With the 2009 proxy season winding down, governance experts are already looking ahead at what the 2010 proxy season will hold for public companies and their shareholders.
Speaking during a June 16 Webcast hosted by the RiskMetrics Group, experts predicted that several major developments now in the works will shape the 2010 proxy landscape in potentially profound ways, including the elimination of broker votes in director elections and the Securities and Exchange Commission’s proposal to let shareholders put nominations for corporate director in the proxy statement.
Romanek
Broc Romanek, editor of TheCorporateCounsel.net, said the potential elimination of broker discretionary votes in director elections—already endorsed by the New York Stock Exchange, and under review by the SEC—is “by far the biggest reform out there, despite all the congressional legislation.”
The NYSE revived a rule proposal in February to prohibit broker-dealers from voting in all director elections absent instructions from their clients on how to vote their shares. Currently, broker-dealers can still vote in uncontested elections, which shareholder activists say is a thumb on the scales in favor of entrenched management.
“I think that’s going to have the biggest impact on behavior in the long run as the votes are going to get much closer,” Romanek said. “This is the big issue people really should be focusing on.”
While concerns have been raised that the change could curb companies’ willingness to adopt majority voting, Ed Durkin, director of corporate affairs for the United Brotherhood of Carpenters, disagreed.
“It was anticipated that the discretionary [broker] voting authority would go when we had majority voting,” he says. Most companies raise the issue, “yet they move to adoption. So I don’t think we’ll see a change in the spread of majority voting adoption.”
Shareholder proxy access could be another influential reform, although views differ on how often shareholders would really exercise such rights. The SEC proposed its proxy-access rule in May and comments aren’t due until Aug. 17, so any final rule is still months away at the earliest.
Koppes
[T]he potential elimination of broker votes in director elections is “by far the biggest reform out there, despite all the congressional legislation.”
—Broc Romanek,
Editor,
TheCorporateCounsel.net
Richard Koppes, of counsel in the law firm Jones Day and a board director himself, said access is “where institutions ought to put their energy … The Board is critical, and that’s where shareowners have the vote and they ought to use it.”
Still, Koppes doesn’t expect proxy access to be common. At minimum under the SEC’s proposal, shareholders would need to hold 1 percent of a company’s outstanding shares for a year before winning proxy access rights—an expensive and time-consuming endeavor under the best of circumstances.
“I think it’s going to have more of a psychological impact than it’s going to have a real impact,” he said. “It still takes money to use it and it takes a 50 percent vote to make a difference.”
Durkin said access “may not be the kind of constructive reform that people hope it will be” and even went so far as to say his union “are not fans” of the idea.
“We think the right combination is an aggressive use of the ‘Vote No’ campaign combined with a dialogue with the company and suggestions about alternative candidates, should vacancies be created by the majority vote,” he said. “Director election challenges and certainly proxy contests should be about corporate strategy … not about whether we can declassify the board or create another level of pressure for some company to adopt a resolution that’s been passed.”
Romanek noted that the SEC’s e-proxy rules, in place since 2007, already offer activists “a cheap way to solicit”—but so far, they haven’t used it. Even with proxy access, shareholders would be more inclined to use e-proxy, since proxy access “still will require a bit of work.”
Yawn-on-Pay
Experts also don’t expect much upheaval should shareholder advisory votes on executive compensation (“say on pay” votes) become mandatory. Just about every power-broker in Washington has already vowed to make say-on-pay votes required of all public companies this year, so it could ultimately just become a rote exercise in compliance.
So far, the several hundred banks and other businesses taking government bailout money have had to adopt say-on-pay votes this year. Several dozen others have fielded shareholder resolutions to do the same, with mixed results. Only about two dozen have adopted the votes voluntarily, RiskMetrics’ Patrick McGurn said.
“It’s pretty rare that companies embrace opportunities to get out in front of anything compliance-oriented … so I think at the end of the day it will become a rote exercise,” Romanek said.
Durkin, too, said an annual vote would become “rote by necessity” simply because of the sheer volume of companies investors would have to analyze if it’s mandated for all public companies, as expected.
COMING IN 2010
What’s New for 2010?
Spread of Majority Voting Provisions
Potential Federal Legislation Mandating MTV
Elimination of Broker Votes in Uncontested Elections
Success of ’09 Just Vote “No” Campaigns
SEC Rule Change Proposal
Potential Federal Legislation Opening Proxy Ballot to SH Nominees
Changes in Delaware Law Allow Access Bylaw Amendment by Boards and Shareholders
Shift from Shareholder Proposals (SSoP) to Management Proposals (MSoP)
Potential Federal Legislation/SEC Rules
Potential Federal Legislation
New SEC Disclosure Requirements
Comply or Disclose
Carryover Momentum from ’09 Season
Obama Administration Jawboning
Promoting Pay for Long-Term Performance
Minimizing Risk
Potential Federal Legislation
New SEC Disclosure Requirements
Compensation Committee Independence
Pay Riskiness
Shareholder and Directors Have More to Talk About
See Issues 1-5 (Ballot Access, Say on Pay …)
Closer Director Elections Without Broker Votes in Mix
New Avenues for BD-SH Communications
Use of the Internet
Source
More Information From RiskMetrics Group (2009).
“We vote at most of the TARP companies,” he says. “It’s an inordinate amount of activity and responsibility to vote those in a responsible way. If we have to do that for all the publicly traded companies it will be a tremendous burden on fiduciaries who have responsibilities to make these votes.”
The carpenter’s union has instead advocated a triennial executive pay proposal, seeking a vote every three years so shareholders would have fewer companies to analyze each year. The proposal would also provide separate votes on the annual incentive plan, long-term incentive plan, and post-employment benefits. Durkin said the vote should apply to “some reasonable definition” of large companies “so investors are looking at a relatively modest universe of companies each year.”
The other significant proposal is to require the roles of board chairman and CEO to be split. Panelists were leery of an outright mandate, but generally supported an alternate idea where companies that don’t split the roles must explain that decision in the proxy statement.
McGurn noted that companies face a slew of other executive compensation-related reforms, including House legislation to address pay riskiness issues and forthcoming SEC proposals to expand company disclosures about compensation. As is typically the case with sweeping reform, panelists expected the changes to bring a variety of unintended consequences.
Durkin feared a say-on-pay mandate could drive a checklist approach of best practices that could cause companies to forget the role compensation plays in driving long-term corporate strategy. “I think we’re about to enter an area where we’re about to dumb-down comp analysis,” he said.
Koppes, echoing similar concerns, urged companies to reach out to their larger and more active shareholders and “start that dialogue now, as soon as proxy season is over.”
Romanek urged people to watch a now-famous YouTube video from the annual meeting of Fortis in Europe, where attendees threw shoes and pennies at board members.
“If you’re a director or anyone who advises directors, it’s mandatory viewing to look at that video and see what your life might be like next year at the annual meeting,” he said. “It’s very possible that sort of behavior might occur here.”
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