Insight

“Private ordering” continues to prompt change. A second U.S. company, Western Union, has proposed to adopt proxy access in response to a shareholder proposal.

In a no-action request submitted to the SEC, Western Union said it plans to offer a management bylaw proposal at its next annual meeting that would allow investor groups who hold a 5 percent stake for three years to nominate board candidates to appear on the management proxy statement. The company is seeking permission to exclude a binding resolution filed by Norges Bank Investment Management that would set a lower threshold for proxy access (a 1 percent stake for one year). Western Union, a Colorado-based payment services firm, has a market cap of $11.8 billion.  

The company argues that the Norges resolution should be excluded under SEC Rule 14a-8(i)(9) because it would conflict with the planned management proposal. The SEC staff has not yet weighed in on competing access proposals, but the staff has allowed dozens of companies to exclude shareholder special meeting proposals (that generally call for a 10 percent stake) by offering management proposals with higher ownership (such as 25 or 40 percent) thresholds. 

Earlier this month, KSW, a small-cap firm, adopted a proxy access bylaw (5 percent for one year) in response to a shareholder proposal from the Furlong Fund that requests a 2 percent stake for one year. The company is seeking SEC approval to omit the fund’s proposal and asserts that it has “substantially implemented” the resolution.
 

ISS has partnered with eSecLending to launch a new service called ProxyValue™, which is designed to help institutional investors maximize income generated from the lending of securities while ensuring that proxy voting fiduciary duties are met.

When participating in securities lending, institutional investors often find it challenging to effectively manage the dual objectives of revenue generation and corporate governance responsibility. ProxyValue™ applies securities lending performance information to proxy voting management, bringing clarity, discipline, and simplicity to the process.

Peter Bassler, Managing Director at eSecLending, states: “ProxyValue™ continues our commitment to leadership and innovation in the industry. We are excited to work with ISS to deliver a creative solution that will help institutional investors make well informed corporate governance decisions. By providing the tools to evaluate the revenue considerations of recalling shares, ProxyValue™ will bridge the gap between institutional investors’ corporate governance and securities lending strategies.”

Matthew Newman, Vice President for ISS, explains: “Our clients are continuously seeking ways to efficiently and effectively execute on their proxy voting responsibilities while also maximizing incremental revenue opportunities. ISS is pleased to partner with eSecLending in their goal to help institutions evaluate the economic and fiduciary impact of recalling shares.”  

For more details, please click here.

The New York Stock Exchange has taken a new position on “broker votes” that will make it more difficult for some U.S. companies to get shareholder approval for management proposals to declassify their boards or to repeal supermajority rules. 

In a Jan. 25 information memo to its members, the NYSE said it was removing corporate governance proposals supported by management from the list of agenda items under NYSE Rule 452 where brokers may use their discretion to vote shares without instructions from their clients. In recent years, the NYSE has been scaling back the use of broker discretionary voting. In 2009, the SEC approved a NYSE proposal to bar brokers from casting uninstructed shares in uncontested board elections. The Dodd-Frank Act endorsed this approach and further prohibited discretionary broker votes on executive compensation matters, including management say-on-pay votes.    

“In light of these and other recent congressional and public policy trends disfavoring broker voting of uninstructed shares, the Exchange has determined that it will no longer continue its previous approach under Rule 452 of allowing member organizations to vote on such proposals without specific client instructions. Accordingly, proposals that the Exchange previously ruled as ‘Broker May Vote’ including, for example, proposals to de-stagger the board of directors, majority voting in the election of directors, eliminating supermajority voting requirements, providing for the use of consents, providing rights to call a special meeting, and certain types of anti-takeover provision overrides, that are included on proxy statements going forward will be treated as ‘Broker May Not Vote’ matters,” the NYSE explained in its memo. 

The NYSE noted that auditor ratification will continue to be a “Broker May Vote” matter, so companies will still be able to use broker votes on that agenda item to help them establish a quorum for shareholder meeting purposes.

While investor advocates have welcomed the exclusion of broker votes from board elections and management say-on-pay votes, the NYSE’s new position will make it more difficult for companies with strict supermajority requirements (such as 75 percent or 80 percent of shares outstanding) to obtain enough votes to pass declassification proposals or other shareholder-friendly management resolutions. Under the NYSE’s new interpretation, those uncast votes will be counted as votes against.   

In 2011, Elli Lilly & Co. and five other companies failed to win sufficient support to overcome high supermajority thresholds to repeal supermajority rules or to declassify, and more such failures appear likely with the exclusion of broker votes. 

The new NYSE approach is similar to the policy of the Council of Institutional Investors, which states that: “Uninstructed broker votes and abstentions should be counted only for purposes of a quorum.” 

In what may be the first failed say-on-pay vote of 2012, Actuant Corp. reported that it did not receive majority support for its executive compensation practices at its Jan. 10 annual meeting.

The Wisconsin-based industrial machinery company, which held its first Dodd-Frank Act-mandated advisory vote this year, received 46.7 percent approval, based on the votes cast "for" and "against." In a filing after the vote, the S&P 600 small-cap company said: "The Compensation Committee of the Board of Directors will consider these results."

It appears that investors had concerns about a pay-for-performance disconnect due to an increase in total CEO pay while the company posted lagging shareholder returns. According to the ISS report on Actuant, the company also provided weak disclosure related to incentive plan goals, utilized above-median peer group benchmarking, and adopted a new supplemental retirement program for executives.

Meanwhile, two companies with early 2011 failed say-on-pay votes are facing investors again after making significant changes to their compensation practices. Jacobs Engineering Group holds its annual meeting on Jan. 26, while Beazer Homes USA's meeting is set for Feb. 7.

A coalition of activist investors has filed 40 shareholder proposals that ask U.S. companies to disclose their direct and indirect lobbying expenses.

This campaign is led by the American Federation of State, County, and Municipal Employees (AFSCME) and Walden Asset Management. AFSCME filed a handful of proposals on this topic last year; four of those resolutions received more than 25 percent support. 

“Over the last five years, investors increasingly have urged companies to disclose their spending aimed at influencing elections,” Timothy Smith, director of ESG shareowner engagement at Walden, noted in a press release.  “This year investors have taken a logical next step and asked companies to disclose their direct and indirect lobbying activities. Whether the issue is environmental impact, consumer protection, financial reform or shareholder rights, it is important for investors to understand how company dollars are spent to influence our laws and regulations by lobbying activities.”

Other proponents include New York State Common Retirement Funds, the Needmor Fund, PAX World Fund, Tides Foundation, Funding Exchange, Russell Family Foundation, CHRISTUS Health, Catholic Health East, and other faith-based investor groups. 

The proponents contend that most companies “do not provide even rudimentary disclosure on their lobbying expenditures and practices to investors.” The investors cite a recent IRRC Institute-funded study, which reported that S&P 500 companies spent a total of $1.1 billion on political contributions and lobbying in 2010, with $979.3 million in federal lobbying expenditures accounting for 87 percent of the total. The IRRC study found that 64 percent of S&P 500 firms made “no mention of lobbying activities, policies, or oversight,” and that only 13 companies in the S&P 500 provided details on how much they spend on lobbying.

This expanded shareholder campaign is in addition to the more than 50 proposals that investors are filing this year as part of the Center for Political Accountability’s (CPA) long-running campaign to prod companies to provide more disclosure of their campaign donations and contributions to independent advocacy groups. Overall, ISS is tracking about 100 resolutions for 2012 meetings that relate to corporate political activities.  

Meanwhile, Bruce Freed, president of the CPA, and Karl Sandstrom, the group’s outside counsel, have published an article, “Dangerous Terrain: How to Manage Corporate Political Spending in a Risky New Environment,” that addresses the reputational risks that companies face when giving money to trade associations and other independent groups. 

“Companies can seize this moment to take more control of their political spending. Executives ought to know that political disclosure is becoming part of the corporate mainstream and that more companies are exercising greater control over the use of their money. There are many changes and new freedoms now, but it is up to companies--not government--to recognize the heightened risks involved in political spending and do their best to secure their own futures,” Freed and Sandstrom write in their article, which was published in The Conference Board Review.

ISS is hosting a webinar on Wednesday (at 11 a.m. EST) to discuss these issues. The webinar will include representatives from Walden, AFSCME, and the CPA. The speakers also will include a representative of NorthStar Asset Management, which is calling for shareholder advisory votes on political spending, and a corporate representative. For more details on the webinar, please click here.  

The Furlong Fund, which has launched a proxy fight at a micro-cap firm, plans to put a proxy access proposal on the ballot. The fund, which is managed by financial analyst Daniel Rudewicz, is calling for investors to own at least a 15 percent stake for one month to be eligible to nominate candidates for up to one third of the board.

The company is Microwave Filter Co., which has a $2.3 million market cap. The Furlong Fund announced its plans in a filing and press release on Friday. The fund is seeking two seats on the company's nine-member board.

The binding proposal is 17th access resolution that has been announced by investors for the 2012 proxy season, according to ISS data. The proposal, which has the highest ownership threshold but the shortest holding period of any resolutions so far, is the fifth "private ordering" variation on proxy access in 2012.

For a full list of 2012 proxy access proposals, please visit the ISS Proxy Season Resource Center.

Speaking today before Parliament, U.K. Business Secretary, Vince Cable, confirmed to British lawmakers the government's intent to empower and encourage shareholders to curb pay "excesses" through offering a binding vote on future pay as well as on notice periods and exit packages in excess of one year's salary.

"The evidence is clear that business and investors recognize there is a disconnect between top pay and company performance and that something must be done," Cable told lawmakers in the House of Commons, according to Bloomberg News. "We cannot accept top pay rising at five times average workers' pay as we did last year."

The government's proposal would also require companies to publish "more informative remuneration reports" to include a single figure for total pay, and Cable called for remuneration committees that were more diverse, including, potentially, two members who had not served on boards before. 

The opposition Labor Party has sought to allow for employee representation on remuneration committees, though Cable's speech gave no backing for such a mandate.

Plans to introduce binding votes on pay would require a new law and Cable told lawmakers the government would initiate consultations on how best to implement both votes, Bloomberg reported.

Britain's National Association of Pension Funds welcomed the government's proposals though warned against the potential for unintended consequences stemming from a binding vote. "[T]he introduction of a binding vote needs to be handled very carefully, and shareholders need to know more about what it means," NAPF Chief Executive Joanne Segars said in a statement today. "A vote must not impede the effective management of businesses, or the constructive dialogue between shareholders and boards."

Similarly, the Confederation of British Industry welcomed most of Cable's proposals while expressing concerns over a binding pay vote suggesting shareholders will be "second-guessing and 'man marking' directors."
 

Carol Bowie, head of executive compensation research at ISS, has posted a commentary on ISS' new pay-for-performance methodology on the Harvard Law School Forum on Corporate Governance and Financial Regulation. 

This commentary can be found by clicking here.

For more on this topic, please also see ISS' recent white paper on the new methodology.

In the debate over voting standards for U.S. board elections, activist investors have expressed concern that directors who receive majority shareholder opposition seldom step down from the boards after those votes. Activists typically have responded by urging companies not to nominate these board members again and by urging boards to adopt majority voting provisions.

Given these concerns, it's useful to take a longer-term look at what happens to directors who receive majority "withhold" or "against" votes. An ISS analysis of majority-opposed directors in 2010 found that this investor opposition can have a significant impact on companies and boards, and often results in the departure of directors or prods companies to address the underlying issues that may have fueled shareholder dissent.

Within the Russell 3000 index, there were 108 directors at 60 companies who received support from less than a majority of the votes cast during 2010 annual meetings, which was less than 1 percent of the directors up for election that year, according to ISS data. Most of the companies that received majority withhold votes on directors were small-cap firms. Only two companies belonged to the S&P 500 index (Cablevision Systems and Stanley Black & Decker), while six were part of the S&P mid-cap 400 index and 20 companies were part of the S&P 600 small-cap index. The majority of the firms (32 of 60 companies) were not even part of the S&P 1500 index.

Upon review of board composition during the 2011 season, ISS found that 15 directors at 13 companies were no longer on the boards of their respective companies in 2011, which means that they stepped down from boards or were not renominated.

These resignations or departures took place despite the fact that none of the companies whose directors received majority opposition in 2010 had a majority vote standard for the election of directors in place. In fact, all aforementioned companies had a plurality vote standard for the election of directors, while only two companies had a director resignation policy in place. It is worth noting that at Herley Industries, one of the two companies that had a resignation policy in place, the nominee with the majority withhold votes did resign, and his resignation was accepted.

The full version of this article appeared in today's Governance Weekly and can be found on Governance Exchange. To learn more about the benefits of joining Governance Exchange, please click here.

In response to a shareholder proposal, KSW has adopted a proxy access bylaw that requires investors to hold at least a 5 percent stake for one year to nominate board candidates. The small-cap company appears to be the first issuer to take such an action since the U.S. Securities and Exchange Commission lifted a ban on investor resolutions that seek access provisions.

KSW mentioned its bylaw in a Jan. 9 no-action letter to the staff of the SEC's Corporation Finance Division in which the company asked for permission to exclude a resolution filed by investor Daniel Rudewicz. While his binding proposal calls for shareholders to hold a minimum 2 percent stake for one year, the company argues that it has "substantially implemented" his proposal by adopting its bylaw. KSW said its board concluded that a 2 percent threshold would be too low and pointed out that just a $415,000 stake would be required (based on the company's closing share price on Jan. 6).

KSW is a Long Island City, N.Y.-based company that furnishes and installs heating, ventilating, and air conditioning systems and process piping systems. The company had a $21 million market cap as of the end of trading on Jan. 18.

It remains to be seen whether any other companies will follow KSW. Most governance observers expect that companies will wait to see how access proposals fare at the SEC and on the ballot this year before considering their own provisions.