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Op-Ed: Boards and the Dodd-Frank Craps Game
Article published on August 9, 2010
Pat McGurn is special
counsel at ISS.
threat of a double-dip recession may cause equity investors to look
elsewhere — say Las Vegas — to make up their portfolio shortfalls. If board
members desire casino-style thrills, upcoming annual meetings should
suffice. The 2011 proxy season does look like a craps game thanks to the new
rules now tumbling out of the Dodd-Frank financial reform bill that empower
the dice so SEC Chairman
Mary Schapiro and her
colleagues at the Securities and Exchange Commission will soon adopt their
long-anticipated proxy access rules. While the rule-making bones have not
yet come to rest on the felt, SEC watchers have put their money down on the
number “five” — that is, a 3% ownership threshold plus a two-year holding
requirement for shareholders seeking to nominate candidates.
run the numbers now to come up with a list of investors who might be
eligible to roll their nominees onto company ballots next season. Directors’
pre-season outreach should include visits with any wannabe nominators. These
gestures need to especially be made to big public employee and labor union
pension funds as well as iconoclastic money managers. Directors probably do
not need to fear boardroom challenges from mega index managers or brand name
mutual funds found on their all-access lists. However, some quick
pulse-taking is advisable since these players typically control big voting
panels, take pains to strengthen or remove weak links in boardroom chains.
Such fragile bonds could be easily broken by targeted solicitations for
Snake eyes issues
like sustained poor performance, nosebleed high CEO pay, overboarding,
chronic truancy and boardroom homogeneity will draw access candidates to
that Congress did drop its proposed listing standard cram-down of majority
threshold voting in director elections. As a result, activist investors now
must get majority voting rules the hard way. Expect to see boxcars loaded
with majority voting resolutions pulling into small-cap firms’ meetings next
year. Boards at firms where nominees’ high “no” votes failed to resonate
with their fellow directors last year would be well-advised to preempt
proposals by embracing the majority rule.
management proposed say-on-pay votes will be a first-time ballot item at
most U.S. firms in 2011 thanks to Dodd-Frank. While the SEC can still exempt
smaller firms, everybody else must throw the dice next year. Compensation
panels should engage with big investors before laying their pay plans on the
table. Remember that 2010’s management proposed say-on-pay votes showed that
excessive perks, overly generous pensions and other non-performance-based
practices are sucker bets.
Issuers also must
offer shareholders the opportunity to vote on the frequency of future
management-proposed say-on-pay votes. While many boards will gravitate
towards the least frequent (triennial) interval, directors might want to
consider waiting for the results of their 2011 debuts before making a
decision to shelf annual say-on-pay votes.
A say-on-pay clone
calling for advisory votes on golden parachute arrangements also made it
into the legislative package. The new law requires boards to win approval of
change-in-control provisions at the same time as, or prior to, the
transactions that trigger them. Contemporaneous votes would be nonbinding,
but failure to win majority support could fuel legal challenges and delay or
imperil underlying deals.
may lead boards to put severance arrangements up for snap votes during
peacetime. After all, morphing plain-vanilla say-on-pay resolutions into
up-or-down advisory votes on parachutes might prove troublesome for some
boards. This is because severance has emerged as a hot topic in the wake of
the SEC’s mandate for enhanced disclosure of payouts.
Adapting to the
new governance landscape will determine if directors roll a “natural” or
“crap out.” Preparation, not luck, will be the key for boards to throw seven
or eleven on the “come-out” at their 2011 annual meetings.
Investor Group Goes After Directors Who Fail to Win
on August 9, 2010
CII has sent
letters to the companies where these votes took place, calling on board
chairs to detail how their boards will address the voting results. According
to RiskMetrics, CII suggests that the directors who failed to receive a
majority of votes should step down, noting that none of the 82 had done so
as of early July. The investor group also recommends that these companies
enact majority-vote standards in director elections.
receiving CII’s letters are mostly small-cap firms. According to
RiskMetrics, roughly 70% of S&P 500 companies have majority voting policies
in place, but most mid- and small-cap companies do not. The final version of
the recently passed Dodd-Frank Act does not include a provision in the
Senate bill that would have instructed national stock exchanges to add
has been an increasing priority for activist investors. In March,
Calpers unveiled plans to ask 58 of its biggest
portfolio companies to voluntarily adopt the majority-vote standard. Around
the same time, the pension’s board voted to remove limits on issuing
shareholder proposals so that the group could wage an unfettered campaign
for majority-vote standards.
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