One thing is for certain: Pay is unique at every company. There are as many iterations of pay as there are companies in America. This uniqueness makes our job as shareholders very challenging. For the most part, we must rely on the members of compensation committees to develop the compensation philosophy and structure in order to incentivize management and align their interests with those of shareholders. We believe that poorly structured pay packages harm shareholder value by unfairly enriching executives at the expense of owners – the shareholders. On the other hand, a well aligned compensation package motivates executives to perform at their best. This benefits all shareholders.

There have been many changes this proxy season and although the evaluation of compensation is still a challenge, we have learned a few things along the way. Given the unique nature of compensation, CalSTRS tried to evaluate pay holistically at every company. We not only looked at the alignment between pay practices and the performance of the companies, but also corporate peer groups, problematic pay practices, and disclosures.

…continue reading: Lessons Learned: The Inaugural Year of Say-on-Pay

As the 2012 proxy season approaches, it appears that certain issues in board composition—the separation of the chairman and chief executive officer (CEO) roles (along with the related issue of the independence of the chairman) and board diversity—are likely to be more prominent this year. As boards consider these and other related corporate governance issues, directors should keep in mind that a corporate board is a complex creature, with company history, personal dynamics, and board structure all contributing to, or potentially undermining, the overall effectiveness of the board. No single factor in board composition will have the same significance at one company as it has at another; boards should seek to adopt best practices that will make them more effective, but this does not mean that governance structures such as the separation of chairman and CEO roles should be mandated. Directors facing pressure from activists should be counseled that it is the board’s right and responsibility to determine its own operation, and that it is the board’s duty to do so in a way that, in the business judgment of the directors, best serves the company and its shareholders.

…continue reading: Analyzing Aspects of Board Composition

As we begin to analyze the first proxy season under “say on pay” in the US, it may be useful to review the evidence from the UK experience with say on pay. In the study, Say on Pay Votes and CEO Compensation: Evidence from the UK, co-authored with David Maber of University of Southern California and forthcoming in the Review of Finance, we examine the impact of “say on pay” in the UK, the first country to adopt a mandatory, non-binding annual shareholder vote on executive pay.

We perform three sets of analyses. First, we examine the market reaction to the (largely unanticipated) announcement of say on pay regulation and find positive abnormal returns for firms with weak penalties for poor performance, e.g. firms with excess CEO pay combined with poor performance and firms with generous severance contracts, which can weaken penalties in the event of poor future performance.

…continue reading: Say on Pay Votes and CEO Compensation

As we enter 2012 and as the U.S. economy continues to stabilize, there appears to be a growing sense of optimism about further recovery in the M&A market. During the first half of 2011, the M&A market continued a resurgence that began in the latter part of 2010, with higher aggregate deal value than had been seen since before the financial crisis. Though worldwide M&A activity declined in the second half of 2011, reflecting uncertainties regarding the volatile global financial climate, it has continued at a relatively strong pace, and a number of significant transactions have recently been announced, including Kinder Morgan’s $38 billion acquisition of El Paso, United Technologies’ $18 billion acquisition of Goodrich, and Gilead’s $11 billion acquisition of Pharmasset.

…continue reading: Mergers and Acquisitions in 2012

Staggered boards, a structure under which the board is divided into classes, with one class of directors standing for re-election annually, are perhaps the most consequential takeover defense. They also are a favorite target of activist shareholders and governance experts. The effect of collective pressure to move to annual elections for all directors has been dramatic: the proportion of public companies with staggered boards has fallen from 60 percent in 2002 to less than half in 2011 (and less than one-third among S&P 500 companies). Non-binding shareholder proposals have been an important catalyst in the move away from staggered boards. [1] More recently, activist hedge funds have emerged as an alternate and better-financed vehicle to channel shareholder displeasure. This report documents the extent to which activism of any type continues to push corporations to implement annual director elections and compares the influence different forms of activism have had on this governance practice.

…continue reading: Activism and the Move toward Annual Director Elections

In recent years, a small number of activist shareholders have increasingly sought to use their equity stock holdings to exert influence over business management. Proponents of “shareholder democracy” have successfully pushed shareholder proposals offered for votes at the annual meetings of public corporations that change the manner in which directors are elected and in which shareholders can force corporate action outside those annual meetings. Proponents of “corporate social responsibility” have pushed companies to change their behavior with a clear interest in pursuing policy goals rather than share-price maximization. Critics of management’s pay levels have pushed for shareholder advisory votes on executive compensation—a practice borrowed from Britain but unheard of in the United States a decade ago—and such “say on pay” votes are now mandated under federal law by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Academics and investors alike have debated shareholder activism generally and these proposals specifically; but to date, hard data have generally not been publicly available about this phenomenon. To fill in this informational gap and to uncover and analyze trends in this aspect of shareholder activism and its influence over corporate governance, the Manhattan Institute launched its Proxy Monitor project. The ProxyMonitor.org database assembles information on the 150 largest corporations (by revenues, as ranked by Fortune magazine) and currently includes searchable and sortable information on every shareholder proposal submitted at each company from 2008 through August 1, 2011. (Earlier years’ proposals, and a broader data set of companies, will be added to the database in the months ahead.)

…continue reading: Corporate Governance and Shareholder Activism in 2011

In our paper, The Effect of Liquidity on Governance, which was recently made publicly available on SSRN, we study how stock liquidity affects whether and how blockholders choose to exert governance on a firm. We find that liquidity encourages shareholders to acquire blocks (stakes of at least 5%). Conditional upon a block being formed, liquidity discourages blockholders from governing through “voice” (intervention) as it increases the likelihood of them filing Schedule 13G (which conveys a passivist intent) rather than 13D (which conveys an activist intent). This switch has two interpretations: the blockholder is abandoning governance altogether, or instead is switching to the alternative governance mechanism of “exit” (informed trading of a firm’s shares, otherwise known as the “Wall Street Rule” or “Wall Street Walk”).

Our evidence supports the latter: the effect of liquidity on both block acquisition and the switch from 13D to 13G is stronger in firms where the manager is more sensitive to the stock price (and thus the threat of exit), and the market reaction to a 13G filing is significantly positive, particularly among firms with high liquidity. Thus, liquidity causes a switch from voice to exit rather than causing a blockholder to abandon governance altogether. Although liquidity reduces the frequency of voice, conditional on a block being formed, this is outweighed by the positive effect of liquidity on block formation to begin with. Thus, unconditionally, liquidity leads to an increase in both exit and voice and so we demonstrate an overall positive effect of liquidity on governance. We use decimalization as an exogenous shock to liquidity to identify causal effects.

…continue reading: The Effect of Liquidity on Governance

Favorable market conditions appear to be producing a substantial increase in shareholder activism and hostile takeover activity this year. Led by pension funds and hedge funds, activist investors have been emboldened by recent changes in corporate governance. As boards of directors and management teams address demands by regulators as well as heightened attacks from shareholder activists, directors need to be fully prepared with state-of-the-art plans ready for immediate use. When facing increased hostile takeover activity, directors should keep in mind that the fundamentals remain unchanged: the business judgment rule still applies, and takeover defenses, especially of the structural variety, are as effective as ever when used appropriately.

…continue reading: Holding Steady in an Active Market

In a speech to the Council of Institutional Investors recently, Nelson Peltz, one of the most successful of the activist investors, said the recent changes in corporate governance would enable him to make investments in the heretofore “untouchables”—companies with market capitalizations over $50 billion. Mr. Peltz noted that the new governance rules give activists more tools with which to pressure companies, noting that larger companies provide bigger profit opportunities than smaller companies.

…continue reading: Activists Target Companies with Market Caps over $50 Billion

Proxy Access

The SEC passed a new rule which would give shareowners greater “Proxy Access” and an avenue to challenge unresponsive directors. By a 3-2 vote, the SEC gave individual (or groups of shareowners) who held 3 percent ownership for 3 years the right to put candidates on corporate ballots. Shareowners would be able to nominate at least one director and as much as 25 percent of a board. In September, the Business Round Table and the U.S. Chamber of Commerce filed legal challenges to the rule arguing that the SEC failed to adequately measure the costs imposed on companies. As a result, the SEC put a hold on the implementation of Proxy Access until the legal questions are resolved, with its earliest application occurring in 2012 if it passes the legal challenges.

…continue reading: Florida SBA Supports Proxy Access and Advisory Firm Transparency