Proxy Season Prognosis
Corporate Board Member
By Laura J. Finn
As boards move into the new year, the events and trends from 2012 annual meetings become the prologue for companies and boards preparing for the 2013 proxy season. During 2012, for instance, say-on-pay proposals garnered the lion’s share of attention (and contention) from shareholders and other investor advocates, but a string of other investor targets—political contributions, proxy access, board declassification, and others—shared the spotlight as well. The following is a roundup of issues directors should keep their eye on to prepare for the months ahead.
A dark horse issue during the 2012 proxy season was proxy access. After the U.S. Court of Appeals ruled against mandatory shareholder access to the proxy in 2011, many observers surmised the issue would quietly fade away. Instead, a number of proposals garnered supporting votes for increased shareholder access to the proxy in 2012. At drilling company Nabors Industries Ltd. and natural gas producer Chesapeake Energy Corp., for instance, shareholders voted by a majority to enact proxy access.
At computer maker Hewlett-Packard Co., management came to a compromise with shareholders by agreeing to submit a proposal on proxy access at the 2013 annual meeting. Thus far, five proxy access proposals have already been filed for the upcoming season. Susan Webster, a partner at Cravath, Swaine & Moore says companies are beginning to prepare for proxy access and other governance-related proposals by being more reactive to the shareholder base than they were in the past. She believes the tide may be shifting in this arena, saying a regulatory mandate for proxy access “may be a possibility in the next four years.”
A movement to declassify boards, meaning that all board members would be up for reelection annually rather than on a staggered basis, is gaining steam. This activity is largely being spearheaded by the Shareholder Rights Project (SRP), a clinical program at Harvard Law School that works to improve corporate governance at publicly traded companies through research and policy projects. While many companies have already declassified their boards, the SRP is pushing hard on the issue and plans to file proposals at 74 S&P 500 and Fortune 500 companies in the 2013 season.
During 2012, the SRP worked with six institutional investors to file declassification proposals at 89 companies and, as a result, more than one-third agreed to declassify their boards. Additionally, the SRP reported on its website that of the 40 companies where the issue went to a vote, proposals at 38 won an average of 82% of votes cast, a strong show of support. According to Lucian Bebchuk, Harvard professor and director of the SRP, “The widespread and strong support for board declassification is reflected in the outcome of the declassification proposals by SRP-represented investors that went to a vote during 2012.”
For 2013, declassification will continue to be a front-and-center issue. Behind the scenes SRP is communicating with most of the 74 companies receiving declassification proposals for their 2013 meetings, and Bebchuk expects a substantial number of these companies will agree to move to annual elections, as many targeted companies did last year. Bebchuk believes this is a positive governance trend, and says “the boards of these companies should be commended for their responsiveness to shareholder concerns.”
On the political front, even with the presidential election behind us, political spending is a hot-button issue that James R. Copland, director of the Manhattan Institute’s Center for Legal Policy, will be watching closely this year. Manhattan Institute’s Center for Legal Policy website, ProxyMonitor.org, tracks shareholder proposals at Fortune 200 companies, and during 2012, it counted 37 shareholder proposals regarding political spending disclosure. Interestingly, of those, not one garnered a majority vote. Nevertheless, boards should watch for political spending disclosure proposals to continue to be filed in the coming proxy season, as Copland believes this is a trend that is gaining traction.
Say on pay has cycled through two proxy seasons, with the results being fairly consistent between 2011 and 2012. Experts say the upcoming focus will be on companies that received a negative vote in 2012 and that are not making changes acceptable to the shareholder base going into 2013. In addition, compensation experts note that say on pay will likely be a big challenge for the smaller companies that were initially exempted from the proposals but whose shareholders will be required to vote on pay packages for the first time.
Another aspect that will gain investor attention in 2013 involves pay package descriptions. In some cases, the wording of such descriptions may have the potential to help companies garner a larger percentage of favorable votes from shareholders, explains Andrew McElheran, senior consultant, Meridian Compensation Partners. A tool known as “realizable pay,” or “grant date pay,” may help companies change the way they explain executive compensation, he says.
“There is no single definition for realizable pay in use at this time,” he notes. McElheran explains that in response to the development of more mechanical pay/performance alignment tests created by many third parties, many companies have developed their own versions of the concept as an essential component of their efforts to tell their pay-for-performance stories in their own terms. The term realizable pay often refers to cash compensation earned and paid (as opposed to bonus opportunities) over a specific period of time (three years is common) as well as the updated value of equity awards granted during that period, McElheran explains. It accounts for salary, annual bonus, and long-term compensation. He says this distinction will make a difference because companies will be showing what executives actually earned on realized stock awards. The key will be that companies using realizable pay will have to be consistent, utilizing this description even in years when it may not paint as rosy a picture as in 2013.
One interesting byproduct of all the issues swirling around compensation disclosure is a change in the way companies are participating in shareholder outreach. The increased amount and sophistication of engagement with shareholders is yet another upside to mandatory annual votes on executive compensation, as companies take greater pains to offer better and more fulsome explanations of pay practices and decisions prior to their annual meetings.
This is an encouraging sign, says Kenneth Bertsch, president and CEO, Society of Corporate Secretaries and Governance Professionals. While there are still some problems—for example, not all companies talk effectively with their shareholders—overall, he says, “increased engagement and sophistication of engagement with shareholders” has been one positive takeaway from the say-on-pay mandate.
Issues related to governance structure and policies reach the ballots annually, and 2013 will be no exception, especially with regard to investors’ concern over board independence. The Manhattan Institute’s Copland expects to see more proposals to create an independent chairman for companies that currently have a single individual in the CEO and chairman role. “There’s some empirical evidence in both directions” as to the benefits of splitting the roles, he says, noting that many companies believe this is not a one-size-fits-all issue. Last year, only two of the companies that ProxyMonitor tracked received a majority vote in support of independent chairman proposals. Notably, nearly half of the independent chairman proposals last year were filed by labor unions, which brings into question whether these proposals are as equally supported by the majority of shareholders, and whether the issue will gain traction.
Allowing shareholders to act by written consent is another issue that will likely draw attention this proxy season at some companies, but time will tell whether it will gain more ground than in 2012. Last year, shareholder proposals seeking action by written consent were filed at 15 Fortune 200 companies. Of those that did not capitulate to shareholder demands prior to the annual meeting, only two received more than 50% of the vote: 51% at International Paper Co. and 52% at JPMorgan Chase & Co. according to ProxyMonitor.
In the case of International Paper, the global paper manufacturer, a similar proposal won 52% of the vote at the 2011 annual meeting; however, management did nothing to act on the request, which was nonbinding. In 2012, the undisclosed shareholder who filed the proposal wrote that “hundreds of major companies enable shareholder action by written consent. This proposal is important because our company does not have a provision for 10% of shareholders to call a special meeting.” In response to the 2012 vote, and possibly fearing a larger proxy fight down the road, International Paper acquiesced, allowing shareowners to act by written consent in lieu of a meeting. Afterward, the company issued a press release stating, “Although the shareowner proposal was only approved by a slight majority, at less than 52% of votes cast, the Board of Directors intends to modify the company’s governance documents to reflect the shareowner recommendation. Over the coming few months, the Board will review appropriate procedural limitations that safeguard the interests of all our shareowners and plans to submit our own proposal on shareowner written consent at next year’s annual meeting.”
At banking company JPMorgan Chase, activist Kenneth Steiner filed a written consent proposal that garnered 52% of the vote, following a narrow loss in 2011 when 49% of shareholders voted in favor of the proposal. The 2012 proposal stated that “hundreds of major companies enable shareholder action by written consent,” but after the favorable outcome, the company has not expressed plans as of yet to enact shareholder action by written consent. Both of these examples serve to show that in the face of nonbinding proposals, some large corporations are digging in their heels on this issue; therefore, 2013 will be an interesting year to watch and see what transpires.
During 2012, shareholders at Fortune 250 companies filed 124 social policy proposals, ranging from proposals regarding animal rights to those creating an independent ethics committee, according to ProxyMonitor. With so many constituents representing a wide berth of interests, Copland of the Manhattan Institute expects to see more social policy proposals in the months ahead, particularly those related to the environment in 2013.
Not everyone believes these movements have tremendous momentum or create a strong impetus to change, however. “Social policy proposals reflect that well-organized investors, unions, and others are becoming better at getting proposals put forward and into the proxies,” Cravath’s Webster says. Yet, these proposals usually garner far less than a majority vote, sometimes with only single-digit affirmative percentages, and as Webster further notes, “I haven’t seen evidence that it reflects a [widespread] change in investor sentiment.”
With such a small amount of support for these proposals, the question inevitably arises: Do social policy shareholder proposals create shareholder value? Copland doesn’t believe so, at least not for the ordinary investor: “If these [proposals] added value, Vanguard would do it.” However, he does see these proposals as agents for change. “Clearly they influence Congress, but Congress is not looking at shareholder interest.”