisory firm Institutional Shareholder Services (ISS) recently polled the largest of its 1,720 clients on the future of corporate governance. The 325 institutional investors surveyed control some $20 trillion worth of equities, or 62 percent of the total $32 trillion under management by ISS clients. Reported John Connolly, the firm's president and chief executive: "Ninety-seven percent of the respondents said that corporate governance was going to be more important than it is today." Furthermore, he added, a large majority said that within their own organizations, corporate governance has moved from a compliance activity to a business imperative.

What does this mean for boards, and how should directors be spending their time in the run-up to the 2007 voting season? The consensus of Directorship's Agenda 07 panel on proxy issues was that communicating clearly and frequently with shareholders is more important than ever. Investors who don't hear about strategy, financial developments, transactions and major market changes from corporate leadership are going to draw their own conclusions. And with various stakeholders eager to spin events to fit their own agendas, those conclusions will often be negative. "As we well know, nature abhors a vacuum," said Nancy Humphries, president and CEO of the National Investor Relations Institute. "Either you control the situation, or one of your owners or the media is going to control it."

Directors aren't about to be asked to become instant IR experts— although some companies bring their IR leaders into the boardroom often. But arguably, in today's climate, part of their fiduciary duty is pressing management to engage early and often with shareholders on key issues. That is a yearround job. Said Warren de Wied, corporate partner at law firm Fried, Frank, Harris, Shriver & Jacobson: "The annual meeting process nowadays is kind of like being a professional athlete. Even in the off-season you have to train. And if you're not training in the off-season, you may not do very well in the regular season."

Clearly, shareholders have targeted the boardroom as the place where they want to see change begin. It's telling that two of the five hot issues for '07 relate to board composition and structure. Connolly expects 450 resolutions on majority voting to come before U.S. companies this year, up from 140 in 2006, 89 in 2005 and just 12 in 2004. Corporate giants from Wal- Mart to Intel have already embedded majority voting in their bylaws, and many more large companies will likely follow.

Gavin Anderson, CEO of rating firm GovernanceMetrics International (GMI), called the majority voting movement an "unstoppable train." So far, only 150 out of 9,000 publicly traded companies have adopted it. But Anderson predicts that a majority will do so within three or four years. Starting this season and continuing indefinitely, more and more directors will be unseated because of shareholders' views of their performance or because they are associated with a problem within the company. And fewer board-appointed directors will be elected in the first place if there's dissatisfaction with the company's overall strategic direction or share price.

Meanwhile, the movement toward board declassification has gathered so much momentum that Connolly advised companies not to waste their resources fighting it. Already, 53 percent of publicly traded companies have declassified boards, and last year saw 94 proposals. Academic studies, by Harvard's Lucian Bebchuk and others, correlate staggered boards with lethargic stock performance, and shareholders have taken notice. Connolly thinks they have simply concluded that a classified board has no benefits for them as owners.

Of all the issues that motivate investors to call for a board shakeup, executive compensation is probably the most explosive, and new disclosure regulations on pay packages—for directors as well as managers— will make the topic even more prominent this year. A whole slew of formerly private information will henceforth be public, and the scandal over options backdating is ongoing. All the panelists agreed that could be a catalyst for action at a lot of companies.