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For earlier reports of evolving marketplace views of the ISS client network campaign for its "Say on Pay" form of advisory voting, see:

In relation to the reported ISS client's theory that declining support for their network's proposals may be related to the implementation of electronic proxy voting, two reports on observations of "e-proxy" experience have been released by Broadridge and can be downloaded from these links:


RiskMetrics (f/k/a Institutional Shareholder Services - "ISS"), May 2, 2008 blog and chart














Friday, May 2, 2008


Analysis: Early Season Trends
Submitted by: Subodh Mishra, Governance Institute


Resolutions calling for advisory votes on pay have received less support at a number of firms this year versus last, according to a RiskMetrics Group analysis of preliminary vote results through April 30.

Governance watchers suggest that a number of factors may underlie the declining support at those firms, though the average support level for all such “say on pay” proposals correlates to that in 2007, based on tallies collected so far.

This year, pay vote proposals have averaged 42.1 percent support at 21 companies so far. That is in line with results for calendar 2007, when 52 such proposals received 42.5 percent average support. Surprisingly, however, the measure received less support at a number of financial companies this season, including Citigroup, Morgan Stanley, Wachovia and Merrill Lynch, where many observers expected the measure would fare better than last year given investor anger over subprime-related losses.

Of the 11 companies where investors voted on the resolution both this year and last, seven have seen declines in support that range from one-tenth of a point at AT&T to 9.6 percentage points at Merrill Lynch. Pay vote proposals received increased support at just five firms, meanwhile, including at Apple (Editor’s Note: this is based on an estimated vote tally of 51 percent, given that the company announced the proposal received majority support, without disclosing the specific votes or percentages; RiskMetrics has recorded a preliminary tally of 51 percent at Lexmark International for the same reason). Defense contractor Lockheed Martin and aerospace giant Boeing each saw 3.9 percentage-point gains.

To view some of the early season trends, please Download file

“It’s a theory at this point, but e-proxy may play a role in the decline,” notes Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees, or AFSCME, referring to the decline at some companies. “There’s some preliminary data showing a drop-off in retail voter participation, and our understanding of retail voter trends is that they’ve supported ‘say on pay’ when they’ve cast their ballots.”

According to vote processor Broadridge, retail voting participation has dropped markedly under the Securities and Exchange Commission’s e-proxy rules, which now require large capital firms to allow investors to receive proxy materials and vote their shares via the Internet. Statistics released by Broadridge in late February show that the proportion of retail shares voting drops from 30.1 percent to 23.3 percent with the e-proxy option. Those numbers are based on an evaluation of 103 corporate issuers that have utilized e-proxy, of which 80 have held their shareholder meeting. Company names were not given, however.

A drop-off in retail voter participation also would serve to amplify the voting of mutual funds and other institutions that generally do not back pay vote proposals, proponents say.

Another potential explanation for the decline is that investors are more focused on business strategy in light of the bear market, and on righting the ship at those firms that have suffered heavy losses as a result of the credit crisis.

“Investors may well be more concerned with corporate performance and company prospects, rather than what officers are being paid, in light of market conditions,” said John F. Olson, a Washington-based partner at the law firm of Gibson, Dunn & Crutcher.

“A lot of the drama that came last year from expanded [SEC rules on compensation] disclosure has passed, and investors are saying we want directors to focus on how to navigate the storm,” said Olson, whose firm is retained by companies on issues pertaining to federal proxy rules and other corporate matters. While there was an outcry when Merrill Lynch’s E. Stanley O’Neal and Citigroup’s Charles Prince received large exit payments last year, their departures may have dampened investor support for pay vote proposals at their former firms this season, Olson noted.

The decline in support levels at some firms may also be indicative of views on the overall value of pay vote proposals, governance observers say. “There’s a mixed view on ‘say on pay’,” argues Prof. Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “I think there are some concerns about its efficacy and impact. It’s a half-step.” Elson asserts that other mechanisms, such as corporate reimbursement for proxy solicitation expenses, are ultimately more effective tools for shareholders to curb pay and other governance abuses.

So far, “say on pay” proposals at two companies—computer maker Apple and Lexmark International, a Kentucky-based manufacturer of printers—have garnered majority support. Last year, proposals passed at seven companies, according to RiskMetrics records, with three of those firms—Blockbuster, Par Pharmaceuticals, and Verizon Communications, agreeing in recent months to hold annual pay votes. Results for the pay vote proposal at the May 1 meeting of Valero Energy, whose shareholders gave the issue 53 percent support in 2007, were not available as of this writing.

Fewer Settlements Overall in 2008
Meanwhile, early season data suggest that fewer investors and issuers are settling this year on governance proposal filings. According to RiskMetrics records, roughly one in four such proposals was withdrawn in 2007, whereas the ratio this year stands at just under one in five.

That is closer to historical averages: in 2005 about 19 percent of proposals were withdrawn, and in 2006 more than 15 percent were withdrawn. That contrasts markedly with data for social issues proposals, which have seen withdrawal rates hold steady at or near 30 percent since at least 2005.

The drop in settlements is not due to a lack of dialogue, according to proponents. “There’s been more dialogue, but less consensus,” says AFSCME’s Ferlauto, who notes the protocol now established is for communication between shareholders and issuers, but there’s less ability to come to terms, particularly on “big ticket” items. As an example, Ferlauto points to negotiations over AFSCME’s tax gross-up proposals, which ask companies to stop providing tax gross-up payments to executives that are not available to other managers.

“Companies are willing to concede on smaller amounts, such as perks,” Ferlauto said, “but not on such things as payments covering change-in-control or other big-number items.”

One proponent is bucking the trend, however, having settled roughly four out of five proposals calling on companies to adopt stricter pay-for-performance metrics, and two-thirds of those calling for a majority vote standard in director elections. The United Brotherhood of Carpenters and Joiners of America has settled 28 of 34 “pay-for-superior-performance” proposals so far this year, according to union officials, and has engaged in “good” discussions with dozens more companies that received letters—rather than proposals—calling for a re-evaluation of some pay practices.

“We thought it’s been the best year in terms of substantive and successful engagement,” said Ed Durkin, corporate affairs director at the Carpenters’ fund, regarding dialogue over this year’s pay for performance proposal, which looked closely at how companies stacked up against their peers on metrics for pay elements ranging from “golden parachutes” to supplemental executive retirement plans.

“Companies appreciated that we took an in-depth look and challenged their plans in specific terms,” Durkin said. “Because of that, what we found was a greater willingness [on the part of issuers] to engage this year, to argue their case, and in many cases concede when it was a good, solid, and substantive discussion.”

With whom the Carpenters engaged also played a role in achieving consensus, Durkin said. Meetings were largely with human resources staff and corporate secretaries, though some also were with the named executive officers whose compensation was the subject of discussion, as well as with compensation consultants. “We were looking for a group of people who knew the ‘nuts and bolts’ of the plans and could best appreciate our arguments” for change, Durkin said. That, he said, made for a more effective and efficient process than had the fund negotiated with the entire compensation committee or multiple directors.

According to Durkin, companies with whom the fund settled largely agreed to make incremental changes toward the use of restricted shares, tightening and greater disclosure of performance targets, disclosure of rationales for performance metrics, increased transparency beyond that called for by the SEC, and other similar steps.

The Carpenters’ experience is echoed to some degree by Olson. “I don’t see that issuers are taking a harder view toward discussing a basis on which to withdraw,” said Olson. Moreover, he noted, ongoing dialogue born of issuer-investor working groups on issues such as majority voting and “say on pay” are helping resolve issues before resolutions are filed.

That may hold true for some compensation and other proposals with a notable exception being pay vote resolutions. Of 82 such proposals now being tracked by RiskMetrics, just two have been withdrawn; one because it was duplicative, and the other because the targeted company, Verizon, agreed to adopt the measure in response to majority support in 2007.

Companies, for their part, have had a tough time dealing with “chronic proponents,” who, according to Olson, are retail shareholders that “simply don’t negotiate” on any practical basis.

Olson’s assertion is backed by withdrawal rates for proposals to repeal classified boards, eliminate a supermajority vote requirement, adopt cumulative voting, and allow shareholders to call special meetings, the vast majority of which are filed by retail investors. RiskMetrics is now tracking 216 such proposals in sum, of which just 15, or 7 percent, have been withdrawn.

Retail investor and governance activist John Chevedden disputes the assertion, however, noting that companies often move to omit proposals at the SEC under the "substantially implemented" argument, then propose the measure as a management-sponsored ballot item. Moreover, Chevedden argues, retail investors are indeed withdrawing at companies that are willing to negotiate "seriously" and points to American Express as an example. A Kenneth Steiner proposal to the credit card company was pulled late last year after the company agreed to put the resolution to a vote as a management item. The measure passed at the company's April 28 annual meeting.


Copyright © 2007 RiskMetrics Group



Say on Pay Results: 2007 vs. 2008


2007 %

2008 %

% Pt. Increase (Decrease)













Bank of America




Bank of New York Mellon








Burlington Northern Santa Fe












Edison International




Electronic Data Systems




Goldman Sachs




International Business Machines




Lexmark International*




Lockheed Martin








Merrill Lynch




Morgan Stanley




U.S. Bancorp








Waddell & Reed Financial




Source: RiskMetrics Group data as of April 30. All vote results are preliminary; the support percentages are based only on votes "for" and "against."
*Proposal received majority support, though vote results were not disclosed.





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