Harvard group's board declassification campaign accelerates

The campaign to move to annual election of board members, launched last year by a Harvard Law School-led team of shareholder rights activists, is gaining momentum. The effort has prompted nearly 100 major US companies to overhaul their board election procedures, which the activists say will improve corporate governance at S&P 500 and Fortune 500 companies.

The Shareholder Rights Project (SRP), which represents public pension funds and institutional investors with more than $400 bn in assets under management, has prompted 97 companies to agree to hold full annual elections for its board members since it started operating in the 2012 proxy season, according to SRP data.

Of those, 77 companies have already switched over from classified boards that hold staggered elections for only one third of their board every year, according to SRP. The group, which started last year with a staff of six part-time workers, has successfully pushed through 57 declassification proposals at annual shareholder meetings -- 39 in 2012 and 18 so far this year -- with votes in favor averaging more than 80 percent.

The latest edition of ProxyPulse, released on July 8 by Broadridge Financial Solutions and PwC’s Center for Board Governance, shows more impressive levels of support from shareholders this year. Declassification proposals at small, mid and large cap companies that held their annual meetings between January 1 and May 23 received 97, 98 and 99 percent approval, respectively, according to ProxyPulse. With annual elections much more pervasive at larger companies, over 75 percent of declassification proposals this year have been at mid cap or smaller companies, the report said.    

‘A significant number of additional declassifications are expected to result as agreed-upon management declassification proposals go to a vote at other companies that have entered into agreements to bring such management proposals to a vote,’ SRP says.

So far this year, the project has prompted declassification at 18 companies, including Costco Wholesale Corporation, Foot Locker, Netflix, Kellogg Company, SCANA Corporation and others.  Other companies, including Moody’s Corporation, Monsanto, Lexmark International, Hess Corporation and Chipotle Mexican Grill have declassified their boards this year after reaching negotiated agreements with SRP and the shareholders the project represents.

Some governance experts say the SRP is accelerating a growing trend toward declassification among major US companies that will likely result in full annual elections for boards of the vast majority of S&P 500 and Fortune 500 companies and herald greater accountability at many companies.

‘Support for the Shareholder Rights project is very widespread and you will see lots of support for declassification,’ says Donna Dabney, executive director of the Governance Center at The Conference Board. ‘The advantage from the viewpoint of an institutional investor is that it increases accountability.’

‘The argument on the other side, which corporations have put forth in the past, is that, in a very large and complex organization, it takes a while for a director to really get up to speed and three-year terms are preferable to one-year terms,’ she says. ‘Also, and I think this is probably the key issue, is that it makes the company more vulnerable to activist shareholder pressure.’

Companies that switched to annual elections as a result of SRP efforts during the 2012 proxy season include McDonald’s Corporation, Newell Rubbermaid, Stanley Black & Decker, BlackRock, The Western Union Company and others.

Increased discussion of board declassification as a result of SRP efforts will likely benefit all boards, even if they don’t opt for declassification, according to Susan E. Wolf, CEO of Global Governance Consulting. 

‘One of the benefits of the SRP is that it’s bringing the issue to everybody’s attention and making sure companies with a classified board discuss the idea instead of having it just sit up there on a dusty old shelf,’ Wolf says. ‘I don’t think this is a one-size-fits-all issue though. Depending on where a company is, it might not be a good time for declassification.’