Proxy Issues Will Return With Vengeance in ’08

irectors and issuers beware: Many of the issues that dominated the current proxy season are expected to return with a vengeance next season.

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Issues that saw a flurry of activity this year, such as shareholder votes on executive compensation, majority voting to elect directors, and broker voting will resurface in 2008, according to a panel of experts at Compliance Week 2007, speaking Thursday on global proxy issues.

Minow

Panelists noted that the practice of majority voting, which requires directors to get a majority of votes cast to serve on the board, is well on its way to becoming universal practice. “Even companies that don’t formally adopt a provision saying you have to get a majority vote to serve on the board will in essence be stuck with it,” said Nell Minow, founder of The Corporate Library. “It’s going to be hard for companies to get the protection of the business judgment rule based on shareholders delegating authority if they haven’t actually delegated authority.”

Institutional Shareholder Services Vice President Patrick McGurn noted that only about 40 of roughly 140 majority vote proposals on the ballot this year are likely to come to a vote. “Negotiation and settlement have eliminated the vast majority of proposals on the topic,” he said.

In addition, some companies have also instituted a policy that requires a director to resign if he or she fails to receive a majority vote. “That’s already spreading to midcap and small-cap firms,” McGurn said. “We expect that campaign to keep up momentum.”

Minow said “say on pay” votes, which refers to providing shareholders a non-binding advisory vote on executive pay packages, “is pretty much a done deal. I think it will either become law or be universally adopted,” she said—adding that if she had her druthers, companies that get a thumbs-down from shareholders on executive pay packages should have to replace the chairman of the compensation committee.

The House of Representatives passed a bill in April to make such votes mandatory. A similar measure has been introduced in the Senate. Shareholders filed more than 60 say-on-pay proposals this year; at least three have won majority approval from shareholders. “Look for double or more next year unless Congress acts in the interim,” said McGurn.

Another issue getting a lot of attention globally is stock lending over the record date, which Minow called “a fairly benign practice that can be abused.” The common and legal practice of lending shares has come under recent scrutiny because of concerns that activists such as hedge funds might borrow stock and vote those shares in support of a short position.

McGurn expects to see more proposals related to shareholder access to the proxy ballot, which allows shareholders in certain circumstances to put their nominees on the board’s proxy ballot. “We're not going to see the SEC cut off those proposals,” said McGurn. “We could see a substantial number of proposals on that.”

Other issues McGurn says are on the horizon for next year include shareholders’ right to call special meetings and enhanced disclosures of the work compensation consultants do for companies where they provide executive compensation consulting. On the social issues side, McGurn noted that political contributions will be a hot issue again since we’re entering a federal election year, along with issues related to sustainability, greenhouse gases, and climate change.

Laurence Hazell from Standard & Poor’s noted that from a credit ratings perspective, when boards respond positively to say-on-pay proposals, “That’s a tick on the plus side.”

“That shows us something about the quality of board, ” he said.

Kenneth Bertsch of Morgan Stanley Investment Management said the aggressive pace of private equity firms scooping pu companies “is having a big impact on the way we think about proxy voting and a lot of other things, particularly in approving the sale of companies. ”

“People are very nervous, even though valuations are high,” said Bertsch. “We’re thinking about that.”

One issue Bertsch said his firm is focusing on is voting for directors. Historically, he said, voting against directors has been mostly “on mechanical grounds,” but now people are “wrestling more with using that in a substantive way.”

“We’re voting against directors less this year, but we’re voting against them for more for real reasons,” he said. “We’ve taken director votes where we really feel something has gone wrong at the company.”

McGurn said the “likely disappearance of broker votes” in uncontested director elections as proposed by the NYSE is fueling that debate for many institutions. As a result, McGurn expects to see a “one-time permanent shift in voting on directors.”

In cases where 25 or 30 percent of votes cast were “withhold” votes, simply by eliminating broker votes in favor of management would goose that total to “a 40, 45, 50, or 55 percent vote against without additional shareholders voting against the board,” McGurn said. In tandem with majority voting and director resignation requirements, that will trigger those policies for the first time. “That’s going to make voting much more nuanced next year,” he said.

Moderator Louis Thompson, a Compliance Week columnist and former president and chief executive of the National Investor Relations Institute noted that that the NYSE proposal that would eliminate broker voting in director elections could have a huge impact. Coupled with majority voting, Thompson said, “It creates a director beware environment.”

McGurn said current discussions suggesting a “bargain” of giving up non-binding shareholder proposals in exchange for getting “some limited form of ballot access,” isn’t “a bargain anyone wants to accept.”

Among 1,250 shareholder resolutions offered at U.S. companies this season, nearly one in every four were withdrawn after negotiations or settlements. “If you take what’s left and say they can only be offered in binding form … there would have been maybe 100 shareholder proposals on the ballot focused on environmental and social concerns,” he said, noting that proposals related to repealing classified boards, poison pills, and executive compensation wouldn’t be valid. “I don’t think it’s a bargain anybody wants to accept.”

Thompson noted that individual investors could have a bigger impact going forward. Thompson said the New York Stock Exchange plans to send a letter to brokerage firms instructing them to send letters to re-solicit objecting beneficial owners to ask specifically whether they want to receive communications from the company on proxy-related issues. “That will open up an opportunity for companies to start communicating with individual shareholders,” he said.

Citing majority voting, director resignation requirements, the end of broker voting in director elections, ballot access, and e-proxies, McGurn said, “All of the elements are there for record storm next proxy season. It’s one to start preparing for soon.”