The Shareholder Rights Project’s Mid-Year Update

Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is the SRP’s Counsel. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here.

In a news alert released yesterday, the Shareholder Rights Project (SRP), working on behalf of eight SRP-represented investors, announced the substantial results of the work by the SRP and SRP-represented investors during the first six months of 2013, as well as the aggregate impact of their work during 2012 and 2013.

Produced Large-Scale Reforms: As a result of the work of the SRP and SRP-represented investors, 77 S&P 500 and Fortune 500 companies declassified their boards of directors during 2012 or the first half of 2013. The companies that declassified:

  • have an aggregate market capitalization approaching one trillion dollars;
  • represent over 60% of companies with which engagement took place; and
  • represent more than half of the S&P 500 companies that had classified boards as of the beginning of 2012.

The main results of the SRP’s work during the first six months of 2013 include the following:

  • 51 Successful engagements (listed here): 51 S&P 500 and Fortune 500 companies have agreed to move toward annual elections following the submission of board declassification proposals for 2013 meetings.
  • 34 Board declassifications (listed here): A total of 34 such companies have already declassified during 2013 as a result of the work of the SRP and SRP-represented investors.
  • 18 Successful precatory proposals (listed here): 18 precatory declassification proposals (95% of proposals by SRP-represented investors that have gone to a vote at 2013 annual meetings) passed at 2013 annual meetings, with average support exceeding 80% of votes cast.

These results, combined with the outcomes of the work by the SRP and SRP represented investors in 2012, have had a substantial impact on the corporate governance landscape. The aggregate impact of the SRP’s work during 2012 and the first half of 2013 include the following:

  • 97 Successful engagements (listed here): 97 of the S&P 500 and Fortune 500 companies receiving proposals in 2012, 2013 or both – about three-quarters of such companies – have agreed to move toward annual elections following the submission of the board declassification proposals.
  • 77 Board declassifications (listed here): A total of 77 such companies have already declassified during 2012 and the first half of 2013 as a result of the work of the SRP and SRP-represented investors.
  • 57 Successful precatory proposals (listed here): 57 precatory declassification proposals passed during 2012 and the first half of 2013, with average support exceeding 80% of votes cast.

» Benefits of Declassification: Annual elections are widely viewed as corporate governance best practice. Board declassification and the resulting annual elections could make directors more accountable and thereby contribute to improving performance and increasing firm value. The substantial shareholder support for board declassification, and the value of the work done on the subject by the SRP and SRP-represented investors, are described in a two pieces by the SRP’s director – a New York Times DealBook column entitled “Giving Shareholders a Voice,” and a response to critics entitled “Wachtell Lipton was Wrong about the Shareholder Rights Project.”

» Contribution to Successful Shareholder Engagement: The work of the SRP and SRP-represented investors has made a substantial contribution to increasing the incidence of successful shareholder engagement. The successful precatory proposals by SRP-represented investors represented 60% of all successful proposals by public pension funds in 2012 and the first half of 2013, and 31% of successful precatory proposals by all shareholders during that period.

» SRP-Represented Investors: The institutional investors working with the SRP during the first half of 2013 were the Florida State Board of Administration, the Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Massachusetts Pension Reserves Investment Management Board, the Nathan Cummings Foundation, the North Carolina State Treasurer, the Ohio Public Employees Retirement System, and the School Employees Retirement System of Ohio. These investors serve more than three million members and manage assets with a total value of more than $400 billion. Additional information about each of the SRP-represented investors is available here.

» SRP Work: The SRP provides SRP-represented investors with a range of services, including assistance in connection with selecting companies for proposal submission, designing proposals, submitting proposals on behalf of represented investors, engaging with companies, negotiating and executing agreements by companies to bring management declassification proposals, and presenting proposals at annual meetings.

  1. Much has been written both on this Forum and elsewhere, such as in Gretchen Morgenson’s recent New York Times column entitled “New Momentum for Change in Corporate Board Elections,” about the Shareholder Rights Project (“SRP”) and its lazer-like focus on the board declassification issue. This issue, while providing the SRP some easy start-up governance wins, also reflects the considerable efforts of Professor Bebchuk to advance an active corporate control market as the most efficacious means of exacting director and executive accountability.
    In his recent work entitled, “The Myth that Insulating Boards Serves Long-Term Value” (working draft), Professor Bebchuk addresses “attempts to invigorate corporate elections” over the past decade solely in terms of the failed effort to advance “proxy access.” Further, he posits that “…the extent to which insiders are insulated from shareholder pressure depends on the extent to which incumbents are insulated from the possibility of removal via a hostile takeover.” Short-slate proxy contests by institutional investors armed with “proxy access” rights or full contests by hedge funds or other market investors would seem to be the only means of board accountability envisioned by Professor Bebchuk. His review of election reforms fails to even mention the extensive shareholder private-ordering effort that has brought a majority vote standard to director elections at companies comprising approximately 75% of the capitalization of the total stock market. As of today, approximately 87% of S&P 500 companies have adopted a majority vote standard in uncontested director elections.
    The United Brotherhood of Carpenters (“Carpenter”) pension program has as its principal goal to provide retirement security to our half a million members and their families after long years of demanding work. To that end, the basic premise of the Carpenter fund’s activism program has been that the funds, corporations, and the market generally will benefit from a corporate governance model that relies more on active monitoring by patient owners and less on the workings of the corporate control market. Effective corporate governance systems are those that incent boards and managers to develop and implement corporate strategies to build growing and innovative companies. The Carpenter pension funds have worked aggressively on important governance and executive compensation issues including auditor independence, stock option expensing, and majority voting in director elections, an issue on which we have used our modest “bandwidth” to submit over five hundred shareholder proposals in the past eight proxy seasons.
    Majority voting in uncontested director elections holds great promise as an accountability mechanism. It complements the responsibility of broadly-invested institutional investors to monitor their holdings on behalf of their participants and beneficiaries. The voting right is well-suited for companies with either classified or unclassified boards. In either context, majority voting provides serious long-term investors an effective means with which to exact real, but measured, accountability from a board that fails to produce long-term corporate value. In the classified board context, a shareholder rejection of a class of directors standing as a proxy for a corporation’s entire board can be a powerful step in stimulating positive changes in board composition, executive leadership, and corporate strategy. The incremental nature of the board accountability in this context is not a governance weakness, but rather allows for a measured and constructive process of board accountability that comports with the long-term interests of broadly-invested institutional investors.
    The SRP’s and its affiliated pension funds’ focus on the decades-long effort to stimulate an active corporate control market that has exacerbated market short-termism is misplaced and poorly serves the ultimate goal of providing pension plan participants a fair and secure retirement. Alternatively, newly established director election voting rights combined with well-informed voting guidelines focused on long-term corporate value creation hold much promise.

    Comment by Ed Durkin — July 10, 2013 @ 5:43 pm

 

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