Yep, proxy season is upon us again. Not surprisingly, shareholder votes on executive compensation will dominate this year's activism, but senior executives and board directors will still have plenty of other worries as well.
2011 is the first year that all publicly traded companies must give their shareholders say-on-pay votes (thank you, Dodd-Frank Act), and ask shareholders how often such votes should be held in the future. While the votes are non-binding, they are being watched closely as barometers of shareholder sentiment on executive pay.
Already, two companies—Beazer Homes and Jacobs Engineering—have received negative say-on-pay votes so far this year. Still, the votes may have a silver lining for directors.
Previously, investors unhappy with executive pay expressed their wrath by withholding votes for members of a board's compensation committee or the full board entirely. Now that say-on-pay votes can channel that anger, “average director opposition may decrease because pay is largely out as a driver of negative votes against boards this year,” Patrick McGurn, special counsel at Institutional Shareholder Services, said during a Feb. 24 ISS Webcast on proxy season trends.
The overall number of shareholder proposals is also likely to be lower this year, since shareholders no longer need to propose holding say-on-pay votes. Those proposals could return in 2012, however, in cases where companies adopt a vote frequency other than one supported by a majority vote of shareholders.
That doesn't mean no compensation-related proposals are out there. Already, shareholders filed about a dozen that focus on equity holdings and eight more that call for a shareholder vote on future golden parachute arrangements, said Carol Bowie, ISS head of U.S. compensation research. Some new proposals this year seek to link executive pay to environmental, social, and governance issues. For instance, Amalgamated Bank LongView Funds has submitted a proposal at some oil companies asking them to integrate sustainability metrics into incentive pay.
While the bulk of shareholder proposals target S&P 500 companies, proposals aimed at small and midcap companies are increasing as activists attempt to move some governance reforms downstream, McGurn said during a Feb. 23 American Bar Association Webcast. Shareholders have filed about 60 resolutions seeking the adoption of majority voting. About 70 percent of large-cap companies have already adopted such a standard, while fewer than 25 percent of small-cap companies have done so, McGurn noted during the ISS webcast. “A lot of activists are retooling their campaigns to go after Dodd-Frank leftovers,” he said.
Corporate political contributions and environmental issues are both hot topics once again with shareholders this proxy season. Socially responsible investor groups have filed more than 350 proposals, including more than 80 related to environmental issues—41 on climate change and 44 on natural resource management, according to a report by As You Sow, the Sustainable Investments Institute, and Proxy Impact.
Those proposals could continue to gain traction this year. McGurn noted that average support for shareholder resolutions on environmental and social issues rose to just above 18 percent in 2010, fueled by fury over the BP oil spill in the Gulf of Mexico and Massey Energy's mine explosion. Another 30 proposals relate to labor and human rights, and new resolutions at major banks seek to address various aspects of the mortgage foreclosure crisis.
Meanwhile, in the wake of the Supreme Court's Citizens United decision that gives companies much more leeway to make political contributions, investors have filed more than 75 proposals seeking disclosure of corporate political spending, coordinated by the Center for Political Accountability. Proposals have already been withdrawn at Target and Best Buy, which agreed to revise their policies on political spending, says Tim Smith, director of ESG shareowner engagement at Walden Asset Management. Walden, which was a proponent of the Target resolution, has filed about 30 shareholder proposals in all this season.
Targeting the Board
“A lot of activists are retooling their campaigns to go after Dodd-Frank leftovers.”
—Patrick McGurn,
Special Counsel,
Institutional Shareholder Services
How the board manages its affairs and the composition of the board are also getting added attention from shareholders. Activist groups filed 46 proposals related to board diversity, including many asking companies to adopt sexual orientation non-discrimination policies.
The American Federation of State, County, and Municipal Employees Plan was particularly active in this area. It filed 27 proposals this year, seeking independent board chairs, annual director elections, majority vote standards, insider-trading best practices, reincorporation to Delaware, compensation benchmarking no greater than the peer median, and reports on the risks to shareholders of corporate lobbying expenditures and aggressive corporate tax strategies.
Succession planning is expected to be a hot issue this season as well. While only 10 proposals have been filed so far, high-profile votes such as what happened at Apple last week (shareholders voted down the idea of disclosing a succession plan for CEO Steve Jobs) create plenty of buzz around the issue, McGurn said.
ENVIRONMENTAL PROPOSALS
The following excerpt from the "As You Sow 2011 Proxy Season Preview" tracks environmental proposals:
Environmental proposals this year fall into three major
categories—climate change, natural resource management, and toxics.
Climate change—Forty-one climate change proposals reiterate
ongoing investor views about what they see as a pressing need to disclose
greenhouse gas emissions, to set goals to cut these emissions, and to
reveal more about related risk and impact assessments. A handful of new
proposals raise renewable energy issues at utilities, butmay not go to votes
given SEC challenges. Two palm oil proposals have been withdrawn after
companies agreed to sourcing restrictions, in a victory for shareholders. All the resolutions come in the context of the new
SEC climate risk disclosure requirements, noted in the sidebar, and as companies are starting to grapple with the new
EPA emissions monitoring regulations. Oil and gas, construction and real estate, and utility companies remain the primary
targets of these proposals.
Natural resource management—Coal and fracking dominate the group of 44 natural resource management
proposals, with several new resolutions about the financial risks of relying on coal-based energy, coal pollution, and a reprise
of 2010 concerns about coal combustion waste. The disclosure campaign about fracking continues, with nine proposals to
companies including Chevron, which in November announced the $3 billion acquisition of Atlas Energy, one of the firms drilling
in the Marcellus Shale region, which straddles parts of New York, Ohio, Pennsylvania, and West Virginia, where controversies
about water contamination and other environmental issues abound. There are new proposals about water use by utilities and
water risk in the supply chain, as well, along with another to Chevron on offshore oil well risks.
Toxics—In the toxics category, new proposals about Bisphenol A (BPA) are on tap at two companies, noting the
chemical's use in dental sealants (at Dentsply International) and in cash register receipts (at Yum! Brands). A new proposal
on electronic waste is pending at Target.
Source: As You Sow 2011 Proxy Season Preview .
Other issues that will re-emerge for 2011 include calls to eliminate super-majority vote requirements (which received “nosebleed” levels of support last year, McGurn said), and proposals pushing companies to give shareholders the right to act by written consent in lieu of a meeting, which averaged more than 50 percent of support in 2010. Proposals giving shareholders the right to call special meetings are also back on corporate ballots.
One issue that appears to have lost momentum this season is the push for companies to split the role of CEO and board chairman, McGurn said. Although it was a hot topic in the wake of the market meltdown, average support levels for proposals seeking independent chairs declined last season.
While shareholder proposals are expected to be lower overall, proxy fight activity is expected to increase this year. (2010 saw only 26 proxy fights, down from a high of 45 in 2009.) Filings of Form 13D, which must be submitted by beneficial owners of more than 5 percent of a class of equity securities, are on the rise this year and could portend more proxy contests in 2011, Martha Carter, global head of research for ISS, said during the Feb. 24 Webcast.
Shareholder rights plans, more commonly known as poison pills, might also spark more contested elections since a recent Delaware Chancery Court action that essentially upheld a board's right to employ the pills to fight off hostile takeovers. (See related story, “Delaware Court Makes Poison Pills Easier to Swallow.”) “More boards may think about adopting shareholder rights plans preemptively,” McGurn said, noting that the prevalence of poison pills is currently at an all time low, at just 14 percent among the S&P 500.
If boards have any good news this proxy season, it's that they shouldn't have to contend with any major surprises. The Securities and Exchange Commission has delayed its shareholder proxy access rule until a legal challenge against it is resolved in court. With proxy access suspended for now and most other major governance reforms either in place or on hold because of the rulemaking backlog created by the budget impasse in Washington, most of the issues on corporate ballots this proxy season will be the same ones boards have been grappling with for years.
“With the exception of some holdover issues, like majority voting and the implementation of say-on-pay, boards are finished with the check-the-box stuff,” says John Wilcox, chairman at Sodali, a shareholder relations consulting firm. “Shareholders aren't asking for new rights or proposing new governance standards. We're moving into an era where shareholders will be pressing directors on how governance standards are implemented and what goes on inside the boardroom.”
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