The declassification of the board of directors is emerging as one of the key highlights of the 2012 proxy season, as shareholder proposals on the subject continue to receive overwhelming support. This and other data from nearly 500 annual general meetings (AGMs) held at Russell 3000 companies in the January 1-April 30 period are discussed in the new edition of Proxy Voting Fact Sheet—the periodic report issued by The Conference Board in collaboration with FactSet Research.
In classified boards, members are divided into classes with directors in each class serving staggered terms (typically three years) so that only one class stands for election each year. Classification is used as a defensive measure to prevent hostile takeovers: when a board is staggered, hostile bidders must win more than one proxy contest at successive shareholder meetings to exercise control of the target. Proposals on declassification seek to discontinue this board structure in favor of a system of annual election for all members. The Fact Sheet reports that across the 17 proposals on declassification that went to a vote in the first four months of the year, the average support level was 75.9 percent of votes cast. The most notable examples included the 85.2 percent approval at Johnson Control, a 78.7 percent vote at F5 Networks, and the 77.2 percent vote at Emerson Electric.
Interest in this issue by pension funds and activist hedge funds had been observed for some time, and high levels of support were recorded in the 2011 season as well. But this year’s numbers confirm that shareholders are determined to question the rationale for not having all corporate directors face a confidence vote on an annual basis. Benchmarking data previously released by The Conference Board indicate that, while only 15.3 percent of U.S. companies with annual revenue of $5 billion or higher still have a classified board, the practice continues to be very common among smaller firms (47.4 percent or higher, depending on the specific size group).
These observations on shareholder proposals are further corroborated by findings from an analysis of management resolutions on the subject. In particular, the Shareholder Rights Project led by Harvard Law professor Lucian Bebchuk has aided major pension funds in putting forth declassification proposals—and has thus far convinced 44 companies to agree to bring management proposals to declassify their boards.
The 2012 voting season is also monitored for its possible developments in the area of executive compensation, a year after the introduction of say-on-pay. The Fact Sheet found approximately 9 percent of companies requesting the advisory vote of shareholders on executive compensation plans were met with lukewarm enthusiasm, obtaining less than the 70 percent of “for” votes that many governance experts consider necessary to exclude further scrutiny into an organization’s pay practices. In particular, that is the level at which proxy advisory firms are expected to take a harder look at a company to see if a future negative vote recommendation on its say-on-pay vote is warranted. Many of those boards will inevitably need to reopen the discussion on pay for performance, and either refine their communication with investors or revisit their compensation policies.
Overall, only eight SOP proposals among the 486 examined for the purpose of the report received a negative advisory vote by a majority of investors.
Executive compensation has historically received the most attention from sponsors of shareholder proposals. With mandatory say on pay serving as a forum for shareholders to voice displeasure with a company’s compensation practices, proponents are expanding into other areas of corporate governance, including proxy access and audit firm rotation policies, separation of the CEO and chairman positions, elimination of classified boards, and adoption of majority voting. Boards not only have to address these new issues, but must also determine how to respond to proposals receiving a majority shareholder vote, especially those related to takeover defenses, which are receiving high levels of support.
Other findings from the report include:
- A total of 596 Russell 3000 companies held AGMs during the period examined. In the S&P 500, that figure was 146.
- Through April 30, more than 60 percent of the shareholder proposals filed at Russell 3000 companies went to a vote, while roughly 28 percent were omitted.
- By sponsor type, most shareholder proposals submitted at Russell 3000 companies through April 30 were filed by individuals (72 proposals) and labor unions (39). Religious groups had the lowest percentage of proposals voted (14.3 percent), and the highest percentage of withdrawals (28.6 percent).
- By subject, the largest proportion of proposals filed at Russell 3000 companies during the period related to corporate governance (105 proposals), including the popular issues of board declassification, majority voting, and the elimination of supermajority voting requirements. Of those, 61 percent were voted.