My annual search for a theme to encompass the impending proxy campaign led to a dicey encounter with a colleague who dabbles in both governance and gambling. Knowing my tendency to tie themes to the year’s final two digits, the frequent visitor to both Las Vegas casinos and governance confabs put his money down on the craps table. “Yo-leven is a natural,” he said.
While I had planned on a football theme with eleven players on either (take your pick) the U.S. gridiron or the rest-of-the-world’s pitch, the governance guru/gambler’s remark required research. After a Google and a few Wikis, I learned that initial rolls of the dice that add up to either seven or eleven are “natural” winners at the craps table. Eleven is called out at the table as “yo-leven” (or “yo”) due to the potential for confusion given the similar sound of seven.
As I pictured the bevy of boardroom requirements tumbling out of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), it hit me that a roll of the dice would more than suffice as the 2011 season’s symbol. While directors will not imagine that they are in the Nevada desert once the say-on-pay tsunami makes landfall, they may feel like riverboat gamblers—slightly queasy and desperately seeking terra firma. The deal-sealer was an obscure Wiki factoid: craps devolved from an old English dice game called “hazard.”
So without further ado, here is a list of seven potentially hazardous points that directors should prepare to roll when they step up to the boardroom craps table for the yo-leven proxy season.
Democrats’ Snake Eyes Roll May Roil Directors
The 2010 annual meeting season was quiet thanks to all of the noisemaking in the nation’s capital. In the wake of the Wall Street-driven market meltdown, all eyes locked onto K Street and Capitol Hill. Many activists actually down shifted their 2010 annual meeting efforts in favor of a march on Washington D.C.
This capital investment paid dividends as Dodd-Frank looked like it would tip the governance table in activists’ direction for 2011 and beyond. Reformers were on a hot steak last summer as Congressional stick men Senator Chris Dodd and Representative Barney Frank passed loaded dice over to the Securities and Exchange Commission (SEC). With the long-coveted cover of Congressional authorization, the Commission adopted its proxy access rules in August 2010 and began implementing Dodd-Frank’s say-on-pay mandates.
Before the winning chips were pushed across the table, however, the U.S. Chamber of Commerce and the Business Roundtable asked the U.S. Court of Appeals for the D.C. Circuit to invalidate the SEC’s access rule. In October 2010, the Commission shocked the good-governance crowd by staying the effectiveness of the rules pending resolution of the legal challenge.
Next, in early November 2010, Washington’s reign as the epicenter of the governance universe abruptly ended when Congressional Democrats rolled snake eyes in the mid-term elections. The subsequent musical chairmen game led to an ideological sea change in the U.S. House of Representatives as Alabama Republican Spencer Bachus replaced Massachusetts Democrat Barney Frank as chair of the House Financial Services Committee. Rep. Bachus promised to go title-by-title through his predecessor’s namesake Act to “correct, replace or repeal the job killing provisions that unnecessarily punish small business and community banks that did nothing to cause the financial crisis.”
The odds of Dodd-Frank’s repeal are low since Democrats still control both the U.S. Senate and the White House. Undaunted, newly installed Republican committee chairs have already begun to harass agency rule writers—via tough oversight—and to starve—via slow, low or zero appropriations—the SEC and the various new bureaucracies envisioned by Dodd-Frank.
Without the promise of further governance changes via Federal fiat and with proxy access offline, directors should prepare for bumper crops of shareholder proposals, letter-writing campaigns, “just vote ‘no’” efforts and old-school proxy fights this year. Notably, activists have turned their attention to the leftovers—especially majority threshold voting (MTV) in uncontested elections—from last year’s Congressional chow down at the governance buffet.
Boards Weigh Odds of Activists Rolling Hard Six
As a result of the SEC’s stay, the Commission’s rule (14a-11), which would have become effective on Nov. 15, 2010, sits in limbo. Even assuming the Federal courts uphold the rule, implementation will not come in time to impact the 2011 proxy campaign. The SEC stay also delays amendments to Rule 14a-8 that would have allowed investors to file bylaw proposals creating more permissive access procedures.
While 14a-11 nominees and 14a-8 bylaws will not appear on 2011 ballots, some activists have begun to build the infrastructure that will allow them to exploit access once it is up and running. The rule, if implemented, will require wannabe shareholder nominators to roll six the hard way—owning at least three percent of a public company’s voting stock for at least three years. That means only big players need apply. Some mega-money managers tell us that they have already received feelers from activists who seek to gauge their future interest in joining coalitions to clear the three-percent/three-year hurdle.
Two of the market’s highest rollers, the $220 billion California Public Employees Retirement System (CalPERS) and the $140 billion California State Teachers’ Retirement System (CalSTRS), are rounding up possible candidates for boards. The two fund giants partnered in 2010 to develop a database of potential shareholder-friendly director candidates with diverse talents. This “Diverse Director Database,” or 3D, opened last year and the funds are fielding resumes.