The 2008 Proxy Season

It is not easy to prognosticate on the 2008 Proxy Season and the future direction of corporate governance. For a little help, I recently turned to a renowned, 60-something-year-old pundit—the Magic 8 Ball.

Most baby boomers would recognize my old-school, black and white, pool-hall inspired, plastic oracle. Busters and Gen-X’ers might know it better by the numerous online versions that have sprung up.

What does this icon of pop culture know about corporate governance? Well, for one thing, the soothsaying, 20-sided, floating die—an icosahedron for all you geometry geeks—graphically represents “constructive engagement,” the dominant trend on the current governance scene.

Ten of the twenty possible answers produced by inverting the orb are variations of “yes.” Five are variations of “no.” That’s a rough approximation of the success rate of shareholders in their interactions with directors these days. Consider the following fun facts.

• Nearly two-thirds of the firms in the S&P 500 now use enhanced rules—either a plurality standard with a director-resignation policy or a full majority vote standard—for board elections.

• Dissident investors met or exceeded their goals—board seats, value-enhancing moves, or both—in more than one half of 2007’s threatened or live proxy fights.

• Less than half of large U.S. companies continue to maintain staggered board terms and poison pills.

• Nearly a quarter of the 1,100-plus shareholder proposals were withdrawn during 2007.

Magic 8 Ball (M8B)’s remaining five possible answers are non-committal, vague, or ambiguous. In other words, M8B is the perfect tool to predict the future course of actions in Washington, D.C. For better or worse, the U.S. Congress, the Securities and Exchange Commission, and the White House look primed to take over driving the bus on most of the big-ticket issues—including proxy access and “Say on Pay”—on the governance highway.

With this prologue, let’s ask, flip, and read.

Will Majority Threshold Voting (MTV) continue to spread? M8B says: “Signs point to yes.”

One sign is the fork protruding from plain-vanilla plurality voting in uncontested boardroom elections. Majority voting jumped from rare to routine over the past two years with 400-plus firms, including 64 percent of the S&P 500 firms (according to Neal, Gerber & Eisenberg partner Claudia Allen), now using enhanced director-voting rules. The MTV movement gained momentum this proxy season as proponents withdrew more than half of the proposals offered on the topic after directors agreed to adopt new bylaw or charter provisions.

How far has the needle moved on majority voting? The staid Ohio business community joined with labor union pension funds to prod that state’s legislature to tweak state law to allow Buckeye firms to opt into majority rules in uncontested boardroom elections.

In just a few short years, look for Ohio, Delaware, and other leading corporate domiciles to follow North Dakota’s lead by making MTV the default standard in boardroom elections.

Will shareholders use the MTV tool to turn out board nominees in significant numbers? M8B says: “My reply is no.”

When the SEC approves the New York Stock Exchange’s proposed rule change that would eliminate discretionary voting of uninstructed voting positions by brokers in uncontested board elections, nominees will lose their traditional 5 to 25 percent head start. Given the significant number of current “no” votes of 35 percent or more, MTV-driven director resignation offers will become commonplace.

It’s doubtful, however, that such MTV policy triggers will cause a massive exodus from boardrooms. The business community’s gloomy prophesies of an MTV-fueled boardroom “reign of terror” haven’t materialized. The first triggering of a modern MTV policy this year (at Gen-Probe) didn’t result in a shareholder mob screaming “off with her head.” Instead, the directors reached out to investors and dealt with the root cause (poor attendance, in this case) of the high “no” vote. Unless boardroom backsliding occurs, the issue appears settled.

Look for similar low-key dialogues to follow most tripping of MTV wires in the future. Also expect to watch directors reach out to investors and their advisers to cure such problematic issues prior to the annual meeting.