The 25 member Task Force, chaired by Holly J. Gregory of Weil, Gotshal & Manges LLP, was comprised of seasoned lawyers representing a broad array of shareholder, corporate and academic perspectives.

The Task Force concluded that “[r]eturning to solid economic growth over the long term will depend in part on the ability of policy makers to respond to concerns over corporate governance as a factor in the present crisis while avoiding reforms that are insensitive to positive aspects of the present legal ordering of decision rights and responsibilities within the corporation.”

The Task Force Report emphasizes the common long-term interest that all parties share in corporate success and effective governance, and asks that participants in reform discussions “reject the rigidity in viewpoints that all too often gets in the way of thoughtful discourse on governance issues.”

The Report includes a number of key observations, including that:
“Shareholders and boards of U.S. public companies have become increasingly active and engaged in their roles.”

“Even for reforms that fall short of working a direct shift in decision-making authority, policy makers should be sensitive to how reforms will work in practice.”

“Shareholder rights to elect the board and make other fundamental decisions should be meaningful. . . . [and] shareholders’ interests in the enhancement of corporate value deserve protection. ”

“[B]oard flexibility and discretion to hire, motivate, guide and oversee the managers to whom they delegate [also] deserves protection.”

“Divergent shareholder interests complicate the board’s task.”

The Task Force Report also includes a set of recommendations for shareholders, boards and policy makers:

Shareholders should:
“Act on an informed basis with respect to their governance-related rights in the corporation. ”

“Apply company-specific judgment when considering the use of voting rights and contested elections to change board composition. ”

“Consider the long-term strategy of the corporation as communicated by the board in determining whether to initiate or support shareh older proposals.  ”

Boards should:
“Embrace their role as the body elected by the shareholders to manage and direct the corporation by: (a) affirmatively engaging with shareholders to seek their views; (b) considering shareholder concerns. . . . (c) facilitating transparency.”

“Acknowledge that, at times, the company’s long-term goals and objectives may not conform to the desires of some shareholders. ”

“Disclose with greater clarity how incentive packages are designed to encourage long-term outlook.”

Policy makers and regulators should:

“In the context of reform initiatives, understand the rationale for the current ordering of roles and responsibilities in the corporation and assess the impact of proposed reforms on such ordering.”

“Carefully consider how best to encourage the responsible exercise of power by key participants in the governance of corporations so as to promote long-term value creation.”

“Ensure that there is equal transparency of long and short, and direct and synthetic, equity positions of shareholder.”

The Task Force concludes: “We all have a keen interest in finding ways to restore investor confidence while positioning the corporation to undertake the actions that will create sustainable long-term value-creation. While the pressures for regulatory solutions are considerable and understandable given the circumstances, caution is prudent with respect to the corporate institution around which so much of our economy is organized.”

Bartz, who was named Yahoo CEO in January, said of Icahn that “it is actually better having him there. [He’s a smart] guy and all of that stuff. [It’s] hard to have someone coming after you so public and so strong.”

The Yahoo CEO also discussed a few principles of good corporate governance, including her belief that boards are too collegial, saying that there is a “tendency to be conflict averse among themselves.”

Bartz also stressed the importance of diversity of age among corporate boards, warning of “that narrow age band,” and suggesting that boards work to incorporate younger directors, and “less middle-aged white guys.”

The ISC, whose member-funds control over $2.4 trillion in assets, is looking to demand greater accountability from its ownership stakes, particularly banks and financial firms. To this end, the group released today a series of guidelines designed to strengthen shareholder activism.

“Shareholders have got to be more purposeful…they should demonstrate their intent by approaching boards collectively and if that fails, by voting against appropriate resolutions at general meetings or even by laying down motions of their own,” says Dnaiel Godfrey, director general at the Association of Investment Companies, a member-group of the ISC.

One ISC proposal is for company chairmen to face annual votes for re-election in the event that support drops below 75 percent.

The ISC, whose member-funds control over $2.4 trillion in assets, is looking to demand greater accountability from its ownership stakes, particularly banks and financial firms. To this end, the group released today a series of guidelines designed to strengthen shareholder activism.

“Shareholders have got to be more purposeful…they should demonstrate their intent by approaching boards collectively and if that fails, by voting against appropriate resolutions at general meetings or even by laying down motions of their own,” says Dnaiel Godfrey, director general at the Association of Investment Companies, a member-group of the ISC.

One ISC proposal is for company chairmen to face annual votes for re-election in the event that support drops below 75 percent.

Icahn, whose Icahn Associates fund owns a 5.6 percent Biogen stake, has crusaded against the company’s management, alleging that current directors have sabotaged attempts to sell the company. Icahn’s current line is that the company should split itself into two separate units.

Icahn has presented four potential nominees for the 12-person Biogen board. Two of the nominees were part of his failed attempt at a board sweep last year.

Icahn, whose Icahn Associates fund owns a 5.6 percent Biogen stake, has crusaded against the company’s management, alleging that current directors have sabotaged attempts to sell the company. Icahn’s current line is that the company should split itself into two separate units.

Icahn has presented four potential nominees for the 12-person Biogen board. Two of the nominees were part of his failed attempt at a board sweep last year.

Ackman, whose Pershing Square Capital group owns approximately 8 percent of Target, has been waging a proxy fight against the retailer since his fund lost approximately 90 percent of its value through 2008. In his column, Nocera accused the fund manager of launching a “huge, expensive distraction” of a proxy fight to try to conceal his own poor investment decision to purchase the stock at its apex.

Ackman’s rebuttal restated that the fund manager was acting in the interest of shareholder value and improved corporate governance, and takes issue with Nocera’s unflattering portrait.

“Despite Mr. Nocera’s accusation of disingenuousness, never in my speech or otherwise did I suggest that this proxy contest was not a means to an economic end on behalf of the investors I represent,” wrote Ackman. “We took a stake in Target two years ago not because it was a bad company or had bad management, but because we saw opportunities to improve a well-managed great company and create value for Pershing Square and other shareholders.”

Ackman, whose Pershing Square Capital group owns approximately 8 percent of Target, has been waging a proxy fight against the retailer since his fund lost approximately 90 percent of its value through 2008. In his column, Nocera accused the fund manager of launching a “huge, expensive distraction” of a proxy fight to try to conceal his own poor investment decision to purchase the stock at its apex.

Ackman’s rebuttal restated that the fund manager was acting in the interest of shareholder value and improved corporate governance, and takes issue with Nocera’s unflattering portrait.

“Despite Mr. Nocera’s accusation of disingenuousness, never in my speech or otherwise did I suggest that this proxy contest was not a means to an economic end on behalf of the investors I represent,” wrote Ackman. “We took a stake in Target two years ago not because it was a bad company or had bad management, but because we saw opportunities to improve a well-managed great company and create value for Pershing Square and other shareholders.”

The study found that hybrid boards, which are formed when activist shareholders elect dissident directors to the board, produced an average shareholder value increase of 19.1 percent, which is 16.6 percentage points more than their peers, within the first year of becoming a hybrid. When the dissident members owned a significant percentage of shares, the positive results tended to be stronger. With a dissident director who owns between 10 and 25 percent of shares, the company outperformed their peers by an average of 67.7 percentage points.

One hundred and twenty hybrid boards formed between 2005 and 2008 were examined for the study, which was conducted to examine the effect of hybrid boards on business strategy and corporate governance structures, as well as shareholder value. Of these 120, 35 percent were composed of dissident members who intended on selling the company, but only 15 percent of them had announced or completed a sale by January. The companies that were sold went for 27.1 percent more than the undisturbed share price. Five percent of the companies studied have declared bankruptcy, although this was not a goal of any of the dissidents.

The study also offers six case studies to provide context to the findings. The stories of H&R Block, Datascope, WCI Communities, Take-Two Interactive Software, Topps, and Vineyard National Bancorp are all analyzed in depth to show how different dissident interests can affect the company.

The full report on “Effectiveness of Hybrid Boards” can be found at www.irrcinstitute.org and www.proxygovernance.com.

Target shares are down about 39 percent from their peak price of $70 in July 2007; Ackman lost $1.6 billion in investor money due to the stock’s poor performance. Ackman’s funds possess about 3.3 percent of Target, with call options for an additional 4.5 percent.

One of Ackman’s arguments for director change cites the positive performance of fellow retail giant Wal-Mart through the recession. “Since the fourth quarter of 2007, Wal-Mart has outperformed Target on key operating metrics, including growth in retail revenues, same-store sales, and earnings per share,” said Ackman in a letter to shareholders.

Ackman has a history of disruptive proxy moves, including a successful bid in 2006 for fast-food chain Wendy’s to sell its Tim Horton’s branch. His new slate of directors at Target will include himself.

The Strategic Research Report on Shareholder Activism for 2008 also showed that the number of cases where activists were successful declined during the period. Activists were successful 29 percent of the time and compromised 38 percent of the time. These numbers declined from 41 percent and 12 percent, respectively, in 2007.

Notable billionaire shareholder activist Carl Icahn and Pershing Square were absent from activity in the fourth quarter.

The report notes that the increase in activism cases in the first quarter of 2009 should place companies on high alert.

The question facing Schapiro is whether she would be ready to push initiatives through the Commission on 3-to-2 party-line votes rather than water down the measures to win bipartisan consensus. Disagreement is sure to ensue.

Already one has demanded a full board vote on a staff plan to curb broker “ballot stuffing” by ending their ability to vote uninstructed shares in director elections. That reform will not be delayed.

GPW predicts similar clashes on Schapiro’s plan to give shareholders the right to nominate directors on corporate proxies. Gillan said that the “access” directive should be issued in late May for passage by year end.

A number of companies have reacted to shareholder and public criticism by reducing director pay. Some directors have made efforts to preemptively dock their own pay.

However, George Davis, partner at Egon Zehnder International, writes in The Wall Street Journal, that boards should not feel obligated to reduce their pay. The current economy has launched unparalleled problems for directors and companies must be able to recruit and retain qualified directors.

Davis argues that boards do not serve on boards for the pay. In fact, prominent directors have generally already achieved a high degree of success in their careers and have a lot more to lose. Reputations that took decades to build can be tarnished easily in a volatile economy.

He notes that much of the criticism geared toward directors is a result of a lack of knowledge of the type of personal investment of time and energy directors are required to utilize when serving on the board of a leading company.

Ultimately, if the best directors are discouraged from serving, it will have a domino damaging affect. While shareholders should make themselves heard, argues Davis, shareholders should focus on best corporate governance practices as opposed to only director compensation. He adds that directors should be applauded and compensated fairly for the time and effort invested.

Some 62 percent of shareholders who voted approved last year’s remuneration package for executive and non-executive directors. If those who abstained from voting are included, support only reached 56 percent.

“If you mention executive pay, people just say ‘no’ at the moment,” Jonathan Rigby, UBS energy analyst, told the FT. “I don’t think the executives have done very much wrong to attract the ire of shareholders, unless there’s some intricate sense of dissatisfaction around corporate governance.”

Salaries for BP directors have been frozen, at the request of the chairman and CEO. BP’s 2008 remuneration package included a 16 percent rise in basic salary and bonus for Tony Hayward, CEO, to £2.5 million. Peter Sutherland, chairman of the company, received a raise in basic salary to £600,000.

BP’s remuneration committee also voted to give executive directors access to 15 percent of shares awarded under a three-year “incentive plan” share scheme. However, under the plan’s guidelines, which compares BP’s total shareholder return over the period to the performance of peer companies, no shares should have been allocated.

“The total shareholder return result, by itself, was not a fair reflection of BP’s relative underlying performance over the period,” the committee wrote of its decision to award the shares. All non-executive directors received pay raises, including Sir Tom McKillop, former chairman of Royal Bank.

“What is breathtaking,” one shareholder said, “is that [Sir Tom], with the full support of the board, was actually planning to stand for re-election. This is a damning indictment of corporate governance. There should be no rewards for failure and Sir Tom McKillop led RBS to a catastrophic, disastrous failure.” The shareholder’s comments induced a round of applause.

Sutherland defended McKillop’s pay increase, saying, “His performance here was first class.”

Finger, whose family owns approximately 1.5 million BofA shares, alleges that Lewis took on a too-large chunk of risk by acquiring Merrill in January. He has also filed a separate lawsuit that alleges BofA executives and directors concealed crucial information related to Merrill’s Q4 2008 losses until after the December 5 shareholder vote to approve the merger.

Merrill suffered a fourth-quarter loss of $15 billion, revealed after the merger went through. Critics allege that BofA executives kept hidden the information related to these losses until after shareholders approved the merger.

BofA’s annual meeting will fall on April 29, at which point shareholders will consider a number of proposals, including whether to put an independent director in the place of Lewis’s chairman spot. Though Finger will not run a formal proxy solicitation in his efforts to displace Lewis, he is filing a notice with regulators that will allow him to run a “vote no” campaign against the current CEO.

The Securities and Exchange Commission put hundreds of companies on notice that they must submit their executive pay plans to an advisory shareholder vote of confidence within months, reports Global Proxy Watch.

The SEC issued an updated guidance yesterday that backed the legislative interpretation offered by Senator Christopher Dodd in a February 20 letter to the agency. As chairman of the Banking Committee, Dodd has oversight authority over the SEC and inserted the advisory vote provision into the recently enacted economic stimulus legislation, according to the RiskMetrics Blog.

The new SEC guidance and Dodd’s letter has further encouraged the investor coalition that filed more than 100 “say on pay” resolutions this season. This campaign has made significant progress since 2006 when the first shareholder proposals appeared on U.S. ballots. Insurer Aflac held the management-sponsored advisory vote last May, and was followed by five other firms in 2008.

Tim Smith, a senior vice president at Walden Asset Management and a leading pay vote proponent, said the latest SEC guidance will prod other firms to agree to hold pay votes. He recalled that one major bank had expressed concern that holding a pay vote would leave it at a “competitive disadvantage,” but said the new guidance “leaves us feeling much more comfortable with providing investors a chance to vote on compensation.”

The Corporate Library begins its Proxy Season Foresight series for 2009 with this brief overview of what shareholders and boards should expect this year, with a special focus on the likely repercussions of last year’s extraordinary loss of shareholder value and confidence.

Shareholder outrage has never been so high: outrage at the extravagance and disingenuousness of CEO pay practices so completely at odds with shareholder interests, outrage at the failed strategic oversight and risk management of their companies’ boards, outrage at market reliance on a flawed and deeply conflicted credit rating system, and outrage at the failure of regulators to prevent the current crisis.

Boards that ignore this outrage will do so at their own peril. Withhold votes for individual directors are likely to reach an all-time high, particularly for those individuals who sit on compensation committees that have failed to rein in CEO pay and power, or audit and risk committees that failed in their responsibility to oversee and mitigate risk. Shareholder proposals to achieve more shareholder input on executive compensation may also see a significant rise in support, as will proposals that seek to limit CEO power by splitting the CEO and Chairman roles.

Also look for:

• Increased focus on regulatory oversight and enforcement by the SEC, as evidenced by recent comments from its newly appointed chairman, Mary Schapiro. More shareholder proposals may also appear on proxies this year, not so much because more will have been filed but because more will have been allowed.

• Sweeping changes in CEO compensation policies, in part to address the obvious excesses of recent years, in part in response to the new economic reality facing most companies. Since the numbers themselves will be down almost everywhere due to market declines, policy will now matter more than ever, and The Corporate Library plans to adjust its compensation analysis and commentary accordingly. Wider adoption of “Say on Pay” seems likely, but since legislation on this topic now seems possible the push for voluntary adoption may actually lessen. One key wildcard in this area: the possibility of new compensation policy requirements for those companies receiving funds under TARP. This is an area that the previous administration failed to address but one which continues to make new headlines, and is one of the main sources for continued shareholder outrage. New federal standards regarding executive pay may become a reality later this year, though probably not in time to affect the upcoming proxy season.

• Much greater attention to how boards manage risk. This will be particularly true at banks and other financial service firms. Once bitten by high-risk business practices, shareholders will be particularly alert for an overreliance on “easy money” such as payday loans, overdraft fees and usurious interest rates aimed at those clients least able to afford them. Such high-margin, high-risk revenue streams still appear to have a strong appeal for financial managers, but shareholders now know better, and will be watching far more closely for such practices.

• Increased shareholder concern over individual director suitability, including personal experience and background, excessive age or tenure, and, in particular, over-boarding, where a director may serve on too many boards to be effective.

• Increased emphasis on disclosure and transparency, including an accelerated agenda for the implementation of XBRL and other enhanced reporting and filing technologies.

• Increased emphasis on climate risk and how companies manage it and present it, given the Obama administration’s likely embrace of a cap-and-trade program for carbon.

• Increased scrutiny of and sensitivity to whatever mechanisms are proposed by the new Treasury secretary for the continuation of the TARP program, and their possible impact on corporate governance and shareholder rights.

The new rules are considerably more restrictive than those previously imposed on institutions that have received government funds and are to be applied prospectively,  according to a report by Pearl Meyer & Partners. Treasury has indicated its goal is to better align executive compensation at these organizations with shareholder and taxpayer interests by:

• Imposing a $500,000 cap on cash compensation to executives

• Restricting equity compensation to restricted stock tied to repayment of government debt

• Further limiting severance payments

• Expanding clawback requirements for inappropriate incentive payments

• Requiring a Board-approved and disclosed policy on luxury expenditures

The report finds that it is reasonable for the Treasury to impose limitations on executive compensation at companies receiving substantial funds from taxpayers. The issue is how extensive aid will be and how limitations will be implemented.

CLICK HERE TO READ THE FULL REPORT.

Only 32 cases of investor activism were reported in the first three quarters of 2008, compared to 53 cases during the same period in 2007. The data has not been tabulated for the fourth quarter of 2008, but indications are that it was equally quiet. The decline in activity is due in part to the difficulties that hedge funds are having and the dearth of new capital flowing into these funds. Activist success rates, however, continue to be strong, with 28 percent of cases resolved successfully in 2008 and 41 percent resulting in some kind of compromise.

Although activist investors in 2008 might have been less noisy, they aren’t going away. Curtis notes that shareholders are unhappy with decreasing stock prices and are pushing for cost-cutting measures—even if that means massive job cutting or acquiring or selling another entity.

According to Curtis, new activists pop up on his reports each quarter. “Carl Icahn receives a lot of press,” he says. “But there are a lot of smaller players who are expected to go forward.” Activists are beginning to making inroads in sectors they have avoided in the past, such as information technology and health care, as well as long-time targets such as consumer discretionaries.

“Information technology and health care have this aura saying they’re highly technical, but there is a lot of exciting potential value that might be unlocked going forward,” notes Curtis. He believes that consumer discretionaries may share the spotlight in 2009, but will remain in the top three categories of activist targets. The most common demands of activist investors include board seats and calls for a sale of the company or an acquisition strategy.

Activists are also pursuing smaller targets. A total of 10 activist situations occurred in the third quarter of 2008, with the Q3 average target having a market capitalization of roughly $4.93 billion. This significantly increased from $3.06 billion in the second quarter, but was a major decline from the first quarter’s $9.49 billion market capitalization.

Despite increased costs associated with lengthy proxy battles, Curtis believes that activism will continue to be a powerful presence in 2009. “Activists of all stripes will be in the marketplace and will be looking to increase value,” he says. “In 2009, activism will be alive and well.”