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Shareholder Activism and the 2013 Proxy Season

March 11, 2013

By James R. Copland

The annual proxy season is fast approaching—most publicly traded American companies hold annual shareholder meetings in the spring and early summer. This year, as in recent years, shareholder activists will play an active role, submitting proposals to change corporate governance and behavior.

The Manhattan Institute’s Proxy Monitor database tracks and analyzes these proposals. In 2012, the average company in the Fortune 250 faced 1.2 shareholder proposals on its proxy ballots, up slightly from 2011. Such shareholder proposal activity was distributed unevenly: 47 percent of companies faced no shareholder proposal, but 20 percent faced three or more.

The number of proposals appearing on shareholder ballots, however, paints an incomplete picture of this form of shareholder activism. A significant number of shareholder proposals are excluded by companies with the permission of the Securities and Exchange Commission (SEC) or are withdrawn after negotiations between corporate management and proposal sponsors. A survey of Fortune 250 companies conducted for the Manhattan Institute by the Society of Corporate Secretaries and Governance Professionals shows that the number of shareholder proposals submitted to companies is 77 percent higher than those that actually show up on proxy statements.

Last year, shareholders proposals were sponsored almost exclusively by labor-union pension funds, investors with a "socially responsible" investing focus, and a small group of individuals who repeatedly file shareholder proposals with multiple companies. Only eleven percent of 2012 shareholder proposals were sponsored by individuals other than the three most active "corporate gadflies" and their family members and family trusts. Just one percent of all proposals were sponsored by institutional investors without a religious or social-investing purpose or an affiliation with organized labor. A plurality of proposals appearing on proxy ballots were sponsored by labor pension funds, but surveyed companies reported that more proposals were sponsored by social-investing groups, which suggests that such groups may be more willing to negotiate with management to withdraw proposals after submitting them.

Fully 41 of all such proposals in 2012 involved social or political issues unrelated to corporate governance or executive compensation. This is unsurprising, given the prominent role played by special-interest investors in sponsoring shareholder proposals. Indeed, the most frequently introduced class of proposals involved corporate political spending, which understandably matters to some investors but whose relationship with share return is attenuated at best.

That said, proposals involving social or political concerns, despite their frequent introduction, rarely win substantial shareholder support. Each of the 26 shareholder proposals to win the backing of a majority of shareholders at Fortune 250 companies in 2012 involved traditional corporate governance concerns, including proposals to de-stagger board elections and vote on all directors annually (nine such proposals passed) and proposals to require that directors receive the support of majority of voting shareholders to be elected (eight such proposals passed). Proposals involving corporate political spending on average received the support of just 18 percent of shareholders, down from 23 percent in 2011.

The most frequently supported proposals last year—proposals to elect directors annually—will also factor prominently in 2013. Harvard Law School’s Shareholder Rights Project, directed by professor Lucian Bebchuk, is working with eight institutional investors—seven of which are affiliated with organized labor, as well as the social-justice-oriented Nathan Cummings Foundation—on submitting shareholder proposals on this topic. Three of the nine Fortune 250 companies to hold annual meetings by mid-February faced a board-declassification shareholder proposal—at Air Products and Chemicals, Costco, and Jacobs Engineering—and each of those proposals won majority shareholder support.

Other types of proposals to watch for in 2013 include proposals to separate the positions of chairman and chief executive officer and proposals for proxy access. Proposals to separate the chairman and CEO roles were the second-most-frequently introduced class of shareholder proposal in 2012 (winning majority shareholder support at two companies, at McKesson Corporation and Sempra Energy). The increase in such proposals in 2012 followed an announced campaign on the topic by organized labor, and the American Federation of State, County and Municipal Employees has already announced that it is filing such proposals this year, including with JP Morgan Chase.

Although Fortune 250 companies faced only three shareholder proposals seeking "proxy access" for shareholders wishing to nominate directors to the board in 2012, the issue appears to be gaining prominence in 2013. Walt Disney faced such a shareholder proposal at its March 6 meeting, and the management of Hewlett-Packard, meeting March 20, put forth its own proxy-access proposal.

Directors and institutional investors need to be cognizant of their fiduciary duties and resist the pressure applied by special-interest investors when such investors advocate for concerns that may not increase expected shareholder returns for all investors. And Congress and regulators—including the SEC, which is considering a rulemaking petition on corporate political spending—need to rethink the degree to which the shareholder-proposal process facilitates market efficiency and capital formation.

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