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- Nearly a quarter of the 1,100-plus shareholder proposals were withdrawn during 2007.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.
If boards remain opposed to access, will Washington intervene and allow shareholders to push for access rights at annual meetings? M8B says: “As I see it, yes.”
The fate of proxy access is back in the SEC’s hands. SEC Chairman Christopher Cox made it appear in July that the “S” in the Commission’s name stands for “schizophrenia” when he offered his serial support to two contradictory rule-change proposals at an open SEC meeting. (See “Washington Update” page 6.)
Will “say on pay” become the common practice in the United States? M8B says: “Better not tell you now.”
Say on Pay (SOP)—which calls for advisory votes on executive compensation at annual meetings modeled on current practices in the United Kingdom and Australia—broke from the pack of pay-related reforms in 2007. The second-time proxy campaign on the topic produced more than 60 shareholder proposals and majority votes for five of them—at Blockbuster, Ingersoll-Rand, Motorola, Valero Energy, and Verizon Communications.
Despite this stellar showing at the ballot box, Aflac remains the lone early corporate adopter of SOP. U.S. board members still don’t show great affection for the reform.
Outside of the United States, executive and board members appear quite comfortable with investor input on remuneration. A recent poll of more than 2,500 global executives and directors by consultant McKinsey & Co. found high levels of support for boosting shareholders’ ability to monitor pay practices. More than two-thirds of the global respondents supported giving shareholders more say on pay. Thirty-eight percent of the corporate audience favored a nonbinding advisory vote on pay. A nearly equal number (35 percent) of execs and board members would vest shareholders with power to veto executive-pay deals. The lion’s share (60 percent) of those who favored a bigger role for shareholders want such oversight focused on the metrics used to assess executive performance.
Will Congress act if Corporate America doesn’t take steps to adopt SOP? M8B says: “Yes.”
Nature abhors a vacuum. Washington loves one. A July Harris/Financial Times poll of U.S. adults found that 77 percent believe senior executives are “overpaid.” That’s nearly 8 out of every 10 possible voters. A drill-down into the poll numbers shows that this “overpaid” mindset cuts across lines of gender, geography, and income. Women, older persons and those with higher incomes—three groups with higher than average voter turnouts on election day—were most likely to say U.S. executives make too much. Unlike strong majorities of the respondents in the United Kingdom, France, Italy, and Spain, however, U.S. respondents don’t favor pay caps. Only 33 percent of the U.S. respondents favored government-set pay caps.
It’s not just envy. Nearly two-thirds of the respondents indicated that they either do not admire corporate leadership (33 percent) or admire them only somewhat (33 percent).
Will executive pay packages look different in five years? M8B says: “It is decidedly so.”
CEO pay will be higher in five years than it is today. The currency used to deliver such compensation, however, will be vastly different. Perks will be a thing of the past. (Yes, that includes every CEO’s favorite goodie: personal use of corporate aircraft.) Severance, deferred compensation, and supplemental retirement plans will be capped (by legislation) or zapped (by shareholder activism). Long-term contracts with guaranteed payouts will be few and far between. Plain-vanilla options and time-lapsing restricted stock will be in short supply. Instead, compensation will consist of a steady diet of performance-based pay.
Will hedge funds continue to play a significant role in corporate governance? M8B says: “It is certain.”
Hedge-fund managers are the new face of investor activism. They now account for the lion’s share of proxy battles and contested solicitations against management-proposed transactions.
Short of a massive scandal, hedge funds will likely continue to attract more dollars from pension funds and other mainstream institutions.
Despite these investments, shareholders remain ambivalent about the role played by hedge-fund activists in the marketplace. Respondents to Institutional Shareholder Services’ annual policy survey were split down the middle, with 41 percent saying hedge-fund activism has helped create long-term value and 39 percent saying it has not.
Votes at the ballot box aren’t as close. The activist hedge fund run by former SEC Chairman Richard Breeden, for example, recently won three seats on the board of H&R Block with a landslide, four-to-one margin of victory at the ballot box (See “Postings” page 78).
Will the typical board look different in five years? M8B says: “You may rely on it.”
Look for boards in 60 months to be, on average, slightly larger, somewhat more independent, and much more diverse (especially along gender lines) than those existing today.
All directors will stand for election at each meeting subject to majority vote rules. Boards, following Pfizer’s lead, will facilitate regular confabs between institutional investors and independent directors. Director evaluations will be the norm, not the exception.
More boards will feature split CEO and chairman positions, but such separation will simply reflect higher CEO turnover levels. When CEO and chairman titles are combined, lead directors will serve as the primary (make that universal) mechanism for providing independent leadership in the boardroom.
There will be fewer committees (look for executive and finance panels to bite the dusts), but the remaining panels will meet more often.
Boardroom pay will continue to rise, but options, director perks, and charitable award programs will perish. Stock ownership and retention requirements will rise and lengthen, respectively.
Will the typical director look different in five years? M8B says: “Yes–definitely.”
Look for directors to be older (retirees have already eclipsed sitting executives as the primary food group), more diverse (reflecting an expanded and less CEO-centric candidate pool), and less immersed in boardroom culture.
Look for a new class of “professional” directors to emerge. “Professional” will describe how these individuals view boardroom service—as a vocation rather than an avocation. Populating this new director class will be successful, mid- to late-career professionals who want a change of pace and new challenges. They’ll happily trade in pressure-packed 7 a.m. to 7 p.m. jobs at corporations, audit firms, law firms, consulting firms, and investment houses for full-time (read: three-to-five seats) board service. Given rising boardroom pay levels, individuals will look to replace most of their six-figure compensation packages by maintaining full dance cards.
Importantly, such individuals will owe their status as directors to the shareholders who nominate (see proxy access above) and elect them (see MTV above) rather than to their membership in the long-standing, old boys/girls club or their presence in old-line search firms’ Rolodexes. As such, these individuals’ reputations will be paramount to their continuing presence on boards. They’ll network with peers and investors. They’ll actively seek continuing education.
Patrick S. McGurn is executive vice president and special counsel at Institutional Shareholder Services, a proxy advisory firm.