Proxy 2010: how was it for you?

The end of Q4 and the beginning of Q1 are the standard times of year for making predictions about the coming proxy season – and the turn of 2010 was no exception. There was lots of variation in the detail of the forecasts but, broadly, they were for a year dominated by compensation issues and board elections (see Expectations for 2010).

These are both areas, incidentally, in which shareholders’ rights are changing, though mostly not in time for the 2010 proxy round. They are also linked issues: the most common reason for shareholders withholding votes in director elections is the view that those directors are overpaying management, especially in relation to performance.

So how did things turn out? To answer this question, Corporate Secretary talked to some of the people at 
the center of the proxy process: the solicitors who, on the one hand, have a vested interest in busy proxy seasons but, on the other, mostly need to get their expectations right if they are to give their clients the right advice and thereby encourage them to come back for more next year.

Preempting problems
Tom Ball of Morrow & Co in New York was confident about his predictions for 2010 – ‘but you always think you know what the next proxy round will be like,’ he concedes. ‘The big event this year was the removal of the broker discretionary vote [NYSE Rule 452] and what the impact of that would be. Would companies get into their solicitation and discover they just weren’t 
getting the vote? We feared a last-minute scramble.’

In the event, Ball says, it wasn’t ‘as bad as we feared’, but that was partly a result of Morrow’s preemptive action. ‘We warned our clients and made sure they were aware of what Rule 452 might mean, and they passed that information on to their directors,’ Ball explains. ‘This method was very 
successful in the sense that there wasn’t any panic. People were prepared.’

In order to provide these warnings, Morrow analyzed clients’ shareholder profiles to anticipate how voting might be affected. To take the obvious example, removal of the broker discretionary vote was bound to have a disproportionate impact on companies with high levels of retail shareholders. On the basis that forewarned is forearmed, Morrow 
provided clients with its analyses in November, so that when the votes came through in April or May, they weren’t unduly shocked.

Of course, that didn’t deal with the whole problem, as Ball readily acknowledges: ‘There was still some anxiety, with a number of clients having to go to a majority vote on directors and being subjected to initiatives by shareholders to encourage withholds.’
Ball says he and his colleagues will continue to advise issuers to open dialogue with shareholders when they’re not in the heat of a proxy vote. ‘Talk to them in the summer or the fall,’ he counsels. ‘That way, you can be sure of a freer dialogue.’

Raised stakes
John Siemann of Laurel Hill Advisory Group says 2010’s proxy round turned out pretty much as he had expected. ‘In our 
conversations with clients, and when I spoke at conferences earlier this year, we anticipated a hectic season, mostly focused on directors,’ he says. ‘That’s what’s made this year particularly tumultuous. Many of the issues were ones that directly affect directors, which made them feel more immediate to 
issuers. Issuers were thus more engaged and that upped the pressure.’

Siemann accepts that the numbers don’t indicate a particularly busy season in 2010, but he insists the stakes were higher. Managements and boards are especially sensitive about shareholders withholding support for directors, and that precipitated increased activity on the part of issuers this year. ‘It meant there were more conversations before the actual solicitations, with issuers wanting to address strategies for dealing with these issues,’ Siemann explains. ‘And they had to negotiate with advisory firms like RiskMetrics, as well as with other individual 
institutions, to try to get withholds withdrawn.’

Siemann sees 2010 as just the start, however. ‘This year was just the first significant salvo,’ he maintains. ‘And the level of success shareholders had in getting changes will encourage them to do more in future.’ He adds that this is already leading to more dialogue: ‘Certainly among our own clients, firms are looking to open up year-round 
dialogue. And they are considering doing investor relations (IR)-style 
roadshows, focusing on governance issues and starting six to nine months before the annual meeting.’
The Altman Group is also looking at this idea. ‘We didn’t do any this year but we’re looking at it for the next proxy season,’ says Paul Schulman, managing director at Altman. He envisages the participants in such events being IR officers or corporate secretaries from the corporate side, and the people responsible for voting at institutions, as well as their advisers, from the shareholder side.

‘Companies have to engage more on the governance front, and not just because they need the support of shareholders,’ Schulman adds. ‘The world’s a changing place; they have to engage.’

Amy Bilbija, who specializes in compensation issues for MacKenzie Partners, also sees activity starting earlier. She attributes this partly to the fact that compensation-related issues were such a hot topic last year. ‘There was a lot of angst in the shareholder world last year about executives being overpaid, especially for poor performance,’ she recalls. ‘So this year we saw a lot of advance work. Usually proxy materials for annual meetings start being drafted around January; this year they started in late summer/early fall. Compensation committees met early and issuers generally got started on everything sooner to avoid being blindsided like last year.’

Greater acceptance
Nonetheless, 2010 was busy. ‘For us it meant more 
lobbying of shareholders to ignore advisory firms 
recommending withholds, and lots of preemptive work,’ Bilbija recalls. The extra work paid off: ‘A number of companies were able to overcome hurdles I didn’t think they would manage to,’ Bilbija adds. ‘Certain institutions became more receptive to dialogue with corporate executives on ballots, rather than being addicted to advisory firm recommendations.’

Bilbija thinks the market rebound also reduced shareholder concern. ‘Shareholders were more disposed to support a corporation facing a withhold recommendation where the share price performance had improved,’ she says. ‘They were more willing to tolerate what they might have seen as unsatisfactory compensation packages a year ago.’

Siemann, too, was struck by just how many shareholders were 
pro-management on a broad range of issues. ‘If you listen to the rhetoric of organizations like the Council for Institutional Investors, it’s easy to assume they speak for all institutions,’ he says. ‘But if you look at the voting record, many of the larger institutions are still supportive of management. It’ll be interesting to see if that remains the case next year.’

Ah yes, next year: what do our experts expect in 2011? ‘That’s really up to Congress,’ says Ball, ‘but it could be a very interesting proxy season.’ Bilbija thinks regulators will be important: ‘On the compensation side, disclosure has become a bigger issue with the SEC as well as an underlying theme with many of the advisory firms,’ she notes. ‘That will continue next year, revolving around the question of transparency, with further details being demanded of how the 
compensation committees arrive at their packages.’

Siemann also thinks compensation issues will remain high on the agenda. ‘The problem will come when issuers and institutions can’t agree on a course of action,’ he suggests. ‘With say on pay we’ve already moved past the original model, but I’m not sure how many compensation committees will want to take advice from shareholders on the detail of their compensation packages. I do think, however, that this year was only the opening act.’