The Center for Political Accountability (CPA) and 17 activist investors have called on S&P 500 firms to improve their disclosure of corporate political spending before the 2012 proxy season—or face possible shareholder resolutions on this topic. 

"We are particularly concerned by heightened pressures companies face to support candidates, groups, and causes whose positions and activities could threaten corporate reputation, bottom line, and shareholder value. We are also concerned about the risks posed by the rise of secretive third party groups as conduits for political spending," Bruce Freed, president of CPA, wrote in an open letter to 423 large-cap companies. 

Freed’s letter urges the 423 companies to join the other large-cap firms that “have demonstrated leadership by disclosing the details of their spending and implementing board oversight of political spending made with corporate funds."

Washington-based CPA has spearheaded shareholder-resolution campaigns for more than six years. The group, together with the Wharton School's Zicklin Center for Business Ethics Research, also plans to release a new index on Oct. 28 that rates firms on the quality of their disclosure.   

During the first half of this year, shareholder proposals calling for reports on political spending and policies averaged 32.5 percent support at 32 companies, up from 30.2 percent in 2010, according to ISS data. (This average doesn’t include other resolutions that sought shareholder votes on spending or reports on "grassroots lobbying" activities). Support for these proposals has increased significantly since 2005, when they typically received between 7 and 10 percent approval.

Given the time and cost involved for institutional investors to cast proxy votes at thousands of companies each year, should states allow issuers to hold shareholder meetings less frequently? 

That provocative question was asked by Widener University Law Professor Lawrence Hamermesh during a speech, "Too Busy to Think, Spread Too Thin to Matter: Making a Rational Stockholder Voting System an Agenda Item for Management/Investor Dialogue" at the Practicing Law Institute's Ninth Annual Directors' Institute on Corporate Governance on Sept. 7 in New York.

In his speech, Hamermesh pointed to the heavy proxy season workloads that many institutions face each proxy season. He cited a comment letter from the Colorado Public Employees' Retirement Association that said that it voted on 8,154 proposals at 2,738 shareholder meetings in 2009, as well as a comment letter from Connecticut's state treasurer, who was responsible for voting on more than 16,000 ballot items at over 2,000 stockholder meetings in one year.

Currently, Delaware and most other U.S. states require companies to hold shareholder meetings on an annual basis. According to Hamermesh, two states, Minnesota and North Dakota allow companies to hold less frequent shareholder meetings, but set lower thresholds for investors to call special meetings. 

The Council of Institutional Investors (CII) released a report today that addresses how institutional investors approached “say on pay” votes during the spring 2011 U.S. proxy season. As expected, most investors said “pay-for-performance” disconnects were a major reason for voting against corporate compensation practices.

The investor group hired Farient Advisors, which interviewed 19 CII members about how they cast their “say on pay” votes. These investor participants consisted mostly of public pension systems (58 percent), mutual fund firms (32 percent), and union pension funds (11 percent).

Investors gave various reasons for opposing corporate pay practices, but the factors most frequently cited were:

• A disconnect between pay and performance (92 percent)
• Poor pay practices (57 percent).
• Poor disclosure (35 percent).
• Inappropriately high level of compensation for the company’s size, industry, and performance (16 percent).

The report’s other findings include:

• Investors were extremely thoughtful about evaluating executive compensation for “say on pay” votes
• Due to resource constraints, investors used proxy advisory firms’ analyses to varying degrees.
• Investors considered multiple factors as well as inputs from various sources in determining their say-on-pay votes.
• Investors evaluated performance and pay over multiple years, and focused primarily on total absolute shareholder return (TSR) over one-, three- and five-year periods.
• Investors spent the most time and resources analyzing pay at “outlier” companies: those with large disconnects between pay and performance, high overall pay and/or low TSR in comparison to their industry or peers.
• Investors focused on CEO pay, rather than the pay of other NEOs, and on the overall “reasonableness” of the level of compensation in view of the company’s size, industry, and performance.
• Investors mostly regarded the “say on pay” vote as an opportunity to voice their concerns about a particular pay program, not a referendum on directors’ oversight of compensation.

The report also had this observation: “This first year of mandatory say on pay has been a learning experience for all participants. Farient encourages investors to conduct a ‘post-mortem’ of their voting processes, including an assessment of any additional resources needed to evaluate ‘say on pay’ proposals fairly and efficiently. Concerned investors should follow up to see what steps, if any, companies take in response to failed ‘say on pay’ proposals, and consider appropriate action.”
 

Earlier today, ISS released the results of its 2011-12 Policy Survey. For the past eight years, ISS has sought feedback on emerging corporate governance issues as a critical component of its annual policy formulation process.

This year’s survey was conducted from July 6 through Aug. 26. ISS’ institutional investor clients, as well as a broad global list of corporate issuers, were invited to participate in an online survey covering governance developments worldwide.

More than 335 total responses were received. A total of 138 institutional investors responded. Approximately 63 percent of investor respondents were located in the United States, with the remainder divided among U.K., Europe, Canada, and Asia-Pacific. One hundred and ninety-seven corporate issuers responded, with 81 percent of them located in the United States and the remainder divided among U.K., Europe, and Canada.

Executive compensation continues to be a top concern in North America for a second straight year. A majority of both investor (60 percent) and issuer respondents (61 percent) cited compensation as one of the top three governance topics for the coming year, similar to last year's survey results.

On a global basis, board independence is a primary concern for investors. Across every region, board independence was identified among the three most important governance topics by approximately 40 percent of investor respondents.

Earlier today, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) announced that they would start accepting submissions to their new Diverse Director DataSource, which also is known as 3D. 

The California pension systems started this effort two years ago in an effort to increase diversity on U.S. corporate boards. The pension funds worked with companies, academics, and search firms to develop the database. Once the 3D database collects a pool of director profiles, it could be used by companies to fill board vacancies, while investors could employ this resource when searching for candidates to nominate in traditional proxy contests or in future proxy access contests.  

"Bringing value to corporate boards through diversity goes beyond race and gender and into a varied range of background, experience, and perspective," Anne Sheehan, director of corporate governance at CalSTRS, said in a press release. "Investors looking for ways to increase corporate value will find such voices in the corporate boardroom indispensible to boosting the bottom line."

"With this initiative, the institutional investor community is creating an important opportunity to expand the pool of qualified corporate directors beyond the traditional boundaries," Douglas Chia, assistant general counsel and corporate secretary at Johnson & Johnson, said in the pension funds’ press release. "This is a resource for those companies that understand that board diversity will give them certain strategic advantages."

Hewlett-Packard, which ousted CEO Leo Apotheker on Thursday, already has attracted a 2012 shareholder proposal, and more investor activism appears likely at the company’s next annual meeting.    

California-based shareholder activist John Chevedden said he has filed an equity retention proposal that urges HP’s board to adopt a policy to require senior executives to retain a significant percentage of stock (such as 50 percent of net-after-tax stock) acquired through equity incentive programs until one year following the termination of their employment.

HP has named former eBay CEO Meg Whitman to replace Apotheker, who served just 11 months. Whitman is HP’s fourth chief executive in the past seven years, and the company’s shares hit a six-year low earlier today. Apotheker is leaving the company with $7.2 million in cash severance and almost 800,000 stock grants (worth an estimated $18 million) that vested immediately upon his termination, according to CNN Money. When he joined HP, Apotheker received a $4 million signing bonus plus $4.6 million in relocation expenses and compensation for lost benefits from his previous employer, SAP.

HP has been criticized by investors previously over the severance payouts to former chief executives Carly Fiorina and Mark Hurd. Union pension funds also filed suit over Fiorina’s $21.4 million severance, but that lawsuit was later dismissed. Hurd received $12.2 million in cash severance, but he agreed to waive his claims to outstanding equity awards after he joined Oracle and was sued by HP.

It appears likely that HP’s board will face additional shareholder activism at its 2012 meeting, which likely will be held in March. HP encountered significant shareholder dissent at its last shareholder meeting, where the technology giant failed to receive majority approval for its pay practices and two directors had more than 22 percent opposition and one board member had a 39 percent withhold vote.   

Given the criticism that the board has faced, the company might face a proxy access proposal next year. In 2007, the last year that investors were allowed to file those resolutions, HP investors gave 43 percent support for a proxy access proposal submitted by AFSCME, which was a strong showing for a new resolution topic. Earlier this week, the SEC lifted its ban on shareholder access proposals.
 

Davis Polk & Wardwell, a law firm that represents directors and executives, recently did an interview with new ISS President Gary Retelny. 

Retelny, the corporate secretary for ISS’ parent company, MSCI, was named ISS president on Sept. 15.  

To see the Davis Polk blog posting with the Retelny interview, please click here. 

To see the ISS press release on Retelny’s appointment, please click here.

“Private ordering” can now begin. 

Earlier today, the U.S. Securities and Exchange Commission published a notice in the Federal Register indicating that the stay on amendments to Rule 14a-8(i)(8) had been lifted. This action clears the way for shareholders to file proposals that ask companies to adopt proxy access provisions to permit investors to nominate board candidates.

While most European markets provide some form of ballot access, the SEC has struggled to reach consensus on this issue for years. A divided SEC approved a marketwide access rule in August 2010, but that measure was challenged by business groups and was struck down by a federal appeals court in July, and the commission decided not to seek further judicial review.  

Under the SEC’s revised Rule 14a-8(i)(8), which was not opposed by business groups, investors won’t need to meet any special ownership requirements beyond the minimum $2,000 stake for at least one year that already is required to file a shareholder proposal on other topics.

It appears likely that investors will seek ownership thresholds and holding periods that are more lenient that the 3 percent stake for three years required in the SEC’s uniform access rule, Rule 14a-11. Most governance observers do not expect investors to submit a flood of these proposals for the 2012 proxy season. In an online poll conducted by TheCorporateCounsel.net blog, almost 58 percent of respondents said they expect to see 20 or fewer resolutions next year.  

In addition, proxy access proposals likely will face no-action challenges from companies. Issuers may challenge a shareholder’s evidence of ownership, or object to the wording of a resolution on vagueness grounds. Non-Delaware companies may argue that the proposal would violate state law. Until the SEC rules on these expected no-action petitions this winter, investors may not know what language will be sufficient to get proxy access on the ballot. If investors decide to file binding proposals, they also may have to overcome supermajority requirements that a company has in place.

The Toronto Stock Exchange (TSX) is seeking comment on various board election reforms. The proposed amendments to Part IV of the TSX Company Manual would require TSX-listed issuers to:

• Elect directors individually rather than as a single slate;
• Hold annual elections for all directors, which would rule out any classified or staggered boards;
• Disclose annually whether the issuer has adopted a majority voting policy for directors for uncontested meetings, and if not to explain why as well as their practices for electing directors; and
• Advise the TSX if a director receives a majority of "withhold" votes, if a majority voting policy has not been adopted.

The proposed reforms would apply to all TSX-listed issuers, which account for about 60 percent of Canadian companies. The TSX also is requesting comment on whether companies should be required to disclose proxy voting results.

Currently, Canadian legislation provides for a plurality voting standard in director elections, whereby shareholders may vote "for" or "withhold" their votes. Under this standard, a director may be elected to the board with the casting of a single vote "for" their election. In the view of many investors, shareholder democracy is further compromised when plurality voting is combined with a single-slate director election.

Over the last decade, the overwhelming majority of Canadian issuers have moved away from single slate ballots to individual director elections. So this year, 90 percent of TSX Composite Index companies have provided individual director elections at their 2011 annual meetings. Classified or staggered boards, wherein a portion of the board is elected each year on a rotating basis, are even rarer in the Canadian market.

On the other hand, majority voting policies is a more recent trend that is slowly catching on. Since 2006, ISS is aware of slightly more than 200 companies that have voluntarily adopted majority voting/director resignation policies, which require directors to submit their resignation if they do not receive majority support.

The TSX acknowledges that the Ontario Securities Commission (OSC) published OSC Staff Notice 54-701--Regulatory Developments Regarding Shareholder Democracy Issues in January; the OSC is soliciting comments on a number of issues, including slate elections and majority voting policies. However, the TSX states that the OSC process is at an early stage and that any OSC initiatives will be complementary to the TSX's proposed amendments. The deadline for comments on the TSX amendments is Oct. 11. --Michelle Tan, ISS Canada Research
 

An international coalition of 14 pension funds with more than $2 trillion in assets under management has called on the U.S. Securities and Exchange Commission to issue a revised proxy access rule. 

The SEC’s marketwide access rule, Rule 14a-11, was struck down by a U.S. appeals court in July and the commission has decided not to appeal that decision. The court agreed with two business groups that the SEC had failed to properly consider the rule’s impact on efficiency, competition, and capital formation. (For more details on the court decision, click here.)

“We applaud the SEC’s Commissioners for their leadership and hard work over the years in bringing forward rules on the use of the proxy to nominate corporate directors. The decision in July by the District of Columbia Circuit Court of Appeals invalidating the SEC’s rule was disappointing. But now is not the time to give up,” the pension funds said in a press release on Tuesday. “We strongly urge the SEC to issue new rules on full proxy access and continue its commitment to providing long-term shareowners with the right to have a say in who runs the companies they own. It’s a principle whose time has come and one that will further restore accountability, integrity, and order in our financial markets.”

The pension fund coalition includes: Norges Bank Investment Management, the Australian Superannuation Fund, the California Public Employees’ Retirement System, the California State Teachers’ Retirement System, the Colorado Public Employees’ Retirement Association, the Connecticut Retirement Plans and Trust Funds, the New York City Pension Funds, the New York State Office of the Comptroller, the North Carolina State Treasurer, the Ohio Public Employees Retirement System, APG and PGGM Investments of the Netherlands, the Universities Superannuation Scheme (U.K.), and the Washington State Investment Board. 

Meanwhile, the SEC was scheduled this week to formally lift a stay on amendments to Rule 14a-8(i)(8) to permit shareholders to resume filing company-specific access proposals. However, it appears that investors won't submit a significant number of these proposals for 2012 corporate meetings. (For more on these potential resolutions, please click here.)

Investors have recently learned that another state, Iowa, has adopted a law that mandates classified boards.

Earlier this year, state lawmakers approved an amendment to the Iowa Business Corporations Act (IBCA) that requires public companies with more than 2,000 shareholders to maintain staggered board terms until Dec. 31, 2014. The law, which took effect March 23, provided a 40-day period during which a company's board could unilaterally vote to opt out of the classification mandate.

It appears that this legislation was passed to help Casey's General Stores, an Iowa-incorporated firm that faced an unsuccessful proxy fight in 2010. Casey's, an S&P 600 small-cap firm, did not opt out of the law and since has adopted a staggered board structure. The company has strong state legislative connections. One Casey board member, Jeffrey M. Lamberti, is an attorney who served in the Iowa Legislature from 1995 to 2006, which included three years as president of the Iowa Senate. His father is Donald Lamberti, the company's founder.

The classified board law was adopted despite the opposition of some Iowa corporate lawyers. In a Feb. 16 memo, the Iowa State Bar Association's Business Law Section Council observed that the legislation "will dramatically reduce the odds" that companies like Casey's would face proxy fights, but warned that it "would eliminate the voice of shareholders [from deciding whether to adopt staggered board terms] and leave that decision solely to management."

The lawyers' group said the bill was "inconsistent with the overarching principles of the IBCA, as well as historical principles of corporate governance that provide shareholders a voice on all fundamental corporate governance issues . . . "

It appears that the Iowa law applies to just 13 public companies. One issuer, EMC Insurance Group has opted out, while three have not, according to ISS data.

In 2009, Indiana passed a classified board law that provided a limited opt-out period. Last year, Oklahoma passed a state law, reportedly at the request of Chesapeake Energy, that mandates staggered board terms and doesn't permit opt-outs until 2015. The Oklahoma law came as a surprise to some companies, such as ONEOK, which obtained shareholder approval in 2008 to declassify.

While there aren't many public companies incorporated in the three states, there is growing investor concern that issuers are increasingly enlisting lawmakers to help fend off proxy contests and majority-supported shareholder proposals that seek declassification.

When investors do have a chance to vote on this issue, they are overwhelmingly supportive of annual board elections for all directors. During the spring 2011 proxy season, shareholder-filed declassification proposals averaged 73.5 percent support, up more than 12 percentage points from 2010, and won majority support at 22 out of 23 large-cap firms, according to ISS data.

It remains to be seen how investors might respond to Iowa's classified board law. Casey's holds its 2011 meeting on Sept. 16, and its board might face significant opposition. Earlier this year, the American Federation of State, County, and Municipal Employees filed reincorporate-to-Delaware proposals at two Indiana firms, Ball Corp. and WellPoint.
 

With the SEC's announcement this week that it won't seek review of a U.S. appeals court decision that blocked Rule 14a-11, companies won't be subject to federal access standards during the 2012 proxy season. However, it appears likely that activist shareholders will be able to file company-specific access proposals.

When adopting a marketwide access rule in 2010, the SEC also approved amendments to Rule 14a-8(i)(8) to permit shareholder proposals that seek more permissive access rules, but those changes were stayed during the litigation by two business groups over Rule 14a-11. That stay is to expire when the SEC formally accepts the court's decision, which is expected by Sept. 13, unless the commission takes action, SEC officials said. Those amendments were not challenged by the business groups, which argued that "private ordering" through company-specific proposals was better than uniform access standards.

The Council of Institutional Investors (CII), which had opposed lifting the stay if an appeal was pending, said the SEC should go ahead and allow investors to file access proposals.

"In light of the SEC's decision, we welcome the lifting of the stay on an amendment to Rule 14a-8 that would allow shareowners to submit proxy proposals seeking access at companies selectively," Ann Yerger, the group's executive director, said in a press release. "Council member funds and the broader investor community are ready and willing to seek access to the proxy to nominate directors judiciously, at companies where boards have been asleep at the switch or chronically unresponsive to shareowner concerns."

On Aug. 24, a lawyers' group, the Federal Regulation of Securities Committee of the Business Law Section of the American Bar Association, urged the SEC to maintain the stay while the agency re-proposes the amendments to Rule 14a-8(i)(8) or reopens the comment period on those provisions, "in order to more fully consider the implications of the amendments in the absence of Rule 14a-11."

If investors decide to submit proxy access resolutions next season, they most likely will seek more permissive standards for nominating board candidates than the 3 percent stake for three years required by Rule 14a-11. Most labor and public funds have supported a one- or two-year holding period and a 1 or 3 percent ownership threshold.

To file an access proposal, investors won't face any additional ownership hurdles beyond the $2,000 stake for at least one year that is required to submit a shareholder resolution on other topics. However, as CII and other investor advocates have noted in the past, it may be difficult for investors to craft binding proposals to address the complex issues associated with access within the 500-word limit mandated by the SEC.

The amended Rule 14a-8(i)(8) does place some limits on access-related proposals. The revised rule would allow companies to exclude shareholder resolutions that seek to nominate a specific candidate, remove a director before his or her term expires, or otherwise impact a particular board election. In addition, some states have additional requirements for investors to file binding proposals; one example is Minnesota, which requires a 3 percent stake, according to the law firm of Leonard, Street, and Deinard.  

Even with the revised Rule 14a-8(i)(8) in place, it appears likely that shareholder access resolutions will face no-action challenges from companies on proof-of-ownership or other procedural grounds. Some companies may try to argue that an access proposal conflicts with state law or is impermissibly vague and misleading.  

If any binding proposals make it on corporate ballots, proponents also will have to overcome other barriers that many companies have in place. A 2009 analysis commissioned by CII found that about 48.5 percent of Russell 3000 firms had unequal voting rights, supermajority requirements, or other limits on shareholder-initiated bylaws.    

At this point, it appears unlikely that investors will submit dozens of access proposals for 2012 meetings, as they have done in past seasons to seek board declassification, majority voting bylaws, or "say on pay" votes. There is concern among some activists that corporate advocates will argue that federal access standards are not needed if investors file a large number of access resolutions next year.

Amy Borrus, CII's deputy director, said she expects to see "probably not more than a handful" of access proposals in 2012. "I expect that shareowners will file proxy access proposals selectively at companies where boards have a history of not being responsive to shareowners or have been asleep at the switch," she said.

Jim McRitchie, a retail shareholder activist who has argued that Rule 14a-11's ownership standards were too onerous, said he is "delighted" that the stay on the Rule 14a-8 amendments is to be lifted. In a blog posting this week, he invited investors to join him in crafting a model access resolution that would set low barriers to access but require all nominators to disclose their election expenditures.

During the 2007 proxy season--the last time that investors were permitted to file access proposals, four resolutions were filed, and three went to a vote. Those proposals earned 43 percent support at Hewlett-Packard, 45 percent approval at UnitedHealth Group, and majority support during a proxy fight at small-cap Cryo-Cell International.

Companies may also propose their own access provisions, but that also appears unlikely unless shareholder proposals start receiving strong support. Comverse Technology and American Railcar Industries are among the handful of U.S. companies that have access provisions. In 2009, Delaware lawmakers approved legislation to permit management to adopt access bylaws, but no well-known Delaware companies have taken advantage of this provision.

The U.S. Securities and Exchange Commission has decided not to seek reconsideration of a federal appeals court decision that struck down Rule 14a-11, the agency's marketwide proxy access rule. The SEC also said that it would not appeal the decision to the U.S. Supreme Court.

After a legal challenge by the Business Roundtable and the U.S. Chamber of Commerce, a three-judge appeals panel ruled in July that the SEC had failed to properly consider the regulation's impact on "efficiency, competition and capital formation." The judges faulted the SEC’s assessment of the costs and benefits of the rule, questioned the studies that the agency relied on, and said the commission failed to fully consider corporate concerns about activism by labor and public funds. Some investor advocates, including the Council of Institutional Investors, had urged the SEC to seek additional judicial review and warned that the panel's reasoning could be used to challenge other rulemaking efforts.

While announcing the SEC's decision not to seek reconsideration, SEC Chairman Mary Schapiro reaffirmed her support for the concept of proxy access. Schapiro was one of three commissioners who backed Rule 14a-11 in a 3-2 vote in August 2010.

“I firmly believe that providing a meaningful opportunity for shareholders to exercise their right to nominate directors at their companies is in the best interest of investors and our markets. It is a process that helps make boards more accountable for the risks undertaken by the companies they manage," Schapiro said in a statement. "I remain committed to finding a way to make it easier for shareholders to nominate candidates to corporate boards."  

"At the same time, I want to be sure that we carefully consider and learn from the Court’s objections as we determine the best path forward," she said. "I have asked the staff to continue reviewing the decision as well as the comments that we previously received from interested parties.”  
 
In her statement, Schapiro did not pledge to try to revive Rule 14a-11, and it appears unlikely that the SEC would be able to draft, propose, and finalize a new marketwide access rule in the near future, given the commission's large backlog of Dodd-Frank rulemaking.   

At the same time, the fight over proxy access may be far from over. It appears that activist shareholders will be able to file company-specific access bylaw proposals for the 2012 proxy season. If investors decide to submit those resolutions, they most likely will seek more permissive ownership standards for nominating board candidates than the 3 percent stake for three years required by Rule 14a-11. When it adopted the marketwide access rule in 2010, the SEC also approved amendments to Rule 14a-8 to permit shareholder access proposals, but those changes were stayed during the litigation over Rule 14a-11. That stay is to expire around Sept. 13, when the SEC formally accepts the court's decision, unless the commission takes action, the agency said. Those amendments were not challenged by the business groups.

In addition to all of its Dodd-Frank Act rulemaking, the U.S. Securities and Exchange Commission soon may be taking a fresh look at some of its existing regulations. 

In response to an Obama administration initiative, the SEC said today it is seeking comment on the process it plans to set up to review existing regulations. The SEC is acting in response to Executive Order 13579, which was signed by President Obama on July 11. The order said the SEC and other independent agencies should do a periodic review of existing “significant regulations,” and “should consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.”

This review won’t include regulations that have been proposed or still are being drafted. In its request for comment, the SEC said it seeks public input on the following issues: 

• What factors should the Commission consider in selecting and prioritizing rules for review?
• How often should the Commission review existing rules?
• Should different rules be reviewed at different intervals? If so, which categories of rules should be reviewed more or less frequently, and on what basis?
• To what extent does relevant data exist that the Commission should consider in selecting and prioritizing rules for review and in reviewing rules, and how should the Commission assess such data in these processes? To what extent should these processes include reviewing financial economic literature or conducting empirical studies? How can our review processes obtain and consider data and analyses that address the benefits of our rules in preventing fraud or other harms to our financial markets and in otherwise protecting investors?
• What can the Commission do to modify, streamline, or expand its regulatory review processes?
• How should the Commission improve public outreach and increase public participation in the rulemaking process?
• Is there any other information that the Commission should consider in developing and implementing a preliminary plan for retrospective review of regulations?

Comments on this regulatory review are due by Oct. 6. 

The Council of Institutional Investors (CII), which represents public, labor, and corporate funds, has urged two prominent lawyers’ groups to support majority voting as the default legal standard for uncontested board elections.  

CII has written to the chairman of the American Bar Association (ABA) Business Law Section’s Committee on Corporate Laws and asked the panel to amend Section 7.28(a) of the Model Business Corporation Act (MBCA) to make majority voting the default standard, instead of plurality voting. The MBCA is the basis for the corporate laws of most U.S. states besides Delaware. The investor group also sent a similar letter to the Delaware Bar Association, which asks the legal group to support a similar amendment to Section 216(3) of the Delaware General Corporation Law.

“The benefits of a majority vote standard are many: it democratizes the corporate electoral process; it puts real voting power in the hands of investors with minimal disruption to corporate affairs; and it makes boards’ more representative of, and accountable to, shareowners,” Jeff Mahoney, CII’s general counsel, wrote in his letter to the ABA and his letter to Delaware lawyers. 

The ABA amended the MBCA in 2006 to help enable companies to adopt majority voting provisions and director resignation policies, but the group declined then to replace plurality voting as the default standard.  

Since then, majority voting has gained wide acceptance among large-cap firms, thanks primarily to shareholder proposals filed by the United Brotherhood of Carpenters and other investors. About 820 public corporations have adopted a majority standard, including 397 issuers that account for 78 percent of the S&P 500 index, Mahoney noted. 

The Senate version of the Dodd-Frank Act included a majority-voting mandate, but that provision was dropped during negotiations over the final version of the law. Since then, shareholders have continued to file proposals, and public pension fund officials in California and Florida have done letter-writing campaigns to prod issuers to adopt majority voting. However, many small and mid-cap firms still have plurality voting, which means that there are no legal consequences when investors withhold majority support from a director. Less than 1 percent of U.S. directors receive majority opposition each year, but just a handful of those board members have ever stepped down.  

“Despite the movement to adopt a majority vote standard in recent years at primarily larger companies, many midsize and smaller public corporations have continued to defer adopting majority voting, perhaps because of fewer shareowner proposals directed at those companies. The disappointing result is that, currently at most public corporations, directors who fail to receive a majority of votes cast rarely resign,” Mahoney wrote.  “For example, in 2010, fifty-nine corporations had at least one director that failed to obtain a majority of the votes cast, and at fifty-four of those companies the rejected directors did not resign from the board. Moreover, so far this year, of the forty-three directors who have received less than majority support, only one has resigned.” 

Majority voting has gotten more media attention recently. In July, Bloomberg Businessweek published an article, "America’s Teflon Corporate Boards," that noted more than 200 directors have received majority opposition in the past three years, but only a few have left their boards.  

Mahoney said both legal groups have responded and said they would consider CII’s request. 

Majority voting remains popular among investors. For the spring 2011 proxy season, shareholders submitted almost 80 resolutions--the most on any topic this year. After more than two dozen withdrawals, these resolutions went to a vote at 36 companies, and averaged 59.7 percent approval, according to ISS data.  
 

More than 10 months after draft rules were proposed, institutional investors that are Form 13F filers still are waiting for the U.S. Securities and Exchange Commission to finalize rules on the disclosure of proxy votes on executive compensation.

Yesterday was supposed to be the filing deadline for 13F institutions, according to the draft rules, which were released last October and are mandated by Section 951 of the Dodd-Frank Act. 

Section 951 requires 13F filers to annually disclose in Form N-PX filings how they cast their ballots on "say on pay" advisory votes, as well as the separate shareholder votes on "golden parachute" arrangements and the frequency of future "say on pay" votes. An institution is subject to Form 13F filing requirements if it has investment discretion over more than $100 million in qualifying securities. Mutual funds, which already are required to disclose all their proxy votes in annual N-PX filings, would be subject to the new rules. 

The SEC had planned to vote on the final 13F disclosure rules on July 26, but one of the commissioners pulled this matter from the meeting agenda the day before the meeting. As of this morning, the SEC had not announced when the final rules would be considered.

The SEC has not publicly stated why consideration of the vote disclosure rules was delayed, except to note: "At times, changes in Commission priorities require alterations in the scheduling of meeting items." SEC staff members said they have not been directed by the commissioners to revise the rules.

SEC staffers said they know that it will take 13F filers time to prepare to file their first disclosures. In comments on the draft rules, some investors and advisors urged the SEC to postpone the compliance deadline to 2012 or allow at least four months for filing after the final rules are approved.

Unlike other Dodd-Frank mandates, the 13F disclosure rules do not appear to be highly controversial. The draft rules have generated just 26 comments so far. 

Many of the comments have dealt with issues, such as: which investment manager should report votes when multiple institutions have shared voting authority; whether there should be a de minimis ownership exception where disclosure would not be required; and whether investment managers should have to report the number of shares they have voting authority over and the number of shares actually voted. Some investor groups, such as Investment Company Institute, argue that it would be burdensome for shareholders to disclose the precise number of votes actually cast. This group points out that funds do not receive vote confirmation from issuers, and there can be several intermediaries between the investor and the corporate secretary who counts the votes.