US 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, below).

These are both areas, incidentally, in which shareholders’ rights are changing, but 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 their view that those directors are overpaid, especially in relation to performance.

So just how did things transpire? To find out, IR magazine talked to some of the people at the center of the proxy process: the solicitors that, on the one hand, have a vested interest in busy proxy seasons but, on the other hand, 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 [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 well prepared.’

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 shocked.

Of course, that doesn’t deal with the whole problem, as Ball readily acknowledges: ‘There was still 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.’ But he 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 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 points out. ‘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, so issuers were 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 that there was a greater number of 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, and other individual institutions, to try to get withholds withdrawn.’

Siemann sees 2010 as only the beginning, 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, companies are looking to open up year-round dialogue. And they are considering doing 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 IROs 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 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 time 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
Nevertheless, 2010 was still busy. ‘For us it meant more lobbying of shareholders to ignore advisory companies recommending withholds, and lots of preemptive work,’ Bilbija recalls. But it paid off. ‘Several companies were able to overcome hurdles I didn’t think they would manage to,’ she 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 apt 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 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, too. ‘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 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. But I do think, this year, this was only the opening act.’

Expectations for 2010
‘[Shareholders] will want to signal their support for early congressional action, so we think say on pay will remain a strong category among shareholder proposals’
‘Director elections are certainly now the main playing field for shareholders’ – Patrick McGurn, special counsel, RiskMetrics

‘A number of compensation issues came up during the meltdown and there is still a lot of concern around pay’ – Art Crozier, co-chair, Innisfree

‘Compensation is going to be on everybody’s plate and we are going to see many board members withheld or voted against’ – Richard Grubaugh, senior vice president, DF King & Co

‘Looking ahead to the 2010 proxy season, Georgeson predicts that proposals relating to executive compensation will continue to dominate the debate’ – David Drake, president, Georgeson

‘…proposals regarding say on pay and independent board chairmanship likely will continue to gain momentum, and it is expected that many more public companies will be pressured into adopting majority voting…’ – David Katz, Wachtell Lipton Rosen & Katz, writing on the Harvard Law School blog

And north of the border?
Wes Hall of Kingsdale Shareholder in Toronto expected 2010 to be ‘really, really busy’. In the event, ‘it wasn’t as busy as we thought,’ he says. ‘We expected lots of shareholder activism because of the market being down, but because it corrected itself things turned out fairly peaceful. Last year there were about 40 proxy fights, this year maybe 15 or 20.’

There were several shareholder proposals on stock options and pay, Hall reports, and he believes companies faced a simple choice on the say-on-pay front: they could either put the issue on the agenda themselves or be pushed to do so. Unlike in the US, there are no legislative changes in Canada but shareholders are still badgering companies. ‘Last year the banks all got proposals on say on pay,’ says Hall. ‘So it’s now the norm at banks, and at bigger companies generally.’

The process began with a small group of proponents but other shareholders soon followed suit. And the votes? Interestingly, they were firmly pro-management, with the lowest support levels still nudging 90 percent. ‘It turned out that, really, the shareholders just wanted to know the compensation policy and be given a chance to vote on it,’ says Hall. ‘It’s only an advisory vote anyway, not a binding one, but issuers were worried about having a whole slew of votes against management.’ Unnecessarily, as it transpired.