Learning from 2010’s Hot Button Issues
While the landscape of proxy disclosure and solicitation has changed significantly during the past few years – and continues to evolve as we begin to wrap up the 2010 season and look ahead to 2011 – there were no landmark contests in 2010 that will set a new course for proxy seasons to come. That said, there are important issues to monitor and evaluate how they will impact your governance practices and specific proxy proposals, as well as how they may influence your current shareholder base.
Major Hot Button Issues
Major hot button issues during the 2010 proxy season include:
- “Just Vote No” campaigns. These campaigns involve applying pressure on an issuer by encouraging fellow shareholders to vote against a corporate proposal or withhold votes from an incumbent director. Similar campaigns have been waged to defeat the quorum for meetings when it appeared likely that shareholders would not have an opportunity to express their views.
- Elimination of broker voting in uncontested elections. Historically, brokers have voted on behalf of their clients and in most cases cast their votes in favor of management. The elimination of broker voting could lead to less automatic support for management proposals and thus could prove troublesome at companies with majority voting rules. Real-time reporting of vote results. The SEC approved amendments to Form 8-K that would require companies to disclose the results of a shareholder vote within four business days after the end of the meeting at which a vote is held. This replaces the requirement to disclose voting results in Forms 10-K and 10-Q, which often are filed months after the relevant meeting.
- Enhanced discussion of risk surrounding compensation practices and climate change. New disclosure requirements require companies to clearly explain the relationship of compensation policies and practices, as well as potential climate change impacts to risk management. In particular, the discussion of compensation should be Copyright Dix & Eaton Incorporated 2010 designed to help investors determine whether a company has incentivized excessive or inappropriate risk-taking by employees.
- Discussion of board diversity. Another new disclosure requires companies to outline whether, and if so how, a nominating committee considers diversity in identifying nominees for director positions. If the nominating committee or board has a policy with regard to the consideration of diversity in identifying director nominees, the final rules require disclosure of how this policy is implemented and how the nominating committee or board assesses the effectiveness of its policy.
- Discussion of management succession planning. More and more emphasis is being placed on the outlook for companies’ future leadership teams. While investors are not necessarily looking for names of specific individuals, they do want more visibility into the process by which the board is preparing for an eventual leadership transition.
- Enhanced disclosure of board members’ past affiliations and litigation involvement. As shareholders continue to increase their scrutiny of directors, reviewing past relationships and legal battles is becoming part of their standard due diligence process. Companies must disclose any directorships at public companies and registered investment companies that directors or director nominees held at any time during the past five years. Further, companies must disclose legal proceedings, such as SEC securities fraud enforcement actions, against the director or nominee, going back 10 years instead of the current five years. The list of legal proceedings included in this disclosure has also been expanded.
- Greater transparency about board members’ experience, qualifications, attributes and skills (also referred to as EQAS). This new disclosure is meant to enhance the standard biographical information typically included in a company’s proxy statement. This disclosure will help investors understand why these individuals were selected to participate on the board and will be critical when promoting management nominees over other nominees. In particular, flowing from the annual objective Board audits and governance best practice, it will be increasingly advisable to outline the specific expertise being sought in nominees and how their backgrounds align with the company’s strategic, operational and governance needs.
In particular, “Just Vote No” and the elimination of broker voting are drawing attention in this latest proxy season. In a May 2010 Inside Investor Relations article, Pat McGurn, special counsel at proxy advisory firm RiskMetrics Group, notes the synergy brewing between the “vote no” movement and the elimination of broker voting is one that may lead to surprising and unwelcome election results this year and beyond. McGurn comments that many large-cap companies have adopted rules which require directors to receive a majority, not simply a plurality, of “yes” votes. According to the article, nearly 100 directors failed this test during the past year, but surprisingly none were removed from their respective positions. The respective directors at majority voting companies submitted their resignations, which were in turn rejected by the board in every case. Companies enforcing plurality rules ignored the vote results. Further, nearly 800 directors received 30 percent of “no” votes last year. When you combine a broker vote heading upwards of 30 percent at some firms with the poor track records of retail investors actually casting proxy ballots, it is evident that these directors may be at risk if their companies have majority voting rules. It is expected that governance activists will continue to push smaller companies to adopt majority voting standards.
Also drawing attention is the requirement for companies to provide an expanded discussion of board members’ relevant experience and qualifications. Many companies are concerned this additional disclosure will help activists easily identify “weak” board members to seek to replace with their own candidate, rather than looking to remove an entire slate of directors.
Several new developments are expected as we look ahead to 2011:
- The financial reform package working its way through Congress will likely include a “Say-on-Pay” mandate for all companies.
- “Say-on-PACs” proposals are expected to emerge as unions look to flex their collective muscle through their investment vehicles to influence how a company allocates funds from its political action committee.
- A long-awaited pronouncement from the SEC on opening up proxy access to shareholder nominees is pending.
- A re-evaluation of the entire proxy voting process by the SEC will likely produce positive implications for non-objecting beneficial owners’ and objecting beneficial owners’ accessand empty voting.
Preparing for Proxy Season 2011
Given how fast these trends are moving and the level of sophistication, we offer several recommendations for you to consider in preparing for the 2011 proxy season.
- Include proxy solicitation and corporate governance highlights into your ongoing investor discussions throughout the year. This will help to ensure investors have a clear understanding of the company’s governance profile as well as its related goals and objectives prior to the start of proxy season.
- Build relationships with proxy advisory services, such as Proxy Governance, Glass Lewis and Risk Metrics. Establishing an ongoing relationship will likely serve the company well, especially if discussions or clarifications are needed prior to any recommendation they may issue on a specific company proposal.
- Similar to the due diligence completed on the investment style of your institutional holders, we recommend researching investors’ corporate governance position and proxy voting dynamics. For example, you will need to know which of your investors follow proxy advisor firms’ recommendations and guidelines, which establish a vote by committee, and how they have historically voted on similar proposals, etc. The proxy solicitor you hire can provide valuable intelligence on these topics. This research will enable IROs to identify potential vote concerns before entering the heat of proxy season.
- Similarly, it is important to know the compliance officers within your major institutional shareholders, as they – not the portfolio manager – are the ones who ultimately control the vote. They are also often open to being “sounding boards” on anticipated corporate governance issues (e.g., compensation) well in advance of the board finalizing a proxy matter for shareholder consideration.
- Finally, it is imperative to keep management and the board apprised of key developments and findings. Both groups must have a clear understanding of where the company’s institutional holders stand on current and looming issues. They should also be briefed regularly – as part of the investor relations update – on important regulatory changes and the impact of these changes on the organization, especially those which may put the company at risk.