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Source: The Harvard Law School Forum on Corporate Governance and Financial Regulation, February 24, 2013 posting

Posted by Matteo Tonello, The Conference Board, on Sunday February 24, 2013 at 9:47 am

Editor’s Note: Matteo Tonello is managing director of corporate leadership at the Conference Board. This post relates to a report released jointly by The Conference Board and FactSet and authored by Dr. Tonello, Melissa Aguilar, and Thomas Singer of the Conference Board. For details regarding how to obtain a copy, contact

The effects of say on pay on shareholder engagement, the introduction of proxy access proposals, and the resurgence of board declassification resolutions were the principal themes of the last proxy season and are expected to continue to take center stage in 2013, according to a report issued today by The Conference Board in collaboration with FactSet Research Systems Inc.

Proxy Voting Analytics (2008-2012) analyzes data on voting by shareholders of U.S. companies that held their annual general meetings (AGMs) in the January 1-June 30 period during the last five years. Aggregate data on shareholder proposals, management proposals, and proxy contests is examined and segmented based on market index (whether the Russell 3000 or the S&P 500) and 20 business industry groups.

The report is supplemented with an appendix offering detailed recommendations from Conference Board experts for companies facing situations of shareholder activism.

Data analyzed in the report includes:

  • Volume, sponsors, and subjects of shareholder proposals.

  • Voted, omitted, and withdrawn shareholder proposals.

  • Voting results of shareholder proposals.

  • Shareholder proposals on executive compensation.

  • Shareholder proposals on corporate governance.

  • Shareholder proposals on social and environmental policy.

  • Volume and subjects of management proposals.

  • Failed say-on-pay proposals among Russell 3000 companies.

  • Say-on-pay proposals that received the support of less than 70 percent of votes cast.

  • Volume, dissident type, reasons for dissent, and outcomes of proxy contests.

  • List of most frequent dissidents.

Additional insights (including volume by index, industry, and sponsor, most frequent sponsors, and support levels) are offered with respect to key issues from the last few proxy seasons, including:

  • Majority voting.

  • Board declassification.

  • Supermajority vote requirements.

  • Independent board chairmen.

  • Proxy access.

  • Sustainability reporting.

  • Political issues.

  • Election of dissident’s director nominee.

The annual general meetings of the last couple of years have been closely observed as a test on the effective implementation of the advisory vote of shareholders on executive compensation plans, now mandatory in the United States. Generally, year-over-year comparison of voting results proved that say on pay can function as a catalyst to greater company awareness of current compensation issues as well as to more engagement and transparent communication with investors.

Board declassification was by far the hot governance issue of 2012 shareholder meetings, as confirmed by the increased volume of this proposal type and the staggering average support level of 80 percent of votes cast recorded in the Russell 3000. Interest in this issue by activist investors had been shown for some time, and high levels of support were documented in the 2011 season as well. But the numbers of 2012 confirmed that shareholders are determined to question the rationale for not having all corporate directors face a confidence vote on an annual basis.

This year also marked the introduction of proposals on proxy access, two of which received the approval of a majority of shareholders and showed that there might be room for increasing levels of support if the formulation of the resolution is consistent with the SEC rules that were vacated by federal courts in 2011. Despite what could be described as an experimental year for proponents of proxy access as they fine-tune the language and terms under which shareholders would vote for their proposals, proxy access proposals actually generated more shareholder support than majority voting did in the first year it was proposed by shareholders. Majority vote standards to elect directors are now overwhelmingly supported by shareholders and have become a corporate governance best practice. If proxy access follows a similar trajectory it will have significant implications for shareholder activism and future proxy battles.

The following are the major findings.

In 2012, shareholders filed more proposals than in prior proxy seasons, marking the reversal of a declining trend observed since 2008. In the Russell 3000, shareholders filed a total of 719 proposals (averaging 0.30 proposals per company), compared to the 684 proposals (or 0.28 proposals per company) submitted in the same period in 2011. These figures document a reversal of a trend of declining shareholder proposal volume that had started in 2008, when the total number of shareholder proposals had reached a record high of 919 in the Russell 3000. Even though it is premature to project this change of direction into the future, the finding may be explained, among other things, for the new opportunities to implement an activist investment strategy resulting from improved market performance and broader access to liquidity as well as for the effects of say-on-pay regulation. Of the shareholder proposals filed in 2012, 677 were related to issues of executive compensation, corporate governance, or social and environmental policy.

The number of proposals introduced by hedge funds and religious groups declined sharply, while labor unions were the most prevalent proponent in unionized business sectors. In the examined 2012 period, hedge funds filed 2.2 percent of the total proposal volume, compared to 3.8 percent in 2011 and 4.9 percent in 2008. The number of proposals filed by religious groups declined by more than half during that last four years, from 75 proposals (8.2 percent of the total) in 2008 to 28 (or 3.9 percent) during the same period in 2012. On the contrary, pension funds have become more active, submitting 127 proposals (or 17.7 percent of the total) compared with 80 (or 8.7 percent) counted in 2008. Labor-affiliated shareholders were particularly active in unionized business sectors, such as energy minerals (where labor unions filed 31.8 percent of proposals received by companies in the industry) and health services (33.3 percent). Overall, labor unions—which typically exert their influence through the stock holdings of employee pension funds—focused their activism on issues of executive compensation, backing 40.2 percent of the proposals filed on this subject at Russell 3000 companies in 2012.

Voted shareholder proposals declined slightly amid increasing withdrawal levels, especially among proposals on executive compensation and by religious groups and pension funds. In the Russell 3000, 66.3 percent of submitted proposals were voted, down from 67 percent of the 2011 proxy season. Proposals omitted by management also declined, albeit marginally (from 24.9 to 24.3 percent of the total submissions). This softening trend was compensated by the growing number of proposals withdrawn before the meeting, an indication of the increased propensity of companies to establish a dialogue with their investors. The percentage of withdrawn proposals was 6 percent in the Russell 3000 (up from 5.4 percent in 2011) and 6.6 percent in the S&P 500 (up from 5.9 percent in 2011). In general, in 2012, withdrawals were more frequent among executive compensation proposals, an area where the initial demands of shareholders tend to exceed their realistic expectations and simply constitute a tactic to engage in negotiations with the company and obtain partial concessions.

Proposals on environmental and social policy consistently scored low levels of for votes and high levels of abstentions, while the percentage of executive compensation proposals receiving majority support declined sharply. Only 16.8 percent of votes cast on proposals related to social and environmental policy were for the proposed change; however, proposals on this subject also reported the highest levels of abstention from voting (10.8 percent, compared to an average of 1.3 percent for the other subjects). This finding indicates that U.S. shareholders, in general, continue to believe that the board of directors and senior management are better suited to determine the business viability of certain sustainability activities and that a one-size-fits-all policies may lead to inefficiencies or capital misallocations. The vote-for percentage was higher for proposals on executive compensation (25.4 percent) and highest for those on corporate governance (49.2 percent). The percentage of shareholder proposals on executive compensation that received majority support dropped to 1.6 percent of voted proposals from 4.3 percent in 2011 and 7.9 percent in 2008. These figures reflect the fact that the executive compensation category no longer includes proposals on say on pay, which are now routinely submitted to a vote by management in application of SEC rules. In addition, proposals on clawback and pay-for-performance were previously used to prompt business organizations to open a dialogue on compensation policies, a need somehow satisfied this year by means of the mandatory say-on-pay consultation. In those cases where the pay-for-performance equation is clearly broken, larger investors no longer feel that they need to introduce a resolution on the topic since they can make their voice heard through the say-on-pay vote.

Following the introduction of say on pay, the focus of shareholder proposals related to executive compensation has shifted to specific themes such as severance agreements and tax gross-ups. Investor focus shifted in 2012 from say on pay (which had dominated the last few proxy seasons, before its mandatory introduction by federal law in late 2010) to specific compensation-related themes such as the adoption of equity-retention requirements for senior executives (41.3 percent of the total number of proposals voted on executive compensation in 2012, up from 15.2 percent in 2011), the request for a policy where compensation elements are linked to the achievements of performance targets (14.3 percent in 2012, compared with 8.7 percent of the total executive compensation proposals voted in 2011), and the introduction of limitations on golden parachutes (19 percent in 2012, up from only 15.2 in 2011).

Despite an overall decline of average support levels for executive compensation proposals, shareholders confirmed their support for those to limit golden parachutes and golden coffins. Average support level for all proposals related to executive compensation submitted in 2012 was 22.3 percent, down from 24.2 percent in 2011 and 27.2 percent in 2008. Major drops in support levels affected proposals on clawbacks (15.7 percent of for votes, down 10.3 percent from 2011 support levels) and those on the pay-for-performance link (23 percent, down 11.6 percent also from 2011 levels of for votes). The only notable exceptions to the general downward trend observed for executive compensation proposals were the requests to limit or require a shareholder vote on SERPs (30.5 percent of for votes, up 1 percent over 2011 support levels), those to require equity retention (24.4 percent, up 0.6 percent from 2011) and proposals to limit (or require a binding shareholder vote on) golden coffins (for which for votes were 12 percentage points higher than in 2011, at 39.6 percent).

Shareholder proposals on the right to act by written consent lost traction in the 2012 proxy season, while the issue of board declassification received overwhelming investor support. The historical analysis of shareholder proposals on corporate governance highlights the resurgence of proposals and board declassification, which represented19.8 percent of the total number of proposals submitted on corporate governance in 2012, up from 17.1 percent in 2011. Average support levels for proposals on this topic was a staggering 80 percent of votes cast, 15.3 percentage points higher than those registered in 2008. Interest in this issue by activist investors had been observed for some time, and high levels of support were recorded in the 2011 season as well. But the numbers of 2012 confirm that shareholders are determined to question the rationale for not having all corporate directors face a confidence vote on an annual basis. However, three shareholder rights on which activist investors had shown increasing interest since the beginning of the financial crisis appeared to start to lose traction during the 2012 proxy season: cumulative voting (which represented 5.6 percent of the total volume of corporate governance proposals, down from 11.7 percent of 2011 and 9.2 percent in 2008), the right to act by written consent (8.6 percent, compared to 14.4 percent in 2011) and the right to call special meetings (6.5 percent, halved from the 13.1 percent level recorded both in 2011 and in 2008).

Proxy access proposals received solid average support by shareholders in 2012, but only two of the 14 filed passed. In 2012, in the Russell 3000, shareholders filed 14 proposals requesting the adoption of bylaws or organizational provisions on the inclusion in proxy materials of director candidate(s) nominated by shareholders. Of the 14 proposals filed on the topic in 2012, 7 (50 percent) went to a vote by June 30 and two passed. Both successful proposals were formulated to match the terms of now-vacated SEC Rule 14a-11, requiring 3 percent ownership for three consecutive years to qualify for proxy access rights.

Despite the surge of shareholder proposals on corporate political contributions and lobbying activities, support level remained low. The U.S. Supreme Court’s controversial decision on Citizen United v. Federal Election Commission (2010) explains the increasing investor interest in political issues (43.8 percent of the total number of proposals submitted on social and environmental policy in 2012, up from 32.1 percent in 2011 and from 18.6 percent in 2008). However, these proposals have garnered an average backing from 18.5 percent of shareholders casting their votes, with none of them obtaining majority support in 2012.

One out of ten companies in the Russell 3000 is subject to increased scrutiny by proxy advisory firms as a result of their unsatisfactory say-on-pay vote in 2012. Of the 1,875 companies in the Russell 3000 reporting detailed say-on-pay vote results through June 30, 2012, 49 executive compensation plans (up from 39 in 2011) failed to receive the majority support of their shareholders. The list includes notable cases such as American Eagle Outfitters (NYSE: AEO), Best Buy (NYSE: BBY), Chesapeake Energy (NYSE: CHK), Citigroup (NYSE: C), and Pitney Bowes (NYSE: PBI). Among companies that did not obtain a favorable majority in the advisory vote on their executive compensation, the average support level was 36 percent of votes cast, with one case (Sterling Bancorp (NYSE: STL) where the company received only 6.2 percent of for votes. In addition, 120 companies in the Russell 3000 (or approximately 9 percent of those requesting the advisory vote of shareholders) did pass the 2012 vote but had their executive compensation plans met with lukewarm enthusiasm, obtaining less than the 70 percent of for votes that many governance experts consider necessary to exclude further scrutiny into an organization’s pay practices. In particular, that is the level below which proxy advisory firms are expected to take a harder look at a company to see if a future negative vote recommendation on its say-on-pay vote is warranted. Many of those boards will inevitably need to reopen the discussion on pay for performance, and either persuade investors that their compensation policies is sound and fits the company’s strategic needs or revisit those policies.

Encouraging year-over-year comparison of voting results confirms that say-on-pay can be a catalyst to improved corporate-investor communication. In the second year of implementation of the SEC rules, say-on-pay generally proved to function as catalyst to greater company awareness of current compensation issues and more engagement and transparent communication with shareholders. A look at 2012 disclosure from companies that were on these lists in 2011 confirms the systematic effort subsequently made to engage with shareholders as well as the improvement of their say-on-pay voting performance when their executive compensation plans went again to a vote during this proxy season. In particular: (a) the 144 companies in the Russell 3000 that received less than 70 percent support levels in 2011 and held their 2012 AGM within the sample period saw such support level improve by an average of about 20 percentage points; and (b) only a handful of Russell 3000 companies (including Hercules Offshore (NASDAQ: HERO), Nabors Industries (NYSE: NBR), Kilroy Realty, and Tutor Perini (NYSE: TPC)) failed their say-on-pay vote for a second year in a row.

As say-on-pay resolutions were being voted on during the 2012 proxy season, management nominees to the board of directors faced less opposition by investors. In the last five years, the volume of shareholder proposals on the election of a dissident’s director nominee that went to a vote at AGMs of Russell 3000 companies has been progressively reduced, from 40 proposals filed in 2008 to only 21 in 2012. In 2012, average support rate for this proposal type decreased to 17.7 percent of votes outstanding from the 34.9 percent reported in 2011 and the 27.6 percent of 2008, with only one proposal approved by shareholders. These findings may reveal that investors were often using this proposal type to manifest (and elevate to the level of a proxy fight) their dissatisfaction over issues of executive compensation, which they can now do by means of the periodic say-on-pay vote.

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