Corporate America is playing hardball this year with shareholders trying to get their concerns on the proxy statement.
That’s according to data tracked by RiskMetrics Group, which show that more companies are asking the Securities and Exchange Commission to keep shareholder proposals off the proxy and that the SEC is granting more “no-action” requests. Among the findings:
As of March 25, the SEC had granted 69 percent of all no-action requests companies had filed. Last year, the agency had granted just 48 percent overall.
As of March 25, companies had challenged 33 percent of all proposals specifically related to governance, up from only 20 percent in 2007. And the SEC has granted no-action letters on governance proposals 22 percent of the time—twice as much as it had granted at this time last year.
More proposals have been omitted this year on the grounds that they relate to the company’s “ordinary business,” which companies can exclude as outside shareholders’ purview. As of late March, 23 percent of omitted proposals were rejected as ordinary business, compared to 13 percent 2007.
Overall, 211 shareholder proposals were omitted as of April 2, including 154 corporate governance proposals, according to Carol Bowie of RiskMetrics’ Governance Institute. But Bowie stresses that pinpointing exact reasons for the spike is difficult without a more detailed analysis.
The SEC acknowledges a high number of no-action requests by companies this year, but says levels aren’t outside the norm.
“We’ve seen more no-action requests on shareholder proposals this season than the past two, but the number is within historical norms,” Jonathan Ingram, deputy chief counsel in the Division of Corporation Finance, tells Compliance Week. “There may have been a bit of an up-tick in requests based on procedural grounds rather than the underlying arguments.”
Data from RiskMetrics supports that. Roughly 30 percent of this year’s resolutions have been omitted for failure to meet eligibility requirements, compared with 26 percent in 2007.
Bowie
Bowie notes that omissions can often hinge on a few words; two companies might get essentially the same shareholder proposal, but minor changes in phrasing can spell the difference between securing a no-action letter and including the resolution in the proxy. For example, Bowie says, homebuilder Pulte Homes had to include a shareholder proposal to report on mortgage lending risks, while similar proposals filed at other companies were allowed to be omitted.
Some topics are also drawing more challenges this year. Last year, for example, companies allowed 24 proposals on cumulative voting and challenged just one. This year, companies have challenged 10 of 33 such proposals and the SEC allowed nine to be omitted.
Bowie says one possible reason is that those companies may already have majority voting policies in place, which is incompatible with cumulative voting in some states. For example, Citigroup, which allowed the measure to go to a vote last year, successfully argued against it this year under Rule 14a-8(i)(2), which allows for exclusion when a proposal may cause the company to violate any state, federal, or foreign law.
To nobody’s surprise, shareholder proposals to let them place nominations for directors into the proxy statement have largely gone nowhere. Companies detest the idea, and last November the SEC voted to clarify that they can exclude such proposals if they choose. The commissioners then granted five no-action letters on the subject in February, much to the chagrin of shareholder activists.
No Benefit of the Doubt
Activists tell Compliance Week that companies do seem to be fighting harder this year to keep proposals they don’t like off the ballot. “There’s more constructive dialogue, but at the same time, companies are getting more aggressive about challenging shareholder proposals,” says Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County, and Municipal Employees.
Ferlauto
Companies do try to reach some agreement with AFSCME and other activists, Ferlauto says, but “when there isn’t one, companies are more aggressive than they have been in the past few years in looking at ways to exclude proposals.”
Ferlauto says he sees more challenges on procedural grounds this year. He describes the SEC under Chairman Christopher Cox as “more accommodating to the business community than previously in terms of exclusions.”
The SEC “is taking a closer reading of the language this year. In the past, they gave shareholders the benefit of the doubt; this year, they’re not.”
—Richard Ferlauto
Director of Policy,
AFSCME
Proposals that were acceptable or survived a challenge in previous years are being challenged again, he says. He cites the example of shareholder advisory votes on executive compensation; some received strong approval last year, but were still excluded this year because “we didn’t stick to the specific language model we’ve used historically.”
The SEC “is taking a closer reading of the language this year and looking for nuance or lack of nuance,” Ferlauto says. “In the past, they gave shareholders the benefit of the doubt; this year, they’re not.”
Pedrotty
Dan Pedrotty, director of the Office of Investment for the American Federation of Labor and Congress of Industrial Organizations, says companies have been less willing to reach settlements this year. By April 1, the labor union had reached settlements with companies on just six of the 30 proposals it filed this year. The union settled 10 of 30 proposals last year, Pedrotty says.
Beth Young, senior research associate at The Corporate Library, says the increase in challenges and no-action letters may be due to a number of different factors. Companies may have been afraid of looking “anti-shareholder” in the past, she says, and may simply feel less inhibited about doing so this year. A large number of new proposals could also account for the increase in challenges, since companies are more likely to challenge first-time proposals.
Additionally, challenges aimed at specific portions of proposals that companies believe to be false or misleading could account for a large number of challenges. “Companies may not necessarily be knocking the entire proposal; they may just want to omit a portion,” she says.
Finally, Young says that companies that feel they are “under siege in the current environment” might be more likely to challenge proposals they normally would allow.
“Some companies are already pretty hard on their luck these days,” Young says. “While they normally might feel fine about proposals on, say, succession planning, they have other issues to deal with, so they may not be so inclined to deal with some proposals if they can avoid it.”
One last notable statistic: The number of omissions for proposals related to social issues is actually down slightly. In 2007 and 2006, 17 percent and 16 percent of all social issue resolution filings were omitted, respectively. Only 14 percent have been omitted so far this year, according to RiskMetrics.
The firm says at least part of that decline can be attributed to the SEC’s approval of revised proposals calling for the adoption of principles for health care reform. In the past, the Commission allowed companies to exclude such proposals as ordinary business.
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