Posted June 20, 2013 1:11:34
by James R. Copland, Manhattan Institute
As the end of June approaches, proxy season is drawing to a close: 210 of America's 250 largest publicly traded companies had filed proxy documents for their annual meetings with the Securities and Exchange Commission (SEC) by June 4. Aside from well-publicized corporate-governance disputes at a handful of companies-including a threatened proxy fight at Hess and significant shareholder votes at companies like JPMorgan Chase, Occidental, and Navistar-what can we say about the 2013 proxy season?
On average, shareholders filed more proposals this year: 1.27 per Fortune 250 company, versus 1.22 in 2012 and 1.18 in 2011. (Shareholder activism through the introduction of resolutions remains significantly below the level witnessed prior to 2011, when the Dodd-Frank Act's creation of mandatory executive compensation advisory votes changed the focus of some of these shareholder activists.) Even as more proposals have been introduced, fewer have been receiving the support of a majority of shareholders. Among shareholder proposals voted on by the equity owners of the 191 Fortune 250 companies holding annual meetings by May 29, only seven percent received majority votes-the lowest level seen in the years covered by the Manhattan Institute's Proxy Monitor database, dating back to 2006.
One reason why fewer shareholder proposals have been passing at America's largest companies is that the types of proposals most likely to attract majority support-those seeking to declassify boards and elect all directors annually, and those seeking to require that nominated directors receive a majority of votes cast to be elected-have become less relevant at large publicly held companies, many of which have already adopted these corporate-governance practices. Indeed, among the 16 shareholder proposals to receive majority support at Fortune 250 companies in 2013, six have involved majority voting for directors and another six board declassification.
In contrast, the most commonly introduced corporate-governance-related proposal in 2013-representing some 12 percent of all proposals-called for separating the company's chairman and chief-executive-officer positions, a proposition for which there is decidedly mixed empirical evidence associating this governance structure with higher share returns. Only one of these chairman-CEO proposals has passed at a Fortune 250 company this year (at Kohl's), in keeping with historic norms: since 2006, only four percent of chairman-CEO proposals have received majority support, usually at companies that had been underperforming.
In addition to the shifting composition of corporate-governance-related shareholder proposals, the declining percentage of majority-backed proposals in 2013 is partly attributable to the increased share of proposals relating to social or political concerns, rather than corporate governance rules or executive compensation. 42 percent of shareholder proposals in 2013 have involved social or policy issues, as compared to 37 percent dating back to 2006. Since only three such proposals have received majority support at a Fortune 250 company since 2006-and two of those with board backing-the shift toward "social policy" proposals this year naturally has led to a fall in the percentage of proposals winning majority votes.
As was the case in 2012, the most-introduced type of social policy proposal-and a plurality of all proposals overall (21 percent in 2013)-concerned corporate political spending or lobbying. Although the focus of these proposals shifted-more concerned lobbying in 2013, whereas more involved political spending in 2012-their average support remained essentially constant, at 18 percent. This level of support is somewhat depressed by outlier proposals: Northstar Asset Management's proposals seeking shareholder votes on political spending in 2012 and reports on corporate values and political contributions in 2013, and proposals seeking to prohibit corporate political spending in both years. However, support for more general political-spending-disclosure proposals, including close variants of the "model proposal" backed by Bruce Freed's Center for Political Accountability-has remained mired in the low 20s, essentially unchanged year over year.
As has been the case historically, the overwhelming majority of shareholder proposals in 2013 were introduced by a small group of individual "corporate gadflies," pension funds affiliated with organized labor, and investors with a "socially responsible" investing focus or express religious or public policy focus. 42 percent of all proposals were backed by individuals; most of these-and 25 percent of all proposals-came from only two individuals and their family members and family trusts: John Chevedden and William Steiner. 32 percent came from labor pension funds, and 25 percent from social-investment vehicles. In keeping with historic norms, only one percent of proposals were backed by institutional investors without a social or policy purpose or an affiliation with organized labor.
Finally, even as "say on pay" votes continued to consume much investor focus and management attention, companies continued to win majority support for their pay packages except in outlier situations. Some 83 percent of shareholders rejected management pay at Navistar, which had been underperforming and attracted the attention of activist investors including Carl Icahn. In addition, at its May 16 annual meeting, Apache Corporation narrowly missed majority support for its pay package, with 49.82 percent of the vote. The Apache vote was doubtless influenced by the "Against" recommendation of the proxy advisory firm Institutional Shareholder Services (ISS). (Apache filed an amendment to its proxy objecting to ISS's recommendation, in part on the grounds that ISS's peer group selection was inappropriate: half of the companies ISS selected as Apache's peers were not, like Apache, in the oil and gas sector, and many of them had a significantly smaller market capitalization-as little as 10 percent Apache's size.) Apart from Navistar and Apache, to date in 2013, seven Fortune 250 companies received between 50 and 60 percent shareholder support for their executive compensation packages, and another eight received between 60 and 70 percent. Given that ISS recommends a corporate response when over 70 percent of shareholders oppose pay plans, directors of these companies would be well-advised to engage on the issue in the coming year.
Overall, the 2013 record confirms that shareholder activism through the introduction of shareholder proposals remains a significant issue for directors, though the success rate of such activism is largely limited to a small subset of proposals, such as those calling for board declassification or majority voting. That said, companies should continue to engage with major shareholders. The emerging norm of electing all directors annually, and requiring majority votes for director election, has increased the power of shareholders to influence boards without launching traditional proxy fights, as shown this year when Occidental's shareholders voted out their chairman of the board and JPMorgan's shareholders almost voted out the members of the bank's risk oversight committee.
James R. Copland is the director of the Manhattan Institute's Center for Legal Policy, which sponsors ProxyMonitor.org, a publicly available database of shareholder proposals and executive compensation advisory votes at America's 250 largest public companies. His latest finding on the 2013 proxy season is available at proxymonitor.org.