Cheat Sheet: Proxy Season 2010
Say on pay
The notion of a non-binding advisory vote on executive compensation received rising levels of shareholder support in 2006 and 2007. Aflac volunteered to do a vote in 2007, followed by Verizon and a handful of other companies.
Say on pay really hit the big time, however, when it was signed into law in February by President Obama in the American Recovery and Reinvestment Act of 2009. Suddenly, hundreds of companies receiving Troubled Asset Relief Program funds had no option but to do say-on-pay votes.
As a practice, say on pay is already well established elsewhere: it was enacted in the UK in 2002 and in Australia and the Netherlands in 2004.
Now it looks like it’s going to become the law for all US companies, the Senate will decide – and the SEC will take care of implementing – the law.
This idea has been kicked around Washington since the 1940s and almost made it into the rule books in 2004 but big business balked at giving shareholders an easier way to nominate directors.
The SEC in June proposed a rule that allows long-term investors to nominate directors on the company’s own proxy ballot. Up to now this would have involved them having to do their own expensive proxy campaign.
The initiative seems to be moving forward despite hundreds of comment letters fiercely opposed to it, including from large institutional investors that say the share ownership thresholds are too low. The first step would probably be to get Congress to pass legislation making proxy access a federal issue, not a state one, which would give the SEC the power it needs to make rules for proxy access.
What if investors want to provoke change without going to the trouble of nominating their own board slates? They can use ‘just vote no’ campaigns, or protest votes, to signal their discontent and embarrass directors into action or drum them right out of the boardroom.
Most famously, 45 percent of the vote in the reelection of chairman Michael Eisner at Disney’s 2004 annual meeting was withheld. And in 2009 proxy adviser RiskMetrics Group began penalizing compensation committees for poor pay policies by backing withhold vote initiatives.
The 2010 proxy season is expected to be rife with vote-no campaigns because, without the broker vote in director elections (see NYSE Rule 452, below), activist investors will have a much easier time getting high proportions of votes.
It used to be that directors could be reappointed in uncontested board elections with just one vote in their favor – so-called plurality voting. By the end of 2008 nearly half of S&P 500 companies had switched to majority voting, meaning a director has to win more than 50 percent of votes cast to be reelected. Losers will generally submit their resignation to the board, which can choose to accept or reject it.
Majority voting is spreading fast – but not fast enough for lawmakers: it is expected to be voted into law next year.
The NYSE’s proxy working group recommended changing Rule 452 back in 2006 but it took three years and a financial crisis for the SEC to move on it.
On July 1 the commission approved the amendment for the 2010 proxy season, which means brokers will no longer be allowed to vote uninstructed shares in uncontested director elections. That means the retail vote, which has traditionally backed management, will just about disappear from the vote count, making it much harder for companies to counterbalance vote-no campaigns (see above).
Starting in 2007, the SEC’s proxy disclosure rules have required extremely detailed compensation discussion and analysis (CD&A). The commission pleaded with companies to provide meaningful narrative and avoid boilerplate – to little avail. Most CD&As are still opaque to all but the most expert eye.
Now, with say on pay looming, institutional investors are trying to get companies to make their compensation case much clearer. Australian companies, which provide good graphic explanations, are held up as examples.
With all the buzz surrounding proxy access and Rule 452, little attention was paid this summer to the SEC’s plans to further expand pay disclosure. Proxy statements will have to explain leadership structure, including whether the chairman and CEO roles are separated, and possible conflicts of interests around the use of compensation consultants will have to be disclosed. Most significantly, a lot more information about directors and nominees will be required, such as their contribution to board diversity, as well as disclosure about the board’s role in risk management.
Notice and access
In 2007 the SEC began requiring US issuers to post all proxy materials on the internet. Companies had the choice of mailing hard copies to shareholders or just a notice telling them where to find the materials on the web. Many have done a mix of the two methods, depending on their meeting agenda and shareholder base makeup.
A number of problems arose. For one thing, the SEC’s rigid definition of a notice confused retail investors; some even sent it back like a proxy card. Above all, the SEC is concerned about a precipitous decline in retail voting, which compounds the challenges faced by companies trying to seat directors (see Rule 452, and Vote-no campaigns, above).
In October 2009 the SEC proposed changes to the notice and access rule to allow more flexibility in the format and content of the notice. Issuers are also allowed to add an explanation of the proxy process. Plus, if someone other than the issuer wants to use notice and access, the SEC proposed easing the deadlines. With an abbreviated comment period, the changes were expected to be passed without fuss in November.
Meanwhile, around the same time as the SEC’s latest proposal, NIRI launched its Standards of practice for investor relations, volume II, about implementing notice and access. The booklet includes guidelines for deciding whether to use notice and access, and how to save money while encouraging voting.