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
Continued heat over how much top executives of companies are paid is not expected to cool in the upcoming year. Recent filings with the SEC show what several top executives have commanded: Goldman Sachs Chairman and CEO Lloyd Blankfein will take home nearly $68 million, while Tyson Foods CEO Richard Bond received nearly $24.6 million in 2007. Capital One Chairman and CEO Richard Fairbank, is slated to receive stock options worth about $17 million in 2008, in place of salary, annual cash incentives, or long-term incentives.
“Compensation, I think, is going to attract the most attention, let’s put it, this year,” McGurn says. “We’re going to see a record number of shareholder resolutions on the topic, and probably a fairly significant number of targeted withhold or ‘no vote’ campaigns against members of compensation committees or boards over the issue.”
McGurn also expects the number of resolutions seeking to link pay to performance will rise at an unprecedented level. Another distinction is that those resolutions will be targeted based on 2007 proxy-statement disclosures. “If you were on one of those boards that did not put the performance hurdles into the proxy, or did not give adequate discussion about the linkage between pay for performance, I think chances are you might find yourself the subject of one of those shareholder resolutions this year.”
Other panelists agree that compensation committee chairs could find themselves facing trouble if investors are unhappy with their pay practices. “Some institutions say, ‘We don’t really need say on pay. We already have a vote. We can vote against the compensation committee members,” says McCormick.
James P. Melican, chairman of Proxy Governance, a proxy advisory and voting company, isn’t so sure: “If the corporate community was generally convinced that the advisory vote on say on pay would ameliorate the problem of how you withhold votes against compensation committee members, you’d be seeing a lot more people moving towards it,” he says.
Other topics likely to get attention on ballots this year, say panelists, are proposals specific to the subprime crisis, healthcare, and product safety. “Those are all issues torn from the headlines and there are new proposals on all of those topics coming up,” says McGurn. Environmental risk and disclosure is also sure to become fodder for shareholder resolutions. “Climate change resolutions are going to be front and center,” says McCormick. “With shareholder resolution support growing substantially, boards would be smart to prepare themselves for that kind of pressure.”
In any event, boards are going to have to look at shareholder activism much more seriously in 2008. Says Davis: “It’s no longer just something you can choose to look at or pay attention to. It’s now something you have to pay attention to, because your jobs, in effect, as directors, could be on the line.”