As various analyses emerge from the 2012 proxy season, one clear trend is taking shape: the importance for companies to engage with major shareholder groups.

A recent Ernst & Young report says that outreach by issuers to their major institutional investors, particularly when it is done just prior to proxy season, reaps significant benefits in gaining support for various shareholder proposals. Communicating with shareholders is especially important to gaining support for “say-on-pay” votes. After a significant outreach effort by many companies this year, the overall support level during advisory votes on executive pay plans climbed to 90 percent, up from 70 percent in 2011.

Another advantage of early investor outreach is the ability to reach agreements for shareholders to withdraw compensation-related proposals, which are now the smallest category of proposal topics compared to board-focused proposals and those related to environmental and social issues. Boards and shareholders are clearly more willing than ever before to iron out their disagreements before they devolve into heated proxy confrontations.

Board Accountability

Companies continue to make their boards more accountable, and many are now adopting the same practices that generated contentious shareholder proposals just a few years ago. Among S&P 500 companies, 81 percent now have annual director elections, as opposed to staggered terms (usually three years), up from 63 percent that had annual elections in 2011.

The increase in voluntary declassification—moving from staggered board terms to annual elections—may have something to do with the high level of shareholder support for proposals calling for declassification. During the proxy season, 33 declassification proposals won shareholder approval, with an average support level of 82 percent, according to the Shareholder Rights Project. Only two declassification proposals failed.

Similarly, 81 percent of S&P 500 boards now have majority voting, compared to 70 percent in 2011. And shareholders seem to be responding to the increase in use of these practices; there was a decline in “vote no” campaigns against directors, with only 5 percent of all nominees receiving opposition votes. The most common target of these campaigns were compensation committee members with long tenures, say governance experts. The idea is that the long period of board service may make some compensation committee members too cozy with their CEOs to remain objective when it comes to deciding how much the executives should be paid.

Shareholders are also gaining ground on initiatives to split the roles of CEO and chairman. The number of proposals calling for an independent chairman that actually made it to a vote jumped 50 percent from 25 in 2011 to 38 in 2012 for S&P 500 companies.  And those proposals received a relatively strong 35 percent support level, although only two of them passed. 

One factor that kept more independent chairman proposals from winning approval from shareholders was Institutional Shareholder Services' policy of not supporting such proposals if the company already has a suitably empowered lead director. Many institutional shareholders share that view. This position is consistent with the 2003 stock exchange rules and the Securities and Exchange Commission's 2009 rules requiring proxy disclosure of board leadership structure with the appointment of a lead independent director and defining that director's role on the board.

Proxy Access

Shortly after the July 22, 2011, U.S. Court of Appeals for the District of Columbia decision to vacate the SEC's proxy access rule 14A-11, SEC Chairman Mary Schapiro issued a public statement saying the Commission would not seek a rehearing of the Court's decision. Instead, the SEC amended Rule 14a-8, allowing shareholders to propose amendments to a company's governing documents that would allow for the inclusion of one or more shareholder nominees for director to be included in the company's proxy materials. These proposals could include provisions requiring a different ownership threshold, holding period, or other qualifications than those contemplated in the vacated Rule 14a-11.

Over 20 such proposals were submitted during the 2012 proxy season—half of which were binding—but only eight came to a vote. Most of those that did not come to a vote were deemed excludable from the proxy statements by the SEC staff.

As various analyses emerge from the 2012 proxy season, one clear trend is taking shape: the importance for companies to engage with major shareholder groups.

Only two shareholder proposals using the 14a-8 approach by various pension funds resulted in a majority vote—60 percent of votes cast targeting Chesapeake Energy and 56 percent for Nabors Industries. Four other shareholder proposals targeting Charles Schwab, CME Group, Wells Fargo, and Western Union, received between 31 percent and 38 percent of votes cast. All four had a 1 percent/1-year threshold of share ownership.

“The vote results from this limited pool suggest that shareholders are hesitant to approve proposals that would give a proxy access right to holders of a small number of shares, but are more supportive of proposals that have ownership requirements that are similar to the 3 percent/3-year that would have applied under the SEC's now-vacated mandatory proxy access rule,” said James Morphy, a partner with law firm Sullivan & Cromwell. “With the benefit of lessons learned in 2012, it seems likely that proponents will create more potent proxy access proposals in the future—both by avoiding the problems that allowed companies to exclude the proposals under the SEC rules and by including thresholds that will achieve broader shareholder support.”

Companies may want to consider creating their own proxy-access proposals and putting it up for shareholder vote at an annual meeting. Such moves would allow companies to exclude a conflicting shareholder proposal and might head off efforts by shareholders to gain proxy access with more inclusive ownership terms.

Shareholder Engagement

Shareholder outreach may well be responsible for keeping more proxy access efforts at bay this proxy season. Being proactive in engaging with major shareholders on a long-term basis is fundamental to an effective shareholder relations program. Providing access to senior management gives the company an opportunity to educate shareholders on what drives value in the company's business and allows investors to measure the quality and integrity of the executive team.

When meeting with shareholders, remember that in 2012, 44 of the nearly 110 resolutions tracked by Ceres, a coalition of investors and environmental organizations, resulted in new commitments of companies to incorporate environmental and social risks in their operations. Ernst & Young says a growing number of shareholders recognize the business case for sustainability, and companies are more willing to engage in a substantive dialog with shareholders on their environmental, sustainability, and governance programs.

The lessons we learned from the 2012 proxy season are positive. Companies are recognizing that providing greater access to senior management, voluntarily adopting provisions that strengthen board accountability, adopting executive compensation plans with greater transparency, and acknowledging the importance of shareholder votes on say-on-pay and board structure are making mandatory regulatory impositions less relevant. When companies consider what's in their own best interests and the interest of shareholders, everybody wins.