Investor engagement well
ahead of annual meetings has substantially increased
Proxy season kicked
off with a flurry of headlines this spring about investor revolts.
Shareholders in the United States loudly voted down
Citigroup chairman Vikram
Pandit’s $15 million pay package, and days later, investors on the
other side of the Atlantic forced Barclays’ chief executive to forego
£2.7 million in order to avert a similar public debacle at the
company’s pending annual meeting.
Soon after, Andrew Moss, chief executive of the British insurance
giant Aviva, resigned after 59 percent of investors rejected his
Perhaps the more telling indication of growing investor muscle,
however, is a story that may surprise many – the under-the-radar,
largely successful campaigns to win over investors by a handful of
companies that saw their pay packages go down in flames in 2011.
At least five
prominent major companies who became poster children for out-of-touch
executive pay last year garnered more than 90 percent support for new
pay packages from their shareholders in the early days of the 2012
proxy season – a stunning turnaround that appears to reflect
aggressive outreach to investors from companies previously viewed as
unwilling to compromise.
At the top of the list is
Umpqua Holdings, which saw its support rise from 35 percent to
more than 95 percent. Stanley
Black & Decker’s shareholder support rose from 39 percent to 94
percent, and Beazer Homes
saw its totals rise from 46 percent to 95 percent.
Even Jacobs Engineering
– the first company last year to have its plan voted down – came out
on top, its numbers rising from 54 percent opposed to 95 percent in
Ron Schneider, senior vice president at Phoenix Advisory Partners,
attributes a major part of the turnaround to aggressive post-meeting
investor outreach by all these companies.
‘The companies knew what the main drivers were and most had negative
proxy adviser recommendations,’ Schneider says. ‘They did a lot of
post-meeting engagement with investors to get an idea of their
concerns, and the results were very, very notable.’
Schneider says that Phoenix worked with Umpqua – which had the largest
percentage turnaround thus far for 2012 – for the first time in the
months leading up to Umpqua’s recent meeting.
This engagement reflects a larger trend. A number of observers say
they have noticed a significant uptick in outreach to shareholders
this year – efforts that, though difficult to quantify, may well be
unprecedented in size.
are seeing a lot of outreach even before the votes are cast,’ says Amy
Borrus, deputy director of the Council of Institutional Investors (CII).
‘I don’t have any numbers to point to, but it just feels that way,
more than before. Particularly on compensation, more companies are
engaging shareowners ahead of time. They are also trying to get ahead
of ISS recommendations. More are filing responses.’
Companies are ‘looking around at their peers’, says Schneider, and ‘if
they see somebody doing something innovative on disclosure and
clarity, they are adopting those methods. Best practices are emerging
and many companies are upping their game.’
Sanjay Shirodkar, of counsel at DLA Piper, agrees, noting that this
year many companies have begun ‘front-loading’ the discussion of
executive compensation in filings not previously known as easy reads.
They’ve added user-friendly charts, graphs and executive summaries in
an effort to make sure their rationale is clearly understood.
The trend is only likely to continue as the consequences for failing
to adequately sell compensation plans continue to grow. ISS is moving
ahead with plans for a ‘yellow card, red card’ system, which draws its
analogy from the penalty system of soccer.
Failing a say-on-pay vote is a warning, or yellow card. Failing to
address a failed say-on-pay vote is a red card, or penalty, which may
well result in a recommendation by ISS of a ‘no’ vote against members
of the corporate compensation committee.
ISS announced recently that in 2013, any company that receives less
than 30 percent support for say on pay and that fails to address
concerns is likely to receive recommended ‘no’ votes on directorships.
Not to be outdone, advisory firm Glass Lewis came out with its own
even more stringent plan soon after, announcing that it will do the
same for companies that receive less than 35 percent.
Board elections receive more attention
The issue of whether to hold annual board elections has been another
hot topic this year. Professors at Harvard University Law School, led
by Lucian Bebchuk, the director of the school’s Program on Corporate
Governance, have been working with pension funds and other large
investors to file resolutions with a number of companies that still
have staggered elections, singling out about a third of those that
Of 60 petitions filed, 44 were withdrawn after the companies
voluntarily agreed to change their policies, says Tim Smith, senior
vice president of Walden Asset Management, who adds that the 12 votes
that occurred midway through the proxy season averaged a tally of 79
percent in support.
‘A couple of years ago, this issue was being hotly debated,’ Smith
says. ‘Now it has overwhelming investor support. Companies read the
tea leaves, and this is a case in point of how things can change
dramatically. It’s become a litmus test for good governance.’
not willing to concede that annual votes are now the only standard,
Shirodkar acknowledges that the deals reached with 44 of the targeted
firms were ‘a fairly significant victory for shareholders’.
One thing seems hard to deny: those that fail such ‘litmus tests’ are
increasingly coming under attack. Already this year, some investors
have demonstrated a new level of willingness to target directors.
This year, Borrus says, has been notable for ‘lots of activity from
other than the usual suspects. More mainstream investors are speaking
out. This has been an extraordinary year, with shareholders demanding
more accountability from the board.’
has received letters from hedge funds demanding the board oust the
company’s co-founder and chief executive, while the company’s largest
shareholder, Southeastern Asset Management, has demanded that
Chesapeake consider offers from those interested in acquiring the
company. Southeastern has also demanded more oversight of the board at
Olympus, where it owns a 5 percent stake.
No hospitality for shareholders
This year, for the first time, six sizeable public employee pension
funds that belong to the CII singled out nine boards that had failed
to heed non-binding shareholder proposals which had previously won
majorities during annual meetings.
Among them was
Hospitality Properties Trust (HPT), a real estate investment
trust, which had ignored majority shareholder votes in favor of board
declassification for three consecutive years.
The CII held an April 17 conference call with the company. Borrus will
not disclose what transpired on the call, but CII members were
apparently so disappointed that they decided immediately after the
call’s conclusion to pay solicitation fees and target two of the board
members for removal.
At the company’s annual meeting, independent trustee Bruce Gans
received just 42 percent of the votes cast. The other director up for
re-election, managing trustee Adam Portnoy, garnered 53 percent of the
Gans resigned, but in what Borrus calls ‘an extraordinary affront to
shareholders’, the board immediately reappointed him to fill the
Tim Bonang, vice president of investor relations for HPT, says that a
de-staggered board ‘encourages short-term thinking’. In addition, he
notes, HPT is chartered in Maryland and has a headquarters in
Massachusetts, both states that require staggered boards.
De-staggering the board would be ‘costly’ and might require the
company to move, he says.
Bonang says CalPERS had been the driving force behind the
declassification effort of the previous three years, in what may well
be an attempt to pressure the board to demand that the hotels HPT owns
use union labor.
‘It’s been pretty clear that we have been under pressure to persuade
our operators to use union workers,’ Bonang says. Of the board’s
decision to reappoint Gans, he explains: ‘It was the board’s belief
that the vote against Dr. Gans wasn’t directed specifically at him for
any personal failing, but was rather aimed at the board for specific
In April, Ricardo Salgado, chief executive of Portugal’s biggest bank,
Banco Espirito Santo, resigned his directorship at NYSE Euronext after
failing to win a majority of votes at the exchange operator’s annual
meeting. Salgado was absent at 75 percent of board meetings last year
due to his own bank’s challenges during the European financial crisis.
Midway through the proxy season, ISS has voting results for 4,668
directors in the Russell 3,000. Of these, ISS recommended ‘no’ or
withhold votes against 290, or 6.2 percent.
Of those, only Salgado failed, while another five directors received
less than 50 percent but passed anyway – including two each at
Barnes Group and one at
Ferro – presumably due to
plurality vote standards in place at those companies. Another 67
directors at 46 companies garnered between 50 and 70 percent of the
The votes drive home the point that ‘the election of directors is no
longer just a routine item’, says Schneider. ‘At this point, the
number of directors who received less than 50 percent support from
their shareholders is in the single digits – but you’ve got dozens
more votes that were still uncomfortably close.’
Proxy access battle continues
This year’s results again highlight the renewed muscle of
shareholders, a trend that can be attributed in part to the overall
environment but which also stems from the end, two years ago, of rules
that gave brokers wide latitude to vote on behalf of their customers,
This year’s annual meetings have also been notable for a number of
battles over proxy access – rules that would require corporations to
include shareholder-nominated board candidates in their proxy
materials, rather than requiring shareholders to shoulder the often
prohibitive cost of paying for their own proxy materials.
Last July a federal appeals court in Washington DC struck down an SEC
rule that would have required proxy access, but the legal decision did
not prevent an SEC revision to another related regulation – Rule 14a-8
– from taking effect.
This revision allowed shareholders, for the first time, to use company
proxy materials to propose their own board election and nomination
procedures. As a result, at least two dozen companies received
shareholder proposals aimed at requiring proxy access.
The proposals varied widely. While the consensus ownership threshold
established in the SEC proposal would have required those nominating
directors to own 3 percent of the company for three years, some of the
investor proposals suggested a threshold of just 1 percent. Others
proposed a plan by which 100 shareholders or more with $2,000 worth of
stock could band together to reach a threshold.
Few of the key votes had been taken yet by mid-season, but early
results are noteworthy. At Wells
Fargo, a proxy access proposal garnered 32 percent of the vote –
an ambiguous number seized on by opponents and proponents alike as a
meanwhile, investors pushing a proxy access proposal agreed to remove
it from the ballot after the company relented at the eleventh hour and
agreed to implement proxy access in 2013 for shareholders who meet a 5
percent ownership threshold. At Ferro, a proxy access initiative that
would have set a threshold at 1 percent was soundly defeated.
Patrick Quick, a partner at Foley & Lardner who specializes in
corporate governance and proxy statements, says that ‘right now the
battle is being won by those who oppose proxy access. But the question
is: how will the war turn out?’
The SEC’s proposals, Quick notes, had far higher ownership
requirements than some of those offered by proxy access proponents.
‘The activists and others now have the benefit of some shareholder
reactions as well as input from the SEC,’ he says. ‘In 2013, will they
get their acts together and come back stronger and better?’
engagement can help boards secure support
responsiveness to shareholders increasingly becoming an evaluation
of director performance, constructive dialogue with investors
around key topics of interest can help secure board support as
well as leading to shareholder proposal withdrawals.
So far this season, at least 15 percent of the more than 780
shareholder proposals tracked by Ernst & Young have been withdrawn
following dialogue between companies and shareholders, with both
sides reaching agreement on how best to achieve corporate
governance and responsibility goals.
Engagement alone does not guarantee investor support – investors
and proxy advisory firms also weigh the quality of engagement and
the follow-up disclosure of results.
Boards continue to focus on balancing engagement trends with the
engagement appetite of the company’s own shareholder base and the
obligation to ensure that the company’s governance practices are
appropriate for its specific circumstances.
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