Activists Savor Proxy Season Victories

Board directors and shareholder activists might remember the 2007 proxy season for the record number of shareholder proposals filed this spring.

A more subtle statistic, however, is equally telling about the state of corporate governance today: the swiftly rising number of companies agreeing to settle or negotiate such measures.

Bowie

“Companies are being more flexible and willing to negotiate to get proposals off the ballot,” says Carol Bowie, director of the Governance Research Service of Institutional Shareholder Services. “I have seen a sea change for the last few years.”

According to Bowie, 717 governance-related shareholder proposals were submitted in the first five months of this year, up from 563 in 2006. But shareholders only voted on 566 proposals this year (79 percent), compared with 529 votes (94 percent) the year before. In other words, companies are settling shareholder proposals in greater numbers and get them off the ballot, rather than fighting shareholders out at an annual meeting.

“There has been a lot of movement in the last 12 months,” asserts Daniel Pedrotty, director of the AFL-CIO Office of Investment. “This year I noticed a difference with past efforts.”

Usually the sponsor of a shareholder proposal withdraws the measure because the company either agrees to some sort of change or has shown a willingness to negotiate a settlement on the issue.

Companies seem to be most amenable to settling shareholder proposals that call for board directors to win a majority of votes cast in board elections. According to Bowie, 77 of 142 such proposals have been withdrawn so far this year. Some companies agreed to introduce a majority vote proposal to shareholders next year, she says, while a large number—Goldman Sachs, Northrop Grumman, and First Data among them—have agreed to enshrine a majority voting bylaw in the company’s articles of incorporation.

The American Federation of State, County, and Municipal Employees withdrew all six of its majority vote proposals this year, which called for binding amendments. All the companies in question—including notables such as Lehman Brothers, Honeywell, and Wells Fargo— agreed to amend their by-laws after very little discussion, according to Richard Ferlauto, AFSCME’s director of pension and benefit policy.

“The high rate of settlements shows that most boards got their hands around the issue, and they understand,” says Ed Durkin, spokesman for the United Brotherhood of Carpenters and Joiners, which sponsored most of the majority voting measures. The measures that did go to a vote received nearly 49 percent support, on average, according to Durkin.

Of the companies where the measure came to a vote, a number of them received majority support, including CSX, International Paper, Newell Rubbermaid, Allied Waste Industries, and Vornado Realty Trust. Altogether, the average vote was 51.2 percent in favor of the proposal, according to Bowie.

Majority voting was one of three “shareholder rights” issues—defined as the ability of shareholders to have an effect on director elections—that received increased support this year. The other two were shareholder access to the proxy statement and declassification of staggered boards of directors.

In votes that the Securities and Exchange was certainly watching closely (the Commission is struggling to devise a rule for proxy access by later this summer), shareholders fell just short of registering majority support for proxy access proposals AFSCME submitted at Hewlett-Packard and UnitedHealth Group. The companies saw shareholder support for proxy access at 43 percent and 45 percent, respectively.

Emerging Trend: Pay Proposals

The other resoundingly popular topic with shareholders this year has been advisory votes on executive compensation, the so-called “say on pay” measures already common in Europe and Australia. Corporate America has seen 66 say-on-pay shareholder proposals so far this year; 45 of them have come to a vote. Six proposals were withdrawn after the companies agree to act on the issue, Bowie says. Another six did not appear on their companies’ proxy statements for unknown reasons, and nine were omitted because their language referenced the SEC’s old compensation committee report, she says.

Four of the proposals that did go to a vote won majority support from shareholders, at Motorola, Verizon Communications, Blockbuster, and Ingersoll-Rand. Another dozen measures received 48 to 50 percent support, according to Ferlauto (whose union has been an outspoken proponent of say-on-pay votes). On average, the proposals received 43 percent support—a stunning endorsement, considering say-on-pay proposals hardly existed before 2006. Insurance giant Aflac even volunteered to adopt say-on-pay earlier this spring without any shareholder proposal at all.

Sixty-two proposals sought to link executive pay and company performance, a hot issue since the SEC’s new rules for compensation disclosure went into effect last year. Of the 62 measures, 15 were withdrawn, presumably because the companies in question made concessions to the shareholder sponsors, Bowie says. The Carpenters’ Union has sponsored most of the pay-for-performance measures, and they generally ask the board not to pay any incentive awards to executives unless the company outperforms its peer group. Average support for the proposals was 36 percent, according to Durkin; Perkin-Elmer saw the highest support, at 43 percent.

ISS notes that proposals asking for a link specifically between equity compensation and executive performance fared much better than broader pay-for-performance proposals. For example, a majority of shareholders supported such a move at KB Home, Hewlett-Packard, and Allegheny Energy, while a similar proposal at UnitedHealth received 40 percent support.

The Carpenters’ Union also sought limits on supplemental executive retirement plans, by proposing to exclude bonuses when calculating the SERPs’ total value—which, the union contends, is the primary driver for soaring SERP packages. “Supplemental benefits are where you see the most egregious” compensation abuses, Durkin says.

Durkin’s union submitted 16 SERP-capping proposals and settled with six companies, but only American Express agreed to a specific arrangement. It promised to limit pensionable compensation to salary plus bonus, but limited the bonus calculation to one times salary. Durkin says he accepts the compromise because eliminating bonuses from the calculations entirely would most likely result in higher annual salaries.

Also, the Amalgamated Bank’s LongView Fund submitted nine proposals related to options grants, calling on the companies to fix grant dates before the fiscal year begins and to price options at an average of the stock’s opening and closing price on the grant date. Five of those proposals came to vote; with 44 percent of shareholders supporting the measure at Analog Devices, and 42.3 percent at Honeywell.

Other issues that came up at this year’s meetings: “clawback” proposals to recoup bonuses from executives if the company subsequently endures a restatement; disclosure of relationships that might compromise the independence of executive pay consultants; an end to supermajority votes; and the right of shareholders to call a special meeting.

In general, activists are happy with the way the proxy season has transpired so far. “To get dramatic change without regulatory or legislative change shows how activism can make serious improvements in governance,” Durkin says.

Adds Pedrotty: “It's extremely encouraging looking forward to next year, especially targeting companies that refused to implement best practices.”