S&P 500 moving towards declassification, annual board elections

A majority of S& P 500 companies that had boards elected by holders of different classifications of stock at the beginning of 2012 will be moving towards the annual election of board members by the end of 2013, the Shareholder Rights Group (SRP), an institutional investor think tank, predicts in a new report.

According to the report, of the annual board election/declassification proposals SRP submitted to 40 public companies last year, 38 of them won (95 percent) with an average of 82 percent of the votes cast. US Steel, Vornado Realty Trust Baxter International and Best Buy were among the businesses approving the proposals. ‘Board declassification and a move to annual elections could make directors more accountable and thereby contribute to improving performance and increasing firm value,’ the report said. 

The trend towards declassification has been gaining steam for over a decade. The number of S&P 500 boards that are declassified climbed to 374 in 2012 from 197 in 1999. 

There are concrete benefits declassified boards deliver to shareholders that include greater board sensitivity to firm performance in deciding executive compensation and CEO retention, better acquisition decisions, and higher valuation of the companies, according to research by Harvard Law School Professor Lucian Bebchuk, who leads SRP, and others.

SRP represents the Florida State Board of Administration, the Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Massachusetts Pension Reserves Investment Management Board, the Nathan Cummings Foundation, the North Carolina Department of State Treasurer, the Ohio Public Employees Retirement System and the School Employees Retirement System of Ohio.

Pressure for declassified boards is coming from other institutional sources as well. SRP said the Council of Institutional Investors, the American Funds, BlackRock, CalPERS, Fidelity, TIAA-CREF and Vanguard all advocate annual elections for directors and have policies to vote in favor of board declassification. Two leading proxy advisors, ISS and Glass Lewis, urge their clients to vote for declassifying boards.

New York Stock Exchange spokesperson Richard Adamonis says the NYSE prohibits listed companies to have boards divided into more than three classes, however, National Association of Corporate Director Peter Gleason said NACD has decided to let boards chose their own approach to this. He says an argument for annual elections is that they can bring accountability, but the argument against is a classified board structure can protect the long-term interests of a company.