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 Consider the settlements at Hewlett Packard, where a shareholder access proposal was withdrawn after the company agreed to sponsor a proposal in 2013, and at Pioneer Natural Resources, where Norges Bank Investment Management withdrew its proposal after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).

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.

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.
 

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.
 

On Monday, the U.S. Securities and Exchange Commission announced the formation of a new Investor Advisory Committee, as required by the Dodd-Frank Act.

The new 21-member panel replaces the committee that was created in 2009 and then disbanded in 2010 after the Dodd-Frank law took effect. Commissioner Luis Aguilar has repeatedly urged the SEC to proceed with forming the new panel. 

According to a SEC press release, the committee is “to advise the Commission on regulatory priorities, the regulation of securities products, trading strategies, fee structures, the effectiveness of disclosure, and on initiatives to protect investor interests and to promote investor confidence and the integrity of the securities marketplace.” 

Among the panelists are: Joseph Dear, chief investment officer of the California Public Employees’ Retirement System; Anne Sheehan, director of corporate governance for California State Teachers’ Retirement System; Damon Silvers, associate general counsel for the AFL-CIO; Ann Yerger, executive director of the Council of Institutional Investors; Barbara Roper, director of investor protection at the Consumer Federation of America; Kurt Schacht, managing director of the CFA Institute; University of Denver Law Professor J. Robert Brown Jr.; and Stanford Law Professor Joseph Grundfest.

"The SEC’s new Investor Advisory Committee is made up of individuals with a broad range of backgrounds and experiences," SEC Chairman Mary Schapiro said in a press release. "I look forward to their insight and recommendations as to how we can further the SEC’s critical investor protection mission."
 

In the first no-action decision on this topic, the staff of the Securities and Exchange Commission has denied a request by Roper Industries to exclude a shareholder proposal that seeks to repeal the company’s exclusive forum bylaw. 

In a March 29 ruling, the staff of the SEC’s Corporation Finance Division turned down Roper’s argument that the resolution could be omitted because it relates to the company’s “ordinary business” operations. 

The proponent, the labor-affiliated Amalgamated Bank, argued that it is not trying to micromanage Roper's legal strategy, but is trying to stop a "naked power grab" by the company. "Board actions that unilaterally snuff out statutory rights surely cannot be considered an 'ordinary' piece of business," Amalgamated said in a letter to the SEC.

Amalgamated, which has filed similar shareholder proposals at Chevron and United Rentals, withdrew this resolution at Superior Energy Services after the company agreed to repeal its exclusive forum bylaw. 

This new proposal was inspired by the recent surge in the unilateral adoption of exclusive Delaware forum provisions. At the end of 2011, 195 companies had adopted exclusive forum bylaws or charter amendments, up from 82 in April 2011, according to a recent study by Claudia H. Allen of the law firm of Neal, Gerber & Eisenberg. However, just six companies sought shareholder approval in 2011 for these provisions.
 

Ten more large-cap companies have publicly confirmed that they will put management-sponsored board declassification proposals on the ballot, according to Harvard Law School’s Shareholder Rights Project (SRP), which is coordinating a shareholder campaign on this issue.

The ten companies are among the 43 S&P 500 firms that have moved toward annual elections for all directors in response to proposals from the Illinois Board of Investment, the North Carolina State Treasurer, the Nathan Cummings Foundation, and other investors. The companies include: Juniper Networks, Western Union, Wyndham Worldwide, O’Reilly Automotive, Flowserve, Coventry Health Care, Hudson City Bancorp, CenturyLink, FMC Technologies, and C.H. Robinson Worldwide. The SRP estimates that the 43 settlements represent about one-third of the S&P 500 index that had staggered board terms at the start of this season. 

Overall, SRP-affiliated investors have filed more than 80 declassification proposals this season at S&P 500 companies. At early meetings this season, declassification resolutions have earned strong support, earning 77.2 percent approval at Emerson Electric, an 85.2 percent vote at Johnson Controls, and 78.7 percent support at F5 Networks. In 2011, declassification proposals averaged more than 74 percent (of votes cast) approval, the highest support for any shareholder resolution topic that year, according to ISS data.
 

Earlier today, ISS announced that it has established a new Feedback Review Board, setting a new high water mark for transparency, openness, and responsiveness.

The new Feedback Review Board (FRB) is designed to serve as a conduit for investors, issuers, and various market constituents to communicate with ISS. The FRB is intended as a complement to, not a replacement for, the established channels for engagement with ISS, many of which have been in place for the greater part of a decade.

ISS’ research team engages with hundreds of companies, institutional investors, shareholder proponents, and corporate advisors each year, through both in-person meetings and analyst conference calls.  Setting a new standard, ISS initiated its highly inclusive annual pre-season policy survey and open comment period in 2005, has maintained an online verification tool for governance data since 2004, and has long offered draft analyses to S&P 500 companies prior to issuing final vote recommendations.

ISS also operates a dedicated U.S. Research HelpDesk, staffed by full-time employees who respond to policy questions and requests for policy interpretations, direct inquiries to specific analysts, and address a variety of other research-related matters that arise before, during, and after proxy season.

“Effective engagement is an ISS hallmark that sets us far apart from other proxy advisory firms,” said ISS President Gary Retelny.  “We already are committed to regular engagement as part of the research process and through our new Feedback Review Board; we can offer an additional and expanded level of interaction between ISS and all market constituencies.”

The FRB is led by Retelny and meets regularly to review submissions. Submissions may be made through the ISS website at www.issgovernance.com/frb.