The 2013 proxy season will bring some new twists, with a fresh crop of companies putting executive compensation to a shareholder vote and a group of activists bent on gaining proxy access at several companies.
Companies are increasingly reaching out to large investors and working to get a better idea of how shareholders are likely to vote on several issues. Say-on-pay will remain among the biggest concerns, especially since, come January, the regulations will apply to companies with market capitalizations of less than $75 million.
Other proposals that are set to appear on the proxies of several companies include those targeting the structure of boards of directors—including those with staggered board terms—proxy access proposals, and campaign finance disclosure. Another wrinkle: plaintiffs' lawyers are launching shareholder suits at companies they believe provided inadequate disclosure of executive pay plan details in their proxy statements.
Say-on-pay continues to be an important focus both for investors and companies, says Laura Richman, a Chicago-based securities attorney at Mayer Brown. Through June 30, 2012, say-on-pay votes at 54 companies failed, compared with 43 in all of 2011, according to the Proxy Season 2012 Review by Laurel Hill Advisory Group, a shareholders communications firm.
Given the importance investors are placing on executive compensation, many companies are focused on ensuring that their disclosures explain their compensation programs in a “user-friendly way,” with greater use of graphs, as well as summaries included within the proxy statements, Richman says.
Moreover, because companies now have to disclose whether and to what extent their leadership took the previous year's vote into consideration when structuring the current year's compensation plan, this is one topic the board's compensation committee definitely needs to discuss, Richman says. “No one is going to want to say that they ignored this.”
Companies new to the say-on-pay requirements may find navigating them “a rude awakening,” says Brad Robinson, managing director with Eagle Rock Proxy Advisors, a proxy solicitation and corporate governance advisory firm. He says smaller firms often struggle to manage say-on-pay disclosure requirements due to a lack of resources.
For companies whose annual meetings are in the spring, making substantive changes to their compensation programs now may be difficult, Robinson says. If the board decides changes would be prudent, however, it can still outline in the proxy the steps the company is planning to take in the future.
A trend that gained momentum with the fall 2012 annual meetings: plaintiffs' attorneys alleging inadequate compensation disclosure in connection with say-on-pay votes or equity incentive plan proposals and then seeking to enjoin the annual meetings. “It's a novel theory,” says Robert Wild, partner with Katten Muchin Rosenman, adding that these are yet another iteration of securities class action suits.
In these claims, the plaintiffs aren't alleging that the disclosures fell short of the Securities and Exchange Commission's disclosure regulations, but that material information was omitted from the disclosures, preventing shareholders from making informed votes on say-on-pay or when deciding whether to approve the company's equity compensation plans. In the month of October alone, 40-plus notices of investigations were filed by plaintiffs' attorneys, with 20 advancing to lawsuits, according to information from Katten.
Based on his review of the companies targeted, Wild says it was difficult to discern any pattern: The firms spanned a range of market caps and industries, and in contrast to what might be expected, the targets weren't limited to firms whose stock had underperformed. Instead, it appears the actions were intended primarily to force companies to decide whether to fight the allegations, or offer a monetary settlement, and in some cases, supplement their proxy statement disclosures.
“You have to look at your investors and see what they're saying.”
Eagle Rock Proxy Advisors
“At this point, I can't say to what extent these actions will continue,” Wild says. “It's conceivable that the plaintiffs' firms will take a run at a few more companies when 2013 proxy season gears up.” With that in mind, companies will want to be thoughtful in drafting their disclosures; some may decide to go beyond the SEC requirements, but also don't want to over-react.
According to the Laurel Hill report, 26 proxy-access resolutions were filed during the first half of 2012. Of these, a dozen were omitted, withdrawn, or not voted on. The remaining resolutions earned relatively strong support. For instance, on average, 34 percent of shareholders voted for the four proposals submitted by Norges Bank Investment Management (NBIM).
In the end, however, just two captured majority support: those at Nabors Industries and at Chesapeake Energy. Richman notes that when shareholders approve proxy-access resolutions, “there generally are other issues at the company that make shareholders concerned.” At Nabors Industries, for instance, a termination agreement with its former CEO, Eugene Isenberg, had included a payout of $100 million, although the board of directors had renegotiated the amount by the 2012 annual meeting.
Several of the proxy access resolutions that were omitted were thrown out on the technical wording of the proposal. It's safe to assume that the groups behind some of the proxy access proposals that were excluded on technicalities this year have learned their lessons and will be back again, Robinson says. Their new proposals likely will avoid the mistakes of the previous ones.
The 2013 proxy season is also likely to see a fair amount of the typical shareholder proposals on board structure. Proposals to de-stagger board members' terms and to move to majority voting for non-contested board seats “are non-controversial and very accepted,” says Charles Elson, professor of finance and an expert on corporate governance at the University of Delaware. “It's hard to go against them.”
Below is an excerpt from Katten Law's review of say-on-pay.
We examined the SOP data compiled by Semler-Brossy for a clearer understanding of 2011 versus 2012. Semler-
Brossy reviewed SOP votes at companies in the Russell 3000 index, and the data has yielded the following findings:
- 72% of the Russell 3000 companies that have already had their SOP vote have passed with 90% or greater shareholder approval…19% have passed with between 70% and 90% shareholder approval…6% have passed with between 50%
and 70% shareholder approval…51 companies in the Russell 3000 (about 2.7%) have failed.
- ISS recommended against 14% of the companies in the Russell 3000 it has reviewed for the 2012 proxy season versus
12% for the same period last year. That 2% point difference is contributing to the larger number of SOP rejections
so far in 2012.
- 19% of the companies that have received a negative SOP recommendation from ISS have actually failed.
- Glass Lewis has recommended against 17% of the companies in 2012, about the same rate as last year.
- In 2011, 37 firms in the Russell 3000, or 1.2% of the index, failed as compared to 2.7% of the index (51 companies) so
far in 2012, a considerable percentage increase year-to-date.
- 96% of the Russell 3000 companies that have already had their SOP vote this year, passed in both 2011 and 2012.
- One fact that has shaken issuers and governance observers is that of the 51 companies in the Russell 3000 that had a
failed .SOP vote this year, 46 companies received majority support in 2011. Some of these companies had considerable
declines in shareholder support:
12 of them received 90% or greater support last year;
18 of them received between 70% and 89% support last year;
16 of them received between 50% and 69% support last year;
4 of them failed for two consecutive years (more on this later);
– For 1 it was their first SOP vote
Source: Katten Law.
According to ISS' 2012 Board Practices Study, two thirds of companies in the S&P 500—that is, companies with market caps of at least $4 billion—have declassified their boards. However, among the S&P 1,500, which includes firms with market caps of at least $300 million, just 48 percent have declassified their boards. “The question is: When will the activists begin targeting mid- and small-caps?” Wild says.
Given the popularity among activist investors of de-staggered board terms, companies that decide to maintain staggered terms should review their policy and confirm that they are comfortable explaining their rationale for it and committed to defending it, Wild says. “Maintaining a staggered board is one of the most potent takeover defenses.” So, even though the trend is to de-stagger, it may not be prudent for every company to reactively concede the protection offered by staggered terms.
The price tag for this year's election season will run about $6 billion, estimates the Center for Responsive Politics. A fair chunk of that came from corporate coffers. Indeed, the top single donor, also according to The Center, was the Las Vegas Sands, which contributed $30 million. As a result, investors increasingly are demanding greater transparency when it comes to companies' political donations.
At 71 companies, shareholders filed resolutions requesting their boards to report on or end the practice of making political donations, according to the Laurel Hill report. That made it the most widely submitted 14a-8 proposal in 2012 and indicates a doubling over the last three years. Nearly all—68—of the proposals came up for a vote, garnering 23 percent support. Voters were more inclined to vote for disclosure than for an end on corporate political contributions.
Richman says she anticipates a fair number of proposals on this issue in 2013. “It's a topic that shareholder activists are concerned about.”
The extent to which a company's political contributions may advance (or undermine) its performance is a legitimate issue for discussion, Robinson notes. He points out that while management may focus on, for instance, a candidate's approach to taxes, if the candidate's stance on other matters, such as social issues, aren't also considered, a donation can end up alienating a group of a company's target market. “If you get a customer boycott in front of your store, it's hard to argue that the dollars (contributed) advanced the company's interests,” Robinson notes.
At a minimum, compliance officers will want to ensure the company has established guidelines for its contributions and then check that any contributions followed them, Robinson says. The goal is “to make sure there's a system in place to prevent donations that will be a black eye to the company.”
To be sure, it's difficult to say in advance just how the season will go, given the newness of such issues as say-on-pay. Even so, compliance officers will want to have a solid understanding of their firms' shareholder base and its priorities, Robinson says. The goal is to minimize both legal and reputational risk. “You have to look at your investors and see what they're saying.”