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.