As we approach the end of the year, it is time to start thinking about the hot button issues that will face boards and senior management – and that may show up in proxy statements – in 2012. Here are my top ten broken out by four categories:
A. Executive Compensation/Say on Pay
1. Responding to your SOP vote – Compensation committees should prepare with a similar level of intensity as last year. Many institutional investors, like ISS, usually revise their voting guidelines annually and could make changes that negatively impact on how they view your compensation program;
2. Problematic Pay Practices – Boards should seriously consider last year’s SOP votes as a wake-up call for compensation committees that have failed to remove or end practices that both proxy advisory firms and large shareholders have deemed problematic;
3. Say-On-Pay Engagement – Compensation committees should be asking, especially those at firms that either lost or sustained their SOP vote by narrow margins, how best to reach out and engage their shareholders on these issues. The compensation committee and senior management should be prepared to consult with advisors before reaching out.
B. Shareholder Rights
4. Proxy Access – Although the SEC can move to reintroduce or re-file access it is unlikely that the Commission will undertake any action prior to the 2012 presidential and congressional elections. It is expected that some governance advocates (public pension, union and social investors), notably among the Taft-Harley funds, will file (or are considering filing) 14a-8 proposals asking individual companies to provide proxy access. Many of these funds have filed resolutions of this type prior to Dodd-Frank. This is an issue boards – especially those with serious governance, performance and compensation problems with shareholders – should be on the alert for.
5. Majority vote – While many S&P 500 companies have already accepted this proposal many mid-size and small-cap companies have not. Expect to see this proposal continue to be pushed by governance advocates;
6. Anti-takeover Defenses/Right to call special meeting and act by written consent – Hedge activists and governance advocates will continue to seek reductions in the percentages on each of these. Management resolutions submitted on these issues could be handicapped by the near-universal support of proxy advisor firms for shareholder proposals seeking lower thresholds.
C. Board Leadership
7. Separate Chairman/CEO – This is another issue likely to capture the attention of the board in 2012. Some investors are extremely adamant on the need for a separation of the roles while others will be satisfied with the establishment of a lead or presiding director. The question will be how strong a lead or presiding director role is contemplated in the company’s corporate governance guidelines. Governance advocates (and the true believers on splitting the roles) are prepared to sharply question companies who wish to keep the dual role. Boards should be prepared with smart, strong responses.
8. Succession Planning - This issue dovetails with the previous discussion on board leadership. From Apple to H-P to News Corporation and numerous other companies, shareholders want to know that the board is guiding the succession planning process. Expect to see more proposals on this topic given its critical importance.
9. Risk and Strategy – While we do not expect proposals on these specific topics, we do foresee investors posing questions to boards and senior management on these “same side of the coin” issues.
D. Environmental and Social Issues
10. Citizens United Decision fallout continues – expect a renewed and vigorous effort to place directors in the hot seat with respect to board oversight of corporate political contributions. Taft-Hartley and public pension funds are looking to increase the number of proposals they filed last year. Their hope is that the filed resolutions will lead to agreements with companies to limit and/or have the board oversee such contributions and corporate political activities.
10a. Natural Resources – Water use, emissions and other carbon footprint issues will also find their way onto company’s proxy ballots in 2012. Increase total vote for these proposal are the result of a move on the part of governance advocates (public and union funds) making changes to their proxy voting guidelines in support of environmental/social resolutions. Other large investors – mutual funds and asset managers – are being been pressured to adopt more restrictive proxy voting policies on environmental/social issues. It is quite possible for a small environmental group whose proposals had received little shareholder support in the past to latch onto a bigger issue and submit a resolution that could gain as much as 30-35% of the shares voted F/A at the annual meeting. Directors need to monitor this and help keep management from being blindsided.