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2012 Proxy Season: Results and Lessons for Directors

July 16, 2012

By James R. Copland

Most publicly held corporations have now held their annual meetings for 2012, including 173 of those in the Fortune 200. What were the trends in shareholder proposal activity and say-on-pay votes this year?

Number and Composition of Proposals
The Fortune 200 companies to have held annual meetings to date, as listed in the Manhattan Institute’s Proxy Monitor database, have averaged receiving 1.4 shareholder proposals—a number equal to last year’s. This total is slightly down from that seen from 2006 through 2010, when large companies regularly received proposals calling for shareholder advisory votes on executive compensation; such proposals have vanished given the mandatory requirement for such votes under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

While the number of proposals has remained roughly constant, the composition of such proposals has changed. For the first time, this year, a plurality of all proposals—20 percent—involved corporations’ political spending or lobbying. Most of these proposals sought disclosure in some form, though some also sought shareholder advisory votes on political spending or sought to prohibit all political participation by the corporation. Other common classes of proposals included those involving executive compensation (15 percent), chairman independence (12 percent), voting rules (chiefly majority voting, 10 percent). 10 percent of proposals related to the environment and 9 percent sought to expand shareholder power to act outside the annual meeting process, either by calling annual meetings or through written consent.

Vote Results
Among Fortune 200 companies, 14 proposals received majority support in 2012: seven seeking to declassify the board, four seeking majority elections for directors, two seeking to enable shareholders to act by written consent, and one calling for shareholder votes before approving any anti-takeover "poison pill."

Three companies in the Fortune 200 saw shareholders vote down executive compensation proposals in 2012: Best Buy, Citigroup, and Community Health Systems. ISS had recommended against the Best Buy exec-comp package based on its objection to the severance awarded to outgoing CEO Brian Dunn, and ISS and Glass Lewis both recommended that shareholders vote against the pay plans at Community Health and Citi. Fortune 200 companies receiving less than 60 percent support for their proposed executive compensation packages were Bank of New York Mellon (59%), Disney (57%), Hess (57%), J.C. Penney (57%), Johnson & Johnson (57%), Johnson Controls (57%), Motorola (58%), and Safeway (51%).

None of the 30 proposals for chairman independence at Fortune 200 companies received majority support, but 11 received the support of at least 40 percent of shareholders: Amgen (42%), AT&T (44%), Dean Foods (46%), Dupont (43%), Honeywell (46%), ITT (44%), Johnson & Johnson (43%), JPMorgan Chase (40%), Northrup Grumman (43%), Pepsi (45%), and YUM (42%). In addition, Goldman Sachs agreed to shareholder activists’ demands to appoint an independent lead director.

While companies saw a record number of proposals involving political spending or lobbying—up 40 percent from 2011, and up over 200 percent since 2008—these proposals only garnered the support of 17 percent of shareholders on average, down from 22 percent last year and a lower support level than any year dating back to 2006. Some of this decline is explained the increased introduction of aggressive proposals that seek to prohibit corporate political participation or seek a shareholder advisory vote on political spending; these proposals received low single-digit support from shareholders. But even among the more limited class of proposals seeking certain political-spending disclosure, being pushed in part by the Center for Political Accountability, shareholder support across the Fortune 200 fell from 27 percent in 2011 to 23 percent in 2012, and none saw as many as 40 percent of shareholders support the proposal. Some or all of this drop, of course, might be explained by changes in corporate practice and/or corporate communications with institutional investors.

Lessons for Directors
What should directors take away from this proxy season? To begin with, though shareholder proposals have been unlikely to pass and executive compensation plans likely to be approved, directors should not be complacent. The relatively high levels of support for chairman independence at many companies, as well as the number of companies who failed to garner 60 percent support for their pay packages, suggests that boards should remain active in communicating to large institutional investors and ISS—and should respond aggressively to adverse recommendations from the proxy advisory firms.

Although political-spending-related proposals are not gaining significant traction, the Center for Political Accountability counts twelve companies that saw an uptick in shareholder support for its proposal year-over-year. These companies—or at least those that saw shareholder support above 30 percent—should aggressively communicate to large investors both the broad objectives of their political participation and their current levels of disclosure. Boards should remain firm, however, in following the broad direction from the majority of shareholders who oppose the political-spending-related proposals: the principal backers of such proposals, social investing funds and labor union pension funds, have interests that do not correspond to the average diversified investor, who has an interest in corporate participation in the political process.

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