During the 2014 proxy season, governance-related shareholder proposals continued to be common at U.S. public companies, including proposals calling for declassified boards, majority voting in director elections, elimination of supermajority requirements, separation of the roles of the CEO and chair, the right to call special meetings and the right to act by written consent. While the number of these proposals was down from 2012 and 2013 levels, this decline related entirely to fewer proposals being received by large-cap companies, likely due to the diminishing number of large companies that have not already adopted these practices. Smaller companies, at which these practices are less common, have not seen a similar decline and, if anything, are increasingly being targeted with these types of proposals.
Posts Tagged ‘Proxy advisors’
On June 30, 2014, the staff of the Securities and Exchange Commission’s (the “Commission”) Division of Investment Management and Division of Corporation Finance (the “Staff”) issued much-anticipated guidance regarding proxy advisory firms, in the form of 13 Questions and Answers. Published in Staff Legal Bulletin No. 20 (“SLB 20″), available at http://www.sec.gov/interps/legal/cfslb20.htm, the Staff’s guidance addresses both (1) investment advisers’ responsibilities in voting client proxies and retaining proxy advisory firms (Questions 1-5), and (2) the availability and requirements of two exemptions to the proxy rules often relied upon by proxy advisory firms (Questions 6-13).
In this year’s Foreword, Dougherty differentiates the need for directors to focus on their core mission of informed oversight and vigilance rather than merely reacting to the constant influx of “daily corporate governance commentary,” and explores other front-burner issues, such as the marked increase in SEC enforcement actions and other recent SEC initiatives; the continuing trend of class action suits as de facto settlement instruments; proxy advisory firm priorities for directors; and new guidance from the Public Company Accounting Oversight Board (PCAOB) that recommends that audit committee directors discuss internal auditing deficiencies with their auditors.
The 2014 proxy season, like previous seasons, has provided shareholders of public US companies with an opportunity to vote on a number of corporate governance proposals and director elections. Throughout this proxy season, proxy advisory firms have provided shareholder vote recommendations “for” or “against” those proposals and “for” or to “withhold” votes for directors. Certain proxy advisory firms, such as Institutional Shareholders Services Inc. (“ISS”) and Glass, Lewis & Co., LLC (“Glass Lewis”), have also published updated corporate governance ratings reports on public companies, including evaluations of a company’s corporate governance risk profile.
Regulation of proxy advisers is a widely discussed subject matter worldwide. The European Securities and Markets Authority (ESMA), the regulator responsible for enforcing European securities regulation, declared in its ESMA Final Report and Feedback Statement on the Consultation Regarding the Role of the Proxy Advisory Industry in February 2013, to favor a self-regulatory approach over mandatory regulation of the industry. “In order to ensure a robust process in developing, maintaining, and updating the Code of Conduct,” ESMA set up a list of key governance for developing a Code of Conduct for the industry (see ESMA, Final Report, at p. 11). These included, inter alia, a transparent composition and the appointment of an independent Chair that possesses the relevant skills and experience. The Code of Conduct was required to “adequately address the needs and concerns of all relevant stakeholders (including proxy advisors themselves, institutional investors, and issuers).” ESMA’s Final Report offered guidance for the detailed elaboration of the Code of Conduct on certain subject matters. In particular, ESMA asked the industry to respond to concerns regarding conflicts of interests and communication with issuers.
…continue reading: Best Practice Principles for Proxy Advisors and Chairman’s Report
Shareholder voting, once given up for dead as a vestige or ritual of little practical importance, has come roaring back as a key part of American corporate governance. Where once voting was limited to uncontested annual election of directors, it is now common to see short slate proxy contests, board declassification proposals, and “Say on Pay” votes occurring at public companies. The surge in the importance of shareholder voting has caused increased conflict between shareholders and directors, a tension well-illustrated in recent high profile voting fights in takeovers (e.g. Dell) and in the growing role for Say on Pay votes. Yet, despite the obvious importance of shareholder voting, none of the existing corporate law theories coherently justify it.
Two articles (among several) in a comprehensive proposal to revise EU corporate governance would have a significant beneficial impact if they were to be adopted in the United States. In large measure they mirror recommendations by Chief Justice Leo E. Strine, Jr., in two essays: Can We do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 Columbia Law Review 449 (Mar. 2014) and One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term? 66 Business Lawyer 1 (Nov. 2010).
We published this post last August. Since then there have been several developments that prompt us to revisit it; adding the first three paragraphs below.
First, Delaware Supreme Court Chief Justice Leo E. Strine, Jr. published a brilliant article in the Columbia Law Review, Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law in which he points out the serious defects in allowing short-term investors to override carefully considered judgments of the boards of directors of public corporations. Chief Justice Strine rejects the argument of the academic activists and activist hedge funds that shareholders should have the unfettered right to force corporations to maximize shareholder value in the short run. We embrace Chief Justice Strine’s reasoning and conclusions.
As the fallout from the financial crisis recedes and both institutional investors and corporate boards gain experience with expanded corporate governance regulation, the coming year holds some promise of decreased tensions in board-shareholder relations. With governance settling in to a “new normal,” influential shareholders and boards should refocus their attention on the fundamental aspects of their roles as they relate to the creation of long-term value.
Institutional investors and their beneficiaries, and society at large, have a decided interest in the long-term health of the corporation and in the effectiveness of its governing body. Corporate governance is likely to work best in supporting the creation of value when the decision rights and responsibilities of shareholders and boards set out in state corporate law are effectuated.
Over the past year, boards of directors continued to face increasing scrutiny from shareholders and regulators, and the consequences of failures became more serious in terms of regulatory enforcement, shareholder litigation and market reaction. We expect these trends to continue in 2014, and proactive board oversight and involvement will remain crucial in this challenging environment.
During 2013, activist investors publicly pressured all types of companies—large and small, high-flyers and laggards—to pursue strategies focused on short-term returns, even if inconsistent with directors’ preferred, sustainable long-term strategies. In addition, activists increasingly focused on governance issues, resulting in heightened shareholder scrutiny and attempts at participation in areas that historically have been management and board prerogatives. We expect increased activism in the coming year. We also expect boards to continue to have to grapple with oversight of complex issues related to executive compensation, shareholder litigation over significant transactions, risk management, tax strategies, proposed changes to audit rules, messaging to shareholders and the market, and board decision-making processes. And, as evidenced in recent headlines, in 2014 the issue of cybersecurity will demand the attention of many boards.