2010 proxy season: the calm during the storm

By almost everyone’s measure, the 2010 proxy season was a surprise. During most of the previous year, the majority of experts were predicting an active and volatile season as investors pushed companies to adopt new governance standards and tightened compensation practices. The ongoing financial crisis was expected to be fuel for the activist fire – but the fire fizzled, although not without 
a few bright sparks.

So what was the reason for the unexpectedly 
non-activist voting season? Most people now say it was the looming shadow of the Dodd-Frank Bill – which finally passed long after most public companies had held their annual meetings – and the SEC’s ongoing but unclear efforts to modernize the mechanics of the proxy system, with a particular focus on voting reform and ballot access. The commission unveiled its 151-page concept release in June, after the completion of the 
regular annual meeting season.

The approval of the Dodd-Frank Wall Street Reform and Consumer Protection Act significantly altered the corporate governance and reporting regime for listed companies and has moved US public firms one step closer to proxy access, not to mention to a number 
of other executive compensation-related provisions, including say on pay.

While obviously investor-friendly, the pending 
passage of the rules forced a number of usually vocal investor groups and gadflies onto the sidelines; they still voted, but refrained from conducting large-scale proxy campaigns. Despite that, the season did see some 
significant activity, including high participation rates.

‘A lot of advertising campaigns promoting proxy solicitation services leading up to the 2010 season described it as the perfect storm, but that didn’t seem to materialize,’ says Kevin Brennan, managing director and head of business development at BNY Mellon Shareowner Services. He adds that BNY Mellon’s issuer client base includes 35 percent of Fortune 500 firms.

In its 2010 proxy season report, BNY Mellon 
highlights three important points: the number and types of proposals on this year’s proxy statements did not change significantly; the elimination of broker 
voting on director nominations did not create issues for most companies; and most meetings were low-key affairs with little or no activist participation.

‘We didn’t see many proposals that would cause an uproar,’ comments Brennan. ‘There was a lot of ‘wait and see’ around how the loss of the discretionary vote would affect quorums.’

In the end, only 35 companies out of 500 had any meaningful reduction in quorum, and even those 
companies saw their proposals passed.

Activism down, participation up
Overall, more than 350 billion shares were processed; that’s 42 billion more than in 2009, according to Chuck Callan at Broadridge. In parallel with high voter 
turnout, or perhaps because of it, ‘there’s also been a greater use of technology and greater savings for 
corporate issuers,’ he explains. ‘Of the shares we 
processed that were voted, 93 percent were voted 
electronically compared with 91 percent in 2009.’

Callan notes that there was an increase of 5.7 
million in new accounts for internet delivery in 2010, boosting levels from the 21 million seen in 2009.

Shares returned increased by 14 percent, while the average quorum decreased to 83 percent. This compares with 85 percent quorum levels in 2009, with the decrease being attributed in large part to a reduction in broker votes; this also affected 84 directors who didn’t receive a majority of ‘yes’ votes for reelection.

The proxy access provision of the Dodd-Frank Act, potentially among the most controversial of the many new rules, expressly authorizes the SEC to adopt rules under which shareholders are able to nominate 
directors using the company’s proxy materials. Prior to Dodd-Frank, if a shareholder – or, more realistically, a group of shareholders – wanted to nominate a director in opposition to management’s nominees, he or she had to file a separate proxy statement, include a separate proxy card with the candidates’ names on it and distribute that proxy statement to the entire shareholder group. This was expensive, often restrictively so.

How things have changed. Proxy access is now closer to being a reality than it has ever been, 
meaning that companies will now be required to include the dissident shareholder’s nominees on their proxy statements and proxy cards, which reduces the expenses a dissident shareholder would have to shell out in opposition to management nominees.

The details must still be worked out, a job that has been left with the SEC, and indications are that relatively strict ownership thresholds and limits on the number of dissident nominees will be enforced. By the time this issue of Corporate Secretary goes to press, those limits should have been released during the SEC’s August 25 meeting.

‘It’s not quite in place yet, but the Dodd-Frank Act was signed into law this summer and directs the SEC to create rules to implement proxy access going forward,’ says Art Crozier, co-chairman at Innisfree M&A.

A storm in a teacup
The 2010 season also marked the first year with director elections in which brokers were no longer allowed to use their discretionary vote to vote shares that were unobstructed in uncontested director elections.

In July 2009 the SEC approved an amendment to NYSE Rule 452 that eliminated the so-called broker discretionary vote in uncontested director elections. The amendment recategorized uncontested director elections from a ‘routine’ matter to a ‘non-routine’ 
matter with the result that, for the first time since Rule 452 was adopted in 1937, brokers no longer had the right to vote their clients’ uninstructed shares in 
uncontested director elections.

It was expected that Rule 452 would have a serious impact on the ability of directors to get elected. In fact, according to recent data released by Georgeson, the opposite was the case. The number of directors who received a majority of votes withheld dropped 48 
percent from 2009, while the number of directors who attracted 40 percent withholds declined 41 percent.

This trend was repeated for all levels of withheld votes, points out Steven Pantina, managing director of research with Georgeson. ‘If 452 had not been amended, the level of director withholds would have been even less this year,’ he says. ‘So it appears that companies were able to address some areas of shareholder concern between this year and last.’

Alternatives to battle
The number of dissidents waging proxy contests in opposition to management boards is currently down 45 percent from last year’s total, according to DF King senior vice president Richard Grubaugh, with most campaigns finding resolution behind closed doors. Biotech giant Genzyme Corporation, for example, quietly settled its proxy dispute with billionaire corporate raider Carl Icahn in June by placing two of Icahn’s nominees 
on its board of directors.

‘The drop-off in contests is because proxy fights are not cheap,’ explains Crozier. ‘A lot of folks who would have waged proxy contests were subject to the problems of the economic crisis.’

Despite chatter around proxy access, the Dodd-Frank Act and the SEC’s reform efforts, four proposals emerged to dominate the spotlight: majority vote, 
advisory vote on compensation (say on pay), greenhouse gas act by written consent, and declassifying the board. ‘There’s clearly a move toward shareholder rights, with the pendulum swinging away from companies and 
over to shareholders,’ says Paul Schulman, executive managing director at the Altman Group.

As is the case with other proxy contests, proposals seeking majority voting are also down this year, with about 28 proposals compared with 38 in 2007. ‘The number of majority voting proposals has decreased because a very large number of large-cap companies in particular have already adopted majority voting,’ explains Crozier.

The same can be said for declassification of boards, with many large companies voluntarily taking this step over the past few years. The two trends in unison can have a serious impact on the voting dynamic for 
corporate directors. As for declassifying the board 
proposals, support has dropped over the past three years from 66 percent in 2007 to 59 percent in 2010, 
according to data from DF King.

‘Votes on shareholder proposals to declassify have stayed fairly high, but the actual number of proposals has decreased because large-cap companies in particular are moving away from classified boards; they have eliminated their classified board structure,’ says Crozier.

Double the cycle
Typically only a third of the board at these companies comes up for the vote at the annual meeting; 
in order to effect real change, therefore, many believe shareholders need two election cycles.

Avista, Abercrombie & Fitch and the Barnes Group had the highest support in favor of 
declassifying the board, with 84 percent, 75 percent and 67 percent, respectively.

‘By implementing declassification so that all directors are up for election every year, institutions and activists are able to ensure that if they are dissatisfied, they will be able to vote on the directors immediately,’ says John Siemann, partner at Phoenix Advisory Partners, a 
subsidiary of American Stock Transfer & Trust Company. ‘Directors either get a majority of votes or they resign, which causes boards to be accountable for their actions.’ The board must then decide to accept (or reject) the resignation; to date, no board member has actually been removed from a board for losing a vote.

Asked about shareholder activism in support of majority voting as a replacement for plurality voting, Brennan says many companies don’t have a policy in place that calls for the resignation of directors who fail to receive a majority vote. ‘In the absence of such a 
policy, directors can still be reelected without achieving a majority vote,’ he points out.

Let’s talk about money
According to research by DF King, the number of 
advisory votes on compensation proposals dropped by around 50 percent from 15 in 2009 to eight in 2010, although we did see the first failed say-on-pay votes at Motorola, Keycorp and Occidental Petroleum. Only 46 percent voted to ratify executive pay at Motorola; 46 percent voted for this at Occidental Petroleum, and 
42 percent at Keycorp.

They may be only advisory, but say-on-pay votes matter. Occidental Petroleum faces a potential proxy fight next year from the California State Teachers’ Retirement System and Relational Investors, which are citing excessive pay practices and poor CEO succession planning as reasons to run an alternative slate of four directors.

In the past, say-on-pay voting results tended to hover around the 40 percent mark. In 2010, 
however, resolutions advocating annual say on pay averaged 44.1 percent support at 47 companies.

‘There was a decline in the number of equity and management compensation plans put out, but the approval of these plans still saw gains. There was not a large drop-off in the number of plans voted down,’ reports Grubaugh. ‘Many large investors still support management. We’ve seen an uptick in retail holders voting in favor of say on pay and some voting against equity plans, but not in great numbers. The media are angrier than shareholders about the issue 
of executive compensation.’

In July Congress acted to mandate say on pay for all listed companies. Say on pay will now be required in 2011, meaning that pay for performance will be an even hotter topic than it was last year.

‘Now that the battle for management say-on-pay votes has been won, the next natural step is for shareholders to push for pay-for-performance types of 
standards over and above simply a disclosure requirement of what the company is doing,’ says Crozier.

The number of greenhouse gas proposals experienced a slight uptick in 2010, with 18 going to vote compared with 16 in 2009. ‘There are more institutions giving credibility to environmental issues with a focus on 
sustainability,’ says Schulman. ‘Most of the environmental issues are related to pollution and greenhouse gas 
emissions.’ There were 39 resolutions about global 
climate change that called for better disclosure.

Other prominent shareholder concerns included the impact of hydraulic fracturing (a method of 
extracting natural gas that may contaminate major US aquifers), the toxicity of common consumer goods, and the quality of corporate reporting on environmental, social and governance issues.

‘Environment-related proposals have been growing in number, and we can only assume – given 
the environmental crisis at hand – that we are likely 
to see more environmental proposals next year,’ 
says Grubaugh.

Write it down and sign it
The average level of support among companies for written 
consent was 54.8 percent. Backed by written consent, shareholders can remove and elect directors at any time rather than having to wait for the annual meeting cycle.

‘Whenever you see a shareholder proposal gain so much 
support among large-cap companies so immediately, you can expect to see activists continue with that proposal for next year as well,’ observes Grubaugh. ‘Written consent comes hot on the heels of great support and success for shareholders’ ability to call for special meetings. The idea is that corporate boards need to be accountable 12 months out of the year for the voting process.’

While 2010 was a quiet year for activism, it is highly unlikely the same will be true for 2011. Every company will be obliged to hold a say-on-pay vote and dramatically increase disclosures of all types, and many will face 
campaigns against directors thanks to proxy access. One thing all the experts agree on is that companies need to start getting ready now, if for no other reason than because the activists are already doing so.