Majority Voting, Proxy Issues

Efforts by shareholders to win the right to nominate board members directly haven't fared well so far this proxy season. Many companies successfully petitioned the SEC for permission to ignore proxy access proposals. Of 22 proposals, only three have gone to a vote and all of them lost. Still, shareholder activists say they aren't about to give up the fight. Details inside.

Social and environmental issues continue their upward march in importance to shareholders, comprising 46 percent of the shareholder proposals filed so far this proxy season. "It's really about transparency: reporting what you're doing so that investors can decide if they agree with it or not," says Steve Starbuck, leader of Ernst & Young's climate change and sustainability practice. How can companies avoid nasty proxy fights? Read inside.

New evidence is emerging that for all the complex calculations that go into tying executive pay to performance, investors view it pretty simply: If they don't like the company's performance, they'll vote against the pay package, details be damned. "Overwhelmingly, it's the criteria investors across the spectrum use to evaluate whether they'll vote for the pay plan," says Tim Smith of Walden Asset Management. More inside.

Two years after the Securities and Exchange Commission enacted new proxy disclosure rules requiring companies to reveal more about how their boards oversee risk, many companies are still struggling with how to communicate aspects of their risk-management programs effectively. According to a recent study, disclosures are too basic and lack details on the company's approach to risk.

A who's who of the auditing world convened at the Public Company Accounting Oversight Board last week for two days of discussion about term limits for audit firms' engagement with clients. Opinions were predictably diverse, and consensus was rare. Goodyear CFO Darren Wells, for example, said auditor rotation should only be required after an audit failure. More views inside.

The SEC's latest batch of decisions on no-action letters offers a bit more insight for companies looking to thwart shareholder proposals about access to the proxy statement. The good news: The SEC did give several companies permission to ignore such proposals. The bad news: Most of those were issued for technical reasons, not any broad attempt by the SEC to limit shareholder proxy access. More details inside.

Meanwhile, shareholders are having more success with proposals to gain proxy access. So far they have launched proposals to put proxy access to a vote—a process known as private ordering—at 18 companies, and two of those companies are moving toward adopting provisions to allow investors to nominate board candidates. "We're in private-ordering land now. I think we'll be there for the extended future," says Patrick McGurn, executive director at ISS.

Two investor groups recently filed proxy proposals to compel companies to adopt auditor rotation policies. So far, their arguments have fallen on deaf ears. Companies have either ignored the proposals or petitioned the SEC for no-action letters, which they have won. But don't expect the battle to stop there. Details inside.

Institutional Shareholder Services issued a revised methodology for how it determines its recommendation for say-on-pay votes, to put more emphasis on pay for performance. The new method involves "some fairly sophisticated analytics in order to ensure the results produce a reliable average trend line," says Carol Bowie head of compensation research development and products at ISS.

Now is the time, say governance experts, to begin preparing for the 2012 proxy season. Shareholders are expected to focus on chairman and board committee independence, majority voting, political spending disclosure, proxy access proposals, and, of course, compensation. "Investors are going to try to take a harder look at pay levels," says Amy Borrus, deputy director at the Council of Institutional Investors.

We all know that a federal appeals court invalidated the SEC's rule for shareholder proxy access—but the SEC slipped another, less-noticed provision into the rulebook that still gives investors an avenue to secure proxy access by shareholder proposal. "It allows for private ordering, coming up with proposals specific to a company instead of using the one-size-fits-all approach," says Michael Littenberg, a partner at law firm Schulte Roth & Zabel.

The U.S. Chamber of Commerce is mulling what rules of the Dodd-Frank Act to challenge next, now that it has defeated a rule to allow shareholder proxy access. Likely targets include proposed rules for conflict minerals, pay-ratio disclosures, and clawbacks. "We will focus specifically on rules and provisions that impact the ability of companies to raise capital and remain competitive globally," Chamber spokesman Tom Quaadman says.

Last year's Citizens United decision undid limits on corporate political spending. Now shareholders are demanding more disclosure on the topic, with a record number of proxy resolutions this season. "As shareholders, we just think they should be very transparent about this," says Laura Berry, executive director at the Interfaith Center on Corporate Responsibility.

Companies can exclude shareholder proposals from the proxy statement if they can demonstrate that they are already doing what the investors' resolution asks them to do—an approach known as the "substantial implementation" exclusion. But it's getting a lot harder to convince the SEC to grant one. Details inside.

Companies with a “plurality plus” standard for electing corporate board directors have a new warning to contemplate from the Delaware Supreme Court: Yes, you can ignore shareholder votes calling for a director’s ouster, but it will come at a price.

While the courts are now weighing the long-expected legal challenge to the Securities and Exchange Commission’s controversial new proxy access rule, lawyers are advising companies to take no chances and begin preparing for its potential effects on director elections during the next proxy season.

Two emerging trends are likely to have a dramatic influence on investor and market behavior. One is the unbridled advance in technology. The other is the will of a majority of commissioners at the Securities and Exchange Commission and of lawmakers in Congress to give more power to investors.

With the smoke still swirling on the Dodd-Frank regulatory reform bill, Compliance Week readers are doubtless turning attention to how governance provisions in the bill (or possibly the law, by the time you read this) will affect corporations and investors. That’s as it should be; the legislation promises to hand shareowners more say in director nominations and executive compensation in ways that we have flagged in the past. For now, however, let’s turn to a striking but under-appreciated legacy of this epic battle. Dodd-Frank readjusts the balance of power in boardrooms, but it also illuminates a potentially tectonic power shift in Washington. For the first time, investors showed—in dramatic fashion—that they can go head to head against the established business lobbies and win.

Washington’s long-promised reforms to corporate governance, financial reporting and regulatory compliance now seem at hand, thanks to the final 2,000-page bill settled by lawmakers late last week.

As efforts to revamp U.S. financial regulation move closer to the finish line, a panel of current and former Securities and Exchange Commission officials recently offered their thoughts on what the new regulatory landscape will mean for corporate board directors.

For any company wondering what grade it may have received for the proxy disclosures it made this spring, listen up.

We’ve always had a soft spot for challenges to conventional wisdom—and as financial reform legislation looms, there is no better time for a bout of it.

Anyone in the corporate governance world wondering when Congress will move forward with its massive reform of financial regulation will need to keep waiting.

Within a week of Sen. Christopher Dodd (D-Conn.) unveiling his 2,200-page finance reform legislation, more than 750,000 articles had been published about it, pushing, prodding, and analyzing its provisions. The “Restoring American Financial Stability Act of 2010” has engendered venom and praise, and enough punditry to restock every cable network’s complement of talking heads. Is there really anything left to say?

A panel created to give input to the Securities and Exchange Commission on investor concerns approved its first recommendations last week, which aim to improve dialogue between investors and boards and to make proxy voting by institutional investors more transparent.

Are you ready for the 2010 proxy season? Companies are faced with new rules for expanded disclosure of executive compensation and director experience in the proxy statement. They have more issues that will come under more scrutiny from more people, be they activist investors, proxy advisory services, pension and union funds, or the media. Here’s what you need to consider to be prepared for the proxy season ahead.

The extended comment period for the Securities and Exchange Commission’s proposal to allow shareholder access to the proxy statement has now closed—and the controversial idea still seems as divisive and unclear as ever.

Welcome to the 2010s. You’re just in time for the move from Sarbanes-Oxley to shareowners.

2010 is shaping up to be a year where the European Union will implement previously planned measures to tighten the screws of financial regulation. The question is whether those efforts will line up with reform plans hatched by the G-20 or be diluted under pressure from lobbyists—and so far, the answer is “who knows?”

A perfect storm of investor anger, regulatory reform, and economic meltdown is hurtling towards the 2010 proxy season—and directors should brace for their own elections to be at the center of the hurricane.

Corporate boards and institutional investors are bracing for a tide of corporate governance changes after the financial crisis. We (and others) have written reams about majority voting, the end of broker-dealer voting in director elections, say-on-pay, and shareholder proxy access. How you feel about those issues largely depends on what hat you wear in the vast corporate governance realm.

The elimination of broker votes in director elections may well to tip the scales of power from corporate boards to shareholders. Companies should prepare now so they won’t be left dizzy by the rule change.

Well, the deadline has now passed for public comment on the Securities and Exchange Commission’s proposal to allow shareholder access to the proxy statement. Now comes the waiting, to see what the SEC will do next with the controversial idea.

It’s all about power. And, as Compliance Week readers know, power is about to shift noticeably away from corporate boards and management toward shareowners, particularly institutional investors.

Compliance officers, corporate secretaries, and other governance executives pondering the 2010 proxy season have some potent new variables to consider: the Securities and Exchange Commission’s proposals to overall proxy disclosure and solicitations.

With the 2009 proxy season winding down, governance experts are already looking ahead at what the 2010 proxy season will hold for public companies and their shareholders.

The resentment and anger over recent corporate performance, especially in the financial services sector, has gone from bubbling up to boiling over.

What should we call the looming changes in how directors are elected and overseen at public companies? A seachange? A paradigm shift? A whole new ballgame?

Despite expectations that the 2009 proxy season would be a banner year for shareholder activism amid the financial crisis, experts say investors’ winter of discontent never did turn into a glorious summer of shareholder victory.

Washington finally seems to be gearing up for its full-court press of corporate governance reforms.

Deep differences of opinions still exist over the idea of abolishing broker-dealers’ power to vote in elections for corporate board directors, despite a revived push by the New York Stock Exchange to end the practice once and for all.

Ah, yes, the siren song of 2009 and the theme of the Obama administration: Change.

Yet again, institutional investors have asked the Securities and Exchange Commission to force companies to do a better job disclosing environmental risks in their periodic filings.

Shareholder activists are using the governance restrictions imposed on companies participating in the Wall Street bailout as a weapon to wrestle still more concessions out of those companies in the coming proxy season.

Shareholder votes on executive compensation packages hit a plateau this year, after a stunning ascendancy in 2006 and 2007. Corporate America, however, should brace itself for another resurgence in 2009.

Many, many will address the Obama Administration and the newly emboldened Democratic majority in Congress as they try to repair America’s frayed financial and regulatory systems. Investor activists intend to be one of the many.

Shareholder complaints about executive compensation are nothing new, especially these days. But shareholder complaints actually influencing executive pay—well, that’s a different story.

It looks like investors and board members are finally learning to play nice with one another, given the growing number of companies that are engaging with shareholder activists.

Public companies in the European Union’s 27 member states should be complying with “EuroSox” by the end of the summer to establish a pan-European framework for governance and financial reporting akin to the Sarbanes-Oxley Act in the United States.

Annual meeting season for the banking industry reached a crescendo at the end of last month, with high-profile shareholder gatherings at Washington Mutual, Citigroup, Merrill Lynch, and elsewhere.