Handicapping the '08 Proxy Season

The most combative proxy season to date may lie ahead in the coming months. Now that the Securities and Exchange Commission (SEC) has decided to restrict shareholder access to proxies for at least another year, it’s more than likely that investors at some companies will attempt an end run by proposing a record number of proxy-ballot initiatives.

If the 2007 proxy season saw a number of shareholder proposals that reflected discomfort with excessive executive compensation, this year is likely to hold more of the same. Three issues—“say on pay,” pay-for-performance, and majority voting for directors— are expected to garner a record number of proposals this proxy season.

Leadership issues on boards of directors will also grab a good portion of the spotlight this year. According to Risk- Metrics, at least 20 companies now face resolutions to split the roles of chairman and CEO, or to install an independent chairman. Moreover, another proposal gaining traction calls on up to 12 companies, including Merrill Lynch, Verizon, and Bank of America, to disclose their policies on successionplanning. Given the succession fallout at both Merrill Lynch and Citigroup, expect interest in this issue to reach a new peak this year.

"Compensation, I think, is going to attract the most attention this year. We're going to see a record number of shareholder resolutions on the topic." --Patrick S. McGurn, RiskMetrics

Majority Voting

While proxy access continues to be a hot-button issue, some companies are choosing to look at an alternative method to director nomination: majority voting.

A report published in November 2007 by law firm Neal, Gerber & Eisenberg LLP, titled The Study of Majority Voting in Director Elections, found that 66 percent of the companies listed in the S&P 500 and more than 57 percent of companies in the Fortune 500 have adopted majority voting. Comparably, in 2006, when the study was first published, only 16 percent of companies in the S&P 500 were known to use the procedure.

“I think we’re going to continue to see fights on the [proxy access] issue for the remainder of the year,” says Patrick S. McGurn, executive vice president and special counsel at the Institutional Shareholder Services unit of Risk- Metrics. “The big wild card is whether this becomes an issue during the 2008 political campaign season, and whether one or more of the parties will pick up on this concept and push it, and really make it potentially a litmus test for future appointees to the SEC.” “I think that the frustration over the lack of progress of the SEC’s access proposals led a lot of activists to look at majority voting as the next-best alternative,” says Robert McCormick, chief policy officer for proxy advisory firm Glass Lewis. “It’s not the holy grail of actually being able to nominate someone without an actual proxy contest, but at least it makes it possible to unseat a director who may or may not be performing as you would like.”

A Shift in Activism

How the SEC decision to restrict proxy access plays out over the proxy season is still unclear, but panelists agree the number of proposals will be high. “We’re in a new era, and, in some respects, I’d say we’re in the second year of a kind of dimensional shift in activism,” says Stephen Davis, editor of Global Proxy Watch (owned by NewsMarkets, publisher of Directorship). “The reason I say that is because this year, 60 percent of the S&P 500 will be offering majority rule for director elections. Last year was the first we’ve really seen majority rule coming into effect. But this year, it’s now majority and I think we’d all say there are going to be more companies adopting majority rule.”

Two-thirds of the institutional investor respondents in an annual survey by RiskMetrics indicated that they favor universal access, while another 15 percent said they’d like it on a situational basis, where the facts and circumstances at an individual company merits it. “That’s more than 80 percent of the institutions overall saying they favor access in one form or another, and those are pretty high numbers to overcome,” says McGurn. Most of the panel agreed that shareholders would sparingly use the ability to vote out incumbent directors with a majority vote. “In most instances, directors are passing with overwhelming support— 95 percent plus support,” says McGurn.

The Battle over Pay