The following is the second of two articles on the 2007 U.S. proxy season. Shareholder proposals on executive pay and board elections were covered in the July 13, 2007, issue of Governance Weekly.
U.S. investors provided strong support this season for shareholder proposals that target takeover defenses, such as "poison pills," classified boards, supermajority requirements, and dual-class equity structures. In addition, proposals seeking the right to call special meetings did well.
A bylaw proposal by investor Nick Rossi that sought a shareholder vote on future poison pills won 73.4 percent at Hewlett-Packard, according to company filings. There was a 79.3 percent vote at MeadWestvaco for investor William Steiner's proposal asking the company to redeem its poison pill or put it to a shareholder vote, according to the company.
At Walt Disney, investors gave 58 percent support to a novel bylaw proposal by Harvard University Professor Lucian Bebchuk that called for a 75 percent vote by independent directors to adopt or amend a pill plan. The company adopted a modified version of Bebchuk's proposal in late June.
However, due to low support at companies such as Praxair and Home Depot, pill-related proposals received 47.8 percent support across eight meetings where results are known. In 2006, pill proposals averaged 55.6 percent support.
Meanwhile, shareholders expressed greater support for proposals asking companies to abolish classified boards and hold annual elections for all directors. About 40 requests for a declassified board structure were voted on this year, and the measure averaged 67 percent support over 19 meetings where results are known, including 90.4 percent at restaurant chain O'Charley's, which may be a new record for a management-opposed resolution. (Last year, board declassification proposals averaged 66.8 percent support.)
Investors withdrew 14 proposals on this topic, while management at 62 companies filed proposals to declassify their boards. These management resolutions reflect the growing number of firms that are dropping these defenses. Only 45 percent of S&P 500 firms now have classified boards, down from 56 percent in 2004, according to ISS' Board Practices/Board Pay 2007 study.
Investor support remained high for proposals that ask companies to eliminate supermajority requirements to approve bylaw changes and other matters. These resolutions have averaged 67.2 percent across 21 meetings, about the same as the 2006 average of 67.8 percent. The average this year was bolstered by high support for a resolution voted at Dollar Tree Stores' annual meeting on June 21, which proponents say won 83 percent support--the highest this season. In addition, management at 28 companies asked shareholders to approve bylaw or charter changes to remove these requirements.
Individual investors filed a series of new proposals that ask for the right of holders of a 10 to 25 percent stake to call special meetings. At the 13 companies where preliminary or final results have been released, those proposals averaged 57 percent support, according to ISS data. The highest vote known, 72.4 percent, occurred at Honeywell. The lowest vote, 19.3 percent, came in at Ford Motor, where a significant portion of the stock is insider-owned.
This season also saw increased investor scrutiny of companies with dual-class stock, which can be an insurmountable takeover defense. Shareholders targeted companies with "A" and "B" class stock that give multiple votes per share to one share class, which is often controlled by the founder's family. Seven proposals aimed at eliminating dual-class stock were voted on, but most of the companies declined to release vote totals in advance of their quarterly reports.
Shareholder proposals seeking to end dual-class structures won significant support from outside investors at Hovnanian Enterprises and Ford Motor, proponents said. A LongView resolution won 14 percent at Hovnanian, where insiders control 75 percent of the voting power. At Ford, a similar proposal received 27 percent support. With the Ford family controlling 40 percent of the voting power, proponent John Chevedden estimates that about 45 percent of non-family investors supported the measure.
Morgan Stanley Investment Management filed a dual-class proposal at the New York Times Co., but the SEC allowed the company to exclude the resolution from its proxy. Instead, the Morgan Stanley fund and other investors protested the company's equity structure by withholding 42 percent support from the four directors who are elected by outside stockholders.
Proposals that advocate a separation of the roles of chairman and CEO--through the adoption of an independent board chair--did less well this year. At the 23 meetings where results are known, these proposals averaged 25.4 percent, compared with 30.2 percent last year.
Of the 40 such proposals voted on, only two received majority support--52.7 percent at CVS/Caremark, according to company filings. The other, at Newmont Mining, received over 50 percent, according to investor John Chevedden, but the company declined to release exact vote totals until its next regulatory filing.
Overall, individual shareholders had significant success in attracting support from other investors this season. Chevedden, who filed about 30 proposals this season and represents other individual shareholders at annual meetings, reports that 42 governance proposals filed by individuals received more than 50 percent support this year. Chevedden said these majority votes are the best showing ever by individual investors with whom he is in contact.
In addition, shareholders at 20 firms approved management proposals this year to implement governance changes sought by individual investors' resolutions, according to Chevedden.