Proxy advisory firm Institutional Shareholder Services said companies received improved overall endorsement on their executive compensation program, with 91.2 percent gaining an average approval rate this year compared to 89.2 percent last year. In its preliminary findings, ISS attributed the improvement to greater engagement by companies in explaining to shareholders their pay practices in supplemental proxy materials. Although the average chief executive's compensation at S&P 500 firms increased by over 33 percent from prior year, it received few opposition from shareholders due to greater engagement by companies. S&P 500 firms received 88.6 percent support, while Russell 3000 companies gained 91.8 percent approval on their say-on-pay votes.

The last proxy season saw fewer governance proposals filed by investors. A total of 466 governance proposals were filed this year compared to 615 in 2010. “The main reason for this drop was the absence of shareholder “say-on-pay” proposals, which became unnecessary after the passage of the Dodd-Frank Act,” the firm said in the report. 259 of the total governance proposals filed this year went to a vote, 104 were omitted, and 103 were withdrawn. Companies were able to exclude some of the proposals by offering their own management proposals or taking board action. However, ISS noted companies did not go as far as what investors wanted.

Board declassification gained momentum in the last season by a diverse group of activists including Florida's pension system, retail investors, and others. The group is pressing for companies to drop staggered board terms and hold annual elections for all directors. These resolutions averaged 73.5 percent support from shareholders and won the majority support at 35 of the 37 Russell 3000 companies with failed pay votes. The increase in declassification support was due to activists' primary target of large capital firms and increased attention by institutional investors on this issue after some Delaware court decisions to uphold aggressive takeover exercises at companies with classified boards.

                                             

                                          *Source: Institutional Shareholder Services.                                      

Another issue sharing the spotlight was renewed interest among shareholders in majority voting. Shareholder activists submitted over 80 proposals on the issue and later withdrew over two dozens of them. Majority voting proposals gained over 50 percent of votes at 22 companies; eight of them are S&P 500 firms. ISS also found a surprising increase in support for independent board chair proposals. The proposals averaged 34.7 percent support at 23 companies after receiving an unexpected boost of an 81.1 percent vote by Cedar Fair during a proxy fight. The proposal also won majority support at insurance group Aetna, credit rating agency Moody's, and real estate investment trust Vornado Realty. 

An interesting find in the past season was the decline in proposals to reject super-majority voting requirements. “These resolutions did not match their season-leading support levels of 2010,” the report said. However, the firm did notice an increase in management proposals on the issue. A total of 61 management proposals were received this year compared to 41 proposals the year before. Only seven of these proposals were passed and the overall prevalence of super-majority rules at large capital firms is declining, the report said. Compensation proposals were also fewer in the last season, 32 compared to last year's 86. ISS said shareholders' attention was mostly focused on secondary compensation issues such as vesting of stock options and performance-based stock.

Looking Ahead to 2012

ISS predicts investors are likely to file for board declassification and majority voting proposals in large numbers next season. Shareholders' attention will most likely shift to mid-cap companies next year as more large-cap companies conform to shareholders' demands in the past season, the firm said. Key questions remain on how shareholders will respond to the U.S. Court of Appeal's ruling last July that eliminated the proxy access rule. ISS predicts a rise in traditional boardroom challenges through proxy fights and an increase in “vote no” campaigns.

Meanwhile, ISS said investors may be able to take advantage of the Securities and Exchange Commission's amendments to Rule 14a-8. Shareholder activists were reported to be discussing whether it makes sense to file access proposals next season and how many companies they wish to target. Investor support on environmental and social issues will continue to rise next year. In the last season, those issues received a 20.6 percent approval rate. Issues include:

Request to include sexual orientation in company's non-discrimination policy

Request for refinery report safety measures

Request for a report on political contributions

Request for a report card on coal combustion water

Request for sustainability report

Request for corporate recycling target