Insight

Proxy access was one of the most highly anticipated issues of the 2012 U.S. proxy season, and here at the halfway mark of the season, this issue has lived up to its billing.
 
To date, only three proxy access shareholder proposals have gone to a vote, but that's only part of the story. 

We have seen a veritable hodgepodge of proposed access rights presented to shareholders: ownership thresholds of 1 percent for one year, 2 percent for one year, 1 percent or 100 shareholders owning $2,000 apiece for one year, and, perhaps most interesting, 15 percent for 1 month. To date, no proposal with a 3 percent/three year ownership threshold patterned after SEC Rule 14a-11 (which was struck down by a federal court) has come to a vote; the first will be at Nabors Industries' meeting on June 5.   

In addition, we have seen proxy access proposals used as bargaining chips. Consider the settlements at Hewlett Packard, where a shareholder access proposal was withdrawn after the company agreed to sponsor a proposal in 2013, and at Pioneer Natural Resources, where Norges Bank Investment Management withdrew its proposal after the board adopted majority voting and sponsored a proposal to declassify the board. 

Moreover, we have seen the SEC grant no-action relief to most of the companies where shareholders filed proposals fashioned on the U.S. Proxy Exchange’s (USPX) model. 

This year's first vote on access was at Wells Fargo, where a Norges Bank proposal received almost 33 percent support. The Norges Bank proposals are binding and seek a threshold of 1 percent for one year. 

At Ferro Corp., a USPX-style proposal received 13.5 percent support, which appears somewhat high considering many institutional investors' concerns with the USPX ownership threshold, which would permit holders of as little as $200,000 to nominate board candidates. It's possible that some investors considered the company's poor governance practices and history of ignoring majority shareholder votes and cast a symbolic vote for this non-binding proposal.

Third, a binding proposal received 21 percent support at KSW’s meeting this week, company officials said. This is an interesting case because it's the first case where we saw a shareholder proposal filed at a company that already had a proxy access right. KSW, a company with a $25 million market cap, adopted a proxy access right with a 5 percent for one year ownership requirement. The shareholder proponent, Furlong Financial, countered with a 2 percent for one year ownership requirement. 

Things are still in the early stages though; shareholders will vote on proxy access proposals at Charles Schwab and Princeton National Bancorp on May 17 and at Western Union and CME Group on May 23. 

Meanwhile, the SEC staff has denied Norges Bank’s request to reconsider a no-action ruling that allowed Staples Inc. to omit its access proposal. The company argued that the binding proposal would conflict with an existing company bylaw. 

ISS Governance Exchange members can obtain more information on 2012 proxy access proposals by clicking here.
 

So far this year, investors have been more receptive to shareholder proposals that seek an independent board chair.

These proposals have averaged 37.7 percent support (based on votes “for” and “against”) at 20 U.S. companies this proxy season, according to ISS Voting Analytics data, which includes meetings at Russell 3000 firms through May 4. These results are a significant improvement from 2011, when independent chair resolutions averaged 32.8 percent approval at 28 Russell 3000 companies during the full year, and from 2010, when there was 27.4 percent support at 38 firms. 

This year’s campaign includes proposals from the American Federation of State, County, and Municipal Employees; shareholder activist Kenneth Steiner; and various individual investors. 

“AFSCME is pleased that shareholders are increasingly voicing their concerns about the lack of independent board leadership and the conflicts of interest it perpetuates, particularly at companies with lackluster performance,” said Lisa Lindsley, the labor pension fund’s director of capital strategies.

While independent chair proposals have yet to earn majority support this year, these resolutions did attract more than 40 percent approval at 10 companies. Among those firms are Johnson & Johnson, PepsiCo, AT&T, DuPont, Honeywell, and Janus Capital Group. The best showing so far was 48.4 percent support at Sterling Bancorp’s May 3 meeting.

Although these resolutions don’t get the wide support received by shareholder proposals seeking board declassification or majority voting, it does appear that more investors are willing to vote for independent board chairs. Support did increase at two companies where this proposal was on the ballot last year. At Wells Fargo & Co., support increased nearly eight percentage points to 37.8 percent. At Whole Foods Market, there was 37.5 percent approval, up from 33.7 percent in 2011.

Independent chair proposals will be on the ballot at several high-profile companies later this month, including at JPMorgan Chase (May 15), Northrop Grumman (May 16), KeyCorp (May 17), and YUM! Brands (May 17).

Four additional firms--Mylan, Tower Group, Sterling Bancorp., and Manitowoc Co.--reported that they failed to win majority support for their executive compensation practices. Overall, 12 U.S.-listed companies have not obtained majority approval from their investors during say-on-pay votes this year, according to ISS data.

Mylan, a pharmaceutical firm in the S&P 500 index, earned about 48 percent support on pay during its May 4 annual meeting. It appears that investors had concerns over pay-for-performance alignment. The Pennsylvania-based company also extended executive employment agreements that include excise tax gross-up provisions, and provided limited disclosure about its engagement with shareholders after Mylan received less than 64 percent support on pay in 2011.

On May 3, the Tower Group, an insurance firm in the S&P 600 small-cap index, received 29.6 percent support, which is the second-lowest vote seen this year during an advisory vote on pay. The New York-based firm has posted low three-year returns relative to its peers, “compounded by substantial non-performance based pay elements and poor long-term incentive design,” according to the ISS report on the company. In its post-meeting 8-K filing, Tower defended its pay policies but said it “will fully consider the concerns expressed by its stockholders and the Compensation Committee will review the structure of the Company’s executive compensation programs.”

At Sterling, a regional banking firm in the S&P 600, pay-for-performance concerns also contributed to investor dissent at the May 3 shareholder meeting. As the ISS report noted: “CEO pay is significantly higher than peers (excluding the change in pension value) and the company's one- and three-year [total share returns] have not kept pace. Further, the multiple fallback structure of the annual incentive plan is incongruous with the purpose of performance-based incentive programs, offering alternative target measures when the original target is not met.” 

Pay-for-performance concerns apparently were a factor at Manitowoc, a Wisconsin-based company that makes cranes and food-service equipment. The Russell 3000 firm received about 48 percent approval on compensation at its May 1 meeting. The ISS report on Manitowoc concluded that there “was misalignment between CEO pay and TSR [total shareholder return] performance relative to peers over the 1- and 3-year term and on an absolute basis over the five-year term,” and that the chief executive’s 2011 pay package was not sufficiently performance-based.

Both Sterling and Tower received more than 90 percent support on pay in 2011, according to ISS data. At Manitowoc, there was 75 percent approval last year.
 

Three more U.S.-listed companies--Cooper Industries, NRG Energy, and Ryland Homes--have reported that they failed to receive majority support for their executive compensation practices. At all three firms, it appears that investors had pay-for-performance concerns.

Cooper Industries earned just 29.4 percent approval at its April 23 annual meeting; this vote is the lowest support level during a say-on-pay vote this year, according to ISS data. The company’s investors have expressed concern over pay in the past. Cooper, an Ireland-incorporated firm that is listed on the New York Stock Exchange and is part of the S&P 500, received just 50.4 percent support during its 2011 advisory vote.  

NRG, a power generation firm in the S&P 500 index, received 45 percent approval during its April 25 advisory vote, one year after earning 59 percent support on compensation. 

Ryland Group, a homebuilder in the S&P 600 small-cap index, had 41 percent support for its compensation policies at its April 25 meeting. Ryland also received significant opposition in 2011, earning just 62 percent approval.  

These three votes suggest that some investors are taking a harder line this year at companies that had less than 70 percent support in 2011 but have not fully addressed shareholder concerns. At the same time, there are other firms that are receiving much greater support after suffering failed votes in 2011. One example is Stanley Black and Decker, which received more than 93 percent support this year after improving its pay practices. In addition, Umpqua Holdings earned 98 percent approval this year after getting just 36 percent support in 2011. 

Overall, eight companies have reported failed votes this proxy season, according to ISS data. The other firms include Citigroup, International Game Technology, KB Home, FirstMerit Group, and Actuant Corp. 

Notwithstanding these votes, investors have overwhelmingly endorsed the pay practices of most U.S. companies. As of May 1, the average support level was 90.6 percent, according to ISS data, which includes vote results from 345 issuers.

Governance Exchange members can obtain more data on say-on-pay results by clicking here.

In testimony to lawmakers this week, SEC Chairman Mary Schapiro said her agency has no immediate plans to revive a controversial proxy access rule that was struck down by a federal court last July. 

"In terms of proposing a proxy access rule and putting it on the commission agenda, we just don't have the capacity right now," Schapiro said Wednesday during a House Financial Services Committee hearing, according to the Reuters news service. "We are just not going to be able to get to it."

Schapiro’s remarks were not a great surprise, given the large backlog of Dodd-Frank Act rulemaking that the SEC is working on, and the long-running debate among investors and issuers over whether a federal proxy access rule is needed.    

Public pension funds and labor investors have urged the SEC to try again to adopt minimum federal standards to allow long-term investors to nominate board candidates to appear in management proxy statements. After a lengthy rule-making process, the SEC voted 3-2 in 2010 to adopt Rule 14a-11, which would have permitted director nominees from investor groups that hold at least a 3 percent stake for three years. Two business groups sued to block the rule, and a federal appeals court agreed that the SEC had failed to properly assess the rule’s economic impact. Corporate advocates also argued that a federal rule would infringe on state law, would empower “special interest” investors, and would lead to costly contested board elections. 

With no marketwide SEC rule on the horizon, access proponents may expand their efforts to seek access provisions on a company-by-company basis. In a memo on Schapiro’s remarks, the corporate law firm of Wachtell Lipton Rosen & Katz observed: “We can expect the focus on private ordering through shareholder proposals to continue and increase.” 

So far this year, investors have filed 21 proposals that include a variety of ownership requirements, according to ISS data. Seven resolutions were omitted after corporate challenges at the SEC and an eighth resolution faces a no-action petition. A labor fund withdrew a proposal at Hewlett-Packard after the company agreed to put a management access bylaw (which would be based on SEC Rule 14a-11) on its ballot in 2013. 

A binding access proposal (that would require a 1 percent stake for one year) went to a vote this week at Wells Fargo & Co. The resolution, filed by Norges Bank Investment Management, did not pass, but detailed vote results were not immediately available. Similar Norges Bank proposals are slated for votes at Charles Schwab Corp. and Pioneer Natural Resources on May 17 and at Western Union and CME Group on May 23. 

On Friday, investors at Ferro Corp.'s annual meeting will vote on a different access resolution submitted by retail activist Ken Steiner. His non-binding measure, which is based on the U.S. Proxy Exchange's model proposal, calls for a 1 percent stake for two years standard, but also would allow nominations from groups of 100 of more investors who each own a $2,000 stake for at least one year. 

In addition, the Furlong Fund has submitted a binding access proposal at a small-cap firm, KSW Inc., which holds its annual meeting on May 9. That resolution would require a 2 percent stake for one year; management has responded by adopting a 5 percent for one year standard.

In June, investors at Chesapeake Energy and Nabors Industries likely will vote on non-binding access proposals (that are based on Rule 14a-11) filed by public pension funds. These two votes may provide the clearest indication this year of the potential investor support for marketwide access standards in the future.

A fifth U.S. company, FirstMerit Corp., has failed to win majority approval from shareholders for its executive pay practices this year. In a regulatory filing, the Ohio-based financial firm reported that it received 46.6 percent support (based on votes cast "for" and "against") during the say-on-pay advisory vote at its April 18 annual meeting. 

It appears that investors had concerns over a pay-for-performance disconnect. While the company's one-, three-, and five-year share returns were negative, the CEO’s total 2011 compensation of $6.4 million was 2.3 times higher than the median of ISS' peer group, according to the ISS report on the company. In addition, FirstMerit lacks a predominantly performance-based pay structure and robust disclosure that details the rationale for the maximum bonus payout for the CEO, the ISS report said. 

So far this year, four other U.S. companies (Citigroup, KB Home, International Game Technology, and Actuant Corp.) have failed to receive majority investor support on their compensation practices, according to ISS data. During this same period in 2011, four companies reported failed say-on-pay votes. 

Notwithstanding these votes, most U.S. companies continue to win broad investor approval on compensation. During the early 2012 proxy season, the average shareholder support during say-on-pay votes was 90.3 percent at Russell 3000 firms, which is close to the 92 percent average in 2011, according to ISS data. 

During all of 2011, 41 Russell 3000 companies reported that they failed to win majority support on compensation. That total still is less than 2 percent of the firms that held advisory votes on pay that year, according to ISS data.

The early vote results this year also suggest that many investors are responding to engagement and pay practice changes that companies are making in response to low votes in 2011. For instance, the four U.S. companies with failed pay votes during the early 2011 proxy season all made changes to their compensation policies and earned significantly more shareholder support this year. At Hewlett-Packard, say-on-pay approval jumped from 48.7 to 78.8 percent. At ShuffleMaster, the company received 86.4 percent support this year, up from 44.5 percent in 2011. Beazer Homes USA and Jacobs Engineering Group both won more than 96 percent approval this year after failed votes in 2011. 
 
For an analysis of the factors that contributed to shareholder opposition during 2011 pay votes, please see a recent ISS white paper, "Parsing The Vote: CEO Pay Characteristics Relative to Shareholder Dissent."

Over the next two weeks, shareholder proposals seeking independent board chairs will be on the ballot at Wells Fargo & Co., Lockheed Martin, and other well-known U.S. companies.

On Tuesday, this topic will go to a vote at Wells Fargo, which also faces a proxy access proposal. Independent chair resolutions also are slated for votes this week at General Electric, Edison International, Johnson & Johnson, Lockheed Martin, and Janus Capital Group. At Janus, management has remained neutral on the shareholder proposal, and the board has named an independent chairman who will take office on April 27. Next week, independent chair proposals will be on the ballot at American Express, General Dynamics, PepsiCo, and Sterling Bancorp.

The resolutions are part of an expanded campaign by the American Federation of State, County, and Municipal Employees and retail investor activists. As of April 16, ISS was tracking at least 44 proposals on this topic; seven resolutions have been omitted after corporate challenges. In 2011, 30 independent chair proposals went to a vote, and four resolutions received majority support. The average approval was 34.6 percent, up from 28 percent in 2010, according to ISS data.

While independent chairs are widely accepted in the United Kingdom and other markets, most large U.S. companies have opted to combine the roles of chairman and CEO, while appointing an independent lead director. 

About 19 percent of S&P 500 firms have an independent board chair, while another 18 percent have a separate non-independent chair, according to ISS’ latest Board Practices study. Smaller firms have been more willing to embrace this reform: 29 percent of S&P SmallCap firms and 25 percent of S&P MidCap firms have independent chairs. 

Proponents of independent board chairs assert that this structure provides greater oversight of management and can ensure that the board is not dominated by a long-serving CEO. In response, companies often argue that a lead independent director can provide effective oversight, and that a board should have the flexibility to select the best person suited to be the chair. Some firms also point out that appointing an outgoing CEO as the board chair can help in the transition to a new chief executive.   

While activists continue to urge boards to appoint independent chairs, several well-known firms have recently combined the positions. Among those companies are Walt Disney Co., Pfizer, Motorola Solutions, and DTE Energy.

The staff of the U.S. Securities and Exchange Commission has granted a request by Staples Inc. to exclude a binding proxy access proposal filed by Norges Bank Investment Management. 

In an April 13 ruling, the staff of SEC’s Corporation Finance Division agreed with the company’s argument that the proposed Norges bylaw proposal was “vague and indefinite” because it would have conflicted with a separate bylaw that states that the company is not obligated to include in its proxy materials any information “with respect to any nominee for director submitted by a stockholder."

“The proposal does not address the conflict between these two provisions of Staples' bylaws,” the SEC staff wrote in its no-action decision. “As such, neither shareholders nor Staples would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.”

The staff reached this conclusion even though lawyers for Norges sought to revise the resolution by adding three words to explicitly state that the shareholder proposal would supersede the existing bylaw that applied to the company's obligation to include investor nominees in its proxy materials. Staples argued that the proposed revision would not address the alleged defects in the resolution. 

The Norges proposal would have permitted investor groups that hold a 1 percent stake for at least one year to nominate board candidates, with a 25 percent limit on the total board seats that access nominees could seek each year.  

Meanwhile, another Norges proposal will be on the ballot at Wells Fargo's April 24 meeting. In support of its proposal, Norges argues that the right of shareholders to nominate directors is a fundamental principle of good corporate governance. The Norwegian institution asserts that the company's governance could be improved, and points to its combined CEO-chair and the 25 percent threshold for investors to call a special meeting. In response, Wells Fargo points out that all of its directors are elected annually under a majority vote standard and that the board has an active lead director who is available to meet with major investors. 

Similar Norges proposals are slated for votes at Charles Schwab Corp. and Pioneer Natural Resources on May 17, and at Western Union and CME Group on May 23. 

Also next week, investors at Ferro Corp.'s April 27 annual meeting will have an opportunity to vote on a different access resolution submitted by retail activist Ken Steiner. His non-binding measure, which is based on the U.S. Proxy Exchange's model proposal, calls for a 1 percent stake for two years standard, but also would allow nominations from groups of 100 of more investors who each own a $2,000 stake for at least one year. Steiner's proposal would allow each investor group to nominate at least one candidate, but doesn't impose a cap on the total number of access candidates in a given election.

In his supporting statement, Steiner criticizes the board's compensation decisions and points out that two directors received majority opposition in 2011 but still remain on the board. The Ohio-based company argues that the proposal's ownership and duration thresholds are inappropriately low and would subject the company to significant expense and diversion of time. Ferro also warns that the lack of a cap on total nominees could result in a significant number of shareholder candidates for each election and add complexity to the election process.

This is the first year since 2007 that U.S. investors will be able to vote on proxy access. The SEC lifted a ban on shareholder access proposals in August 2010, but that rule change remained on hold during the 2011 meeting season while corporate groups successfully challenged a separate SEC rule (Rule 14a-11) that would have imposed minimum access thresholds (3 percent for three years) for all firms.

In addition, public pension funds have filed non-binding access resolutions (that are based on SEC Rule 14a-11) at Chesapeake Energy and Nabors Industries, which hold their annual meetings in June.
 

At its annual meeting on Tuesday, Citigroup reported that it failed to win majority approval from investors for its executive compensation practices. According to news reports, Citi received 45 percent support during its non-binding say-on-pay vote. 

It appears that investors may have had concerns over the amount of discretion for the compensation committee under the incentive compensation and retention programs for CEO Vikram Pandit. Citigroup also has posted negative shareholder returns over the past one, three, and five fiscal years. 

After the vote, Citigroup Chairman Richard Parsons said the vote was "a serious matter" and that directors would meet with shareholders to hear their concerns, according to the Reuters news service.  

In addition to Citigroup, three other U.S. companies--KB Home, International Game Technology, and Actuant Corp.--have reported failed say-on-pay votes this year.

In 2011, the first year of mandatory pay votes for most U.S. companies, 41 firms in the Russell 3000 (or less than 2 percent of the total index) reported that they failed to win majority approval from investors on pay.

So far this year, the average investor support level during say-on-pay votes has been 90.4 percent, according to ISS data, which includes vote results from 175 companies. That percentage is almost identical to the average support during all of 2011.

Most companies with failed votes (or close votes) last year have fared better this proxy voting season due to engagement efforts with investors and, in some cases, positive changes to their pay programs. For instance, Jacobs Engineering Group and Beazer Homes USA, which both suffered failed 2011 votes, received more than 95 percent support this year after making improvements to their pay practices.
 

Six U.S. companies--H.J. Heinz, Supervalu, Electronic Arts, Legg Mason, J.M. Smucker Co., and BMC Software--have reached settlements with investors to provide more information on auditor independence, according to the United Brotherhood of Carpenters, which is leading a shareholder campaign on this issue.

The six issuers have agreed to provide an audit firm independence statement that details the company's audit firm, the firm's tenure, and states that the audit committee "periodically considers whether there should be a regular rotation of the independent external audit firm," according to the Carpenters.

"The points of disclosure in the settlement are a solid step in providing shareholder information about the tenure of the relationship and the audit committee's role in various processes (fee negotiations, audit partner rotation, [and] periodic consideration of firm rotation), and it also includes a statement that the committee believes the continued retention of the audit firm is in the best interests of the company and its investors," Ed Durkin, director of corporate governance at the Carpenters union, told ISS. 

So far this year, the Carpenters have filed 16 proposals that seek annual audit firm independence reports. Dell, McKesson Corp., Xilinx, and Computer Sciences Corp. have submitted no-action petitions to exclude these resolutions, but the Securities and Exchange Commission has not yet ruled on those requests. Earlier, the Carpenters filed dozens of resolutions that called for seven-year auditor rotation policies, but the SEC staff allowed companies to omit those proposals on "ordinary business" grounds.