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ISS | Governance Weekly
March 22, 2012

Feature Story

U.S. Season Preview: Governance Proposals

Proxy access, board declassification, and independent board chairs will be most closely watched shareholder proposal topics during the 2012 U.S. proxy season.

Europe, Middle East, and Africa

Executive remuneration again will be a contentious issue during the U.K. proxy season.

U.S. Regulatory Watch

The Senate fails to pass a Democratic-sponsored amendment to limit corporate governance and accounting exemptions for newly public companies.

U.S. Season Preview: Governance Proposals

While proxy access has attracted the most attention before the 2012 U.S. proxy season, investors have filed a significant number of proposals on two other governance issues: board declassification and independent board chairs.

Earlier this week, Harvard Law School’s Shareholder Rights Project (SRP) announced that it was working with institutional investors that had submitted more than 80 proposals that ask S&P 500 companies to declassify their boards and hold annual elections for all directors. The proponents include the North Carolina State Treasurer (25 proposals), the Illinois State Board of Investment (25 resolutions), the Nathan Cummings Foundation (17), the Los Angeles County Employees Retirement Association (15), and the Ohio Public Employees Retirement System (four).

The proponents have been successful in negotiating settlements with companies. According to the Harvard's SRP, settlements have been reached with 42 companies; 21 have said in regulatory filings that they plan to present management proposals to eliminate staggered board terms. Among those firms are Alcoa, BlackRock, Cigna, Janus Capital, McDonald’s, Owens-Illinois, Newell Rubbermaid, and Stanley Black and Decker. The SRP estimates that the 42 settlements represent about one-third of the S&P 500 index that had staggered board terms at the start of this season.

At early meetings this season, declassification proposals have continued to win strong support, earning 77.2 percent approval at Emerson Electric and an 85.2 percent vote at Johnson Controls. A shareholder declassification resolution earned almost 98 percent support at Modus Link after management endorsed it. 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.

While large-cap U.S. companies have been increasingly willing to accept declassification, a growing number of new firms are going public with classified boards. In a New York Times DealBook column this week, Ohio State University Professor Steven Davidoff noted that 86.4 percent of the firms going public this year have staggered boards, up from 64.5 percent in 2011. Tesla, LinkedIn, and Dunkin’ Brands are among the firms that have gone public with classified boards.

Davidoff notes that IPO companies are adopting classified boards before they have to face shareholder pressure, in part to protect management positions and compensation. “In the IPO market, most investors are there for short-term profits. They buy to almost immediately sell on the first-day ‘pop’ that often occurs. Corporate governance does not matter to these buyers,” Davidoff observed.

Independent Board Chair

Another topic attracting greater investor interest this year is independent board chairs. Labor funds, including the American Federation of State, County, and Municipal Employees, and retail shareholder activists say they have filed more than 50 resolutions for 2012 meetings. So far, the Securities and Exchange Commission staff has allowed seven companies to omit these resolutions, while rejecting six no-action challenges.

In 2011, 30 proposals went to a vote, and four resolutions received majority support. The average approval was 34.6 percent, up from 28 percent in 2010, but below the support traditionally received by majority voting, declassification, and other popular governance reforms.

In early meeting results, an independent chair resolution received 37.5 percent at Whole Foods Market on March 9, up from 33.7 percent in 2011. The company now has an independent chair, but the board has not permanently separated the roles of CEO and chairman. A shareholder proposal wasn’t on the ballot at Walt Disney Co.’s March 13 meeting, but Connecticut pension officials opposed four directors over the board’s retreat from a 2005 commitment to have an independent board chair; one of those directors received more than 26 percent opposition.

Independent board chairs still are relatively rare among large-cap companies. About 19 percent of those firms have an independent board chair, while another 18 percent have a separate non-independent chair. Smaller firms have been more willing to embrace this reform: 29 percent of S&P SmallCap firms and 25 percent of S&P MidCap firms have independent chairs, according to ISS’ latest Board Practices study.

Proxy Access

In the most closely watched issue of the season, investors have filed 20 proposals that urge companies to adopt proxy access bylaws. Six resolutions have been omitted, and 13 still are pending. One proposal was withdrawn after Hewlett-Packard agreed to put a management access bylaw on its 2013 ballot.

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.

One surprise this season has been the variety of access standards sought by investors; there are at least five variations so far. Public pension funds have submitted non-binding proposals at Chesapeake Energy and Nabors Industries (which both faced significant investor dissent over executive pay in 2011) that are based on Rule 14a-11. In 2007, similar access proposals (i.e., with a 3 percent threshold) received more than 40 percent approval at H-P and UnitedHealth Group.

Meanwhile, Norges Bank Investment Management, Norway’s pension fund giant, has filed binding proposals at Wells Fargo, Western Union, Staples, and three other firms that would require a 1 percent stake for one year. The Norges access proposal has survived no-action challenges from three firms, and Staples’ request is pending.

Meanwhile, retail investors submitted nine resolutions that are based on model language from the U.S. Proxy Exchange (USPX). Those proposals call for a 1 percent stake for two years standard, and also would allow nominations from groups of 100 of more investors who each own a $2,000 stake for at least one year. The SEC has allowed six companies to exclude these resolutions, and seventh no-action ruling is likely. It now appears that USPX access proposals will go to a vote at Ferro Corp. and Princeton National Bancorp.

Furlong Financial has filed binding access proposals at two small-cap firms, KSW Inc. and Microwave Filter Co. The resolution at KSW would require a 2 percent stake for one year, while the proposal at Microwave Filter would mandate a 15 percent stake for one month. (For more on the Microwave Filter proposal, please see this week’s “Meetings to Watch” section.)

While it appears likely that the public funds’ two proposals will attract significant investor support, it remains to be seen whether many institutions will support the lower threshold resolutions.

Majority Voting

So far, it appears that investors are filing far fewer proposals that seek majority voting in uncontested board elections. In 2011, investors submitted more than 80 resolutions on this topic, which averaged almost 60 percent approval.

In early season results, a majority vote proposal sponsored by the California Public Employees’ Retirement System earned 80 percent approval at Apple, which since has agreed to adopt majority voting. Almost 80 percent of S&P 500 companies now have majority voting bylaw and/or a director resignation policy, according to ISS’ Board Practices study. Fastenal and Fifth-Third Bancorp are among the firms that are presenting management proposals on this topic this season.

CalPERS and the Florida State Board of Administration have been waging letter-writing campaigns to urge other companies to adopt majority voting, which remains far less common at smaller firms.

Meanwhile, investors have filed six proposals that seek CEO succession planning policies. Four resolutions have been withdrawn, including at, which reached a settlement with the Laborers International Union of North America.

Takeover Defenses

Once again, retail investors associated with California-based activist John Chevedden have filed dozens of proposals that seek to address corporate takeover defenses, and many of these resolutions have faced no-action challenges.

So far this year, shareholders have filed 46 proposals that would allow investor groups that hold at least a 10 percent stake to call a special meeting, according to ISS data. Nineteen companies have obtained permission from the SEC to exclude these resolutions. At least eight firms, including Dun & Bradstreet and Flowserve, knocked out the shareholder filings by pledging to present their own management proposals with higher ownership thresholds, such as 25 or 40 percent. Western Union, Newell Rubbermaid, and three other companies successfully argued that the shareholder proposals were impermissibly vague.

Retail activists also have submitted 34 written consent proposals. The SEC has granted five no-action challenges, but turned aside eight omission requests.

ISS also is tracking 28 proposals that seek to repeal supermajority vote requirements for bylaw changes and other matters. Six resolutions have been omitted so far. Duke Energy, which now has various 80 percent (of shares outstanding) requirements, was able to exclude a shareholder resolution by offering a management resolution to trim its thresholds to 75 percent (of shares outstanding), which is far short of the majority (of votes cast) standard sought by the proponent.

New Topics

One of the new topics this year is a campaign by the Amalgamated Bank against exclusive Delaware forum bylaws that were unilaterally adopted. The labor-affiliated bank has filed this resolution at four companies. In response, Superior Energy Services has agreed to repeal its bylaw, while Roper Industries has asked for no-action relief. (For more details, please see the March 15 edition of Governance Weekly.)

Another new shareholder campaign has run afoul of the no-action process. The United Brotherhood of Carpenters and the Sheet Metal Workers union initially filed dozens of proposals that asked companies to adopt seven-year auditor rotation policies, but companies successfully argued that the resolutions could be excluded on “ordinary business” grounds. In response, the Carpenters have prepared a revised proposal that seeks an annual report on auditor independence; the union pension fund is filing that resolution at 14 firms. The revamped proposal faces challenges by Dell and Xilinx. --Ted Allen, Governance Counsel

Please see the March 8 edition of Governance Weekly for a preview of 2012 environmental and social shareholder proposals. Executive compensation issues will be previewed in the March 29 edition of this newsletter.

Europe, Middle East, and Africa

2012 Voting Season Preview: United Kingdom

The 2012 voting season in the United Kingdom unfolds against a backdrop of persistent macro-economic fears of moderate inflation and the continued possibility of recession, as well as considerably less corporate and economic recovery than had previously been expected, with ongoing tight lending and cash stashed on corporate balance sheets.

Share price performance during 2011 mirrored this sentiment, with an overall decline in the FTSE All Share Index of 6.7 percent, as compared with an increase of 10.9 percent in 2010. However, at the time of writing, since the beginning of 2012, U.K. stock performance has been healthier, with the FTSE All Share and FTSE 100 indices recovering much of the ground they lost during 2011.

The main voting season will run from April to June for companies with financial year-ends in December, with a lighter season in July for companies broadly reporting in line with the U.K. tax year-end (March 31).

In order to get a better insight into what may be expected for the 2012 voting season, it is first useful to review the topics of interest during the 2011 season. As expected, executive remuneration continues to be a contentious issue for investors in the U.K., as it has for some years. In 2011 and early 2012, it has also been center stage as a public issue and through the news media.

However, although executive remuneration undoubtedly remains the most publicized issue at U.K. companies, the average dissent ("against" and abstain votes) on remuneration reports at FTSE All Share companies during 2011 remained relatively constant at 10.7 percent, a mere 1 percent increase over 2010. Moreover, the number of remuneration report resolutions voted down remained relatively low, with only three reports not achieving the 50 percent support required to pass in 2011 (Afren PLC, easyJet PLC, and Robert Walters PLC).

There appear to be general themes emerging each voting season. With investors expressing their dissatisfaction with lavish or inappropriate remuneration packages mostly at underperforming companies in 2009 and 2010, there was a trend of using the remuneration vote more so on policy, not simply corporate performance, in 2011.

Public focus in 2012 likely will be placed on absolute pay numbers, sometimes even despite overall satisfactory corporate performance, but especially in underperforming companies with disappointing share price performance, cost-saving schemes such a large-scale redundancies, and sectors under considerable media and political scrutiny (e.g., banks).

Furthermore, with media coverage and political pressure mounting, it is clear that investors will be expected to use their voting powers with the currently non-binding vote on director remuneration more frequently, along with undertaking increased engagement with companies, and holding directors accountable for the decisions by the remuneration committee.

The new version of the U.K. Corporate Governance Code officially came into effect for U.K. premium-listed companies for financial years beginning on or after June 29, 2010, and therefore the 2012 season is technically the first year in which corporations will have to report against the updated recommendations of the new Code. However, given the timing of its publication in June 2010, in most cases there was sufficient time for companies to consider its implications and many chose to adopt key recommendations in time for the 2011 reporting season.

A large number of companies chose to apply annual reelection of directors at their annual general meetings in 2011. The proportion of FTSE All Share companies practicing annual reelection of all directors had increased to over 60 percent in 2011. The number of companies applying annual director reelection includes smaller (below FTSE 350) and larger companies alike, although the provision strictly applies only to FTSE 350 companies.

The substantial number of companies implementing this recommendation may demonstrate the issuers’ acceptance that any perceived risks can be outweighed by the benefits that annual reelection of directors are seen to deliver in today’s drive for increased accountability of company boards. It is likely that most remaining larger companies that have not yet applied this requirement will follow suit in 2012.

Along with the drive for increased board accountability came a number of reviews regarding the adequate constitution of corporate boards, in particular improvements in suitable board diversity. While the 2010 Code introduced a provision to encourage general diversity in the boardroom with the goal of improving board decision-making, in his February 2011 report "Women on Boards," Lord Davies of Abersoch has driven a focus on gender diversity, mirroring efforts in other European countries.

The Davies Report recommended that large U.K. companies (FTSE 100) should have boards with at least 25 percent female representation by 2015. However, without regulatory or legal enforceability, U.K. companies still trail many of their European counterparts a year later. The slow take-up by U.K. companies regarding improved gender diversity has prompted increasing political pressure, with the U.K. coalition government threatening to put in place strict quotas on female board representation should companies not be seen to do more to actively raise the proportion of women directors on their boards.

Many companies have--perhaps in an effort to prevent European regulation and quotas for gender diversity--implemented board diversity plans formally within their director election processes. Although disclosure on more prescriptive policy statements in U.K. companies' annual reports still is weak, a clear demonstration of the trend is the substantial increase in new women directors in 2011, as compared to 2010. In 2010, 46 female director elections were put to their first shareholder approval at FTSE All Share companies (representing 10.2 percent of new director appointments); this figure increased in 2011, when 80 out of 581 board vacancies were filled by women (13.8 percent).

Another recommendation of the U.K. Corporate Governance Code is the requirement for FTSE 350 companies to have an external board evaluation undertaken by a third party every three years, in addition to the regular review of the board’s performance and processes that may be undertaken internally in the intermediate years.

Unlike annual director elections, which achieved widespread early adoption by larger and smaller companies alike, issuers in the U.K. were somewhat more reticent in early adoption of this recommendation. Whereas the 2011 season saw a number of companies committing to introduce external evaluation processes within the next three years, other companies pointed to the Code's application deadline of 2012 and deferred a decision on this recommendation until then (before which they neither had to comply nor explain their governance aspects regarding this provision).

Many larger companies are expected to explain, if not to comply with, the recommendation on external board evaluation in 2012. Those companies choosing not to apply this recommendation are likely to cite cost issues as preventing them from implementing third-party board evaluation processes, as well as questioning their ultimate benefit to the board and shareholders given some concerns over a currently somewhat limited number of providers. However, many investors are supportive of the discipline of external board evaluations, particularly for larger companies. --Karoline Herms, U.K. Research

U.S. Regulatory Watch

Investor Protection Measure Fails in the Senate

On March 20, the U.S. Senate failed to pass an amendment backed by institutional investors and regulators that would limit the broad governance, accounting, and disclosure exemptions for new companies that are proposed in legislation passed by the House of Representatives. 

The amendment, which was sponsored by Senators Jack Reed, Mary Landrieu, and Carl Levin, received 55 votes, five votes short of the 60 needed for approval under Senate rules, according to news reports. The three Democratic senators offered the amendment, known as the “INVEST in America Act,” as an alternative to the “Jump-start Our Business Startups (JOBS) Act," which was passed by the House of Representatives by a 390-23 vote earlier this month.

The Senate, which has fast-tracked consideration of the bill during this election year, likely will vote on the House legislation later this week. (On March 21, the bill cleared a procedural hurdle by a 76-22 vote.) The Obama administration has welcomed the House bill, but also was supportive of Senate Democrats’ efforts to add safeguards for investors. 

The JOBS Act would create a new category of newly public issuers, “emerging growth companies,” that would be exempt from say-on-pay votes; golden parachute votes; and various audit, disclosure, and initial offering requirements for five years or until they reach $1 billion in annual revenues or $750 million in market capitalization. 

The Reed-Landrieu-Levin amendment called for lowering the threshold for these “emerging” companies to $350 million in annual revenues. “The House bill would allow very large companies, with up to $1 billion in revenues per year, to offer stock to the public and yet avoid financial transparency and auditing requirements designed to ensure they’re not cooking the books,” Levin said in a statement.

The Council of Institutional Investors, which represents public, labor, and corporate pension funds, urged senators to support the Reed-Landrieu-Levin amendment. SEC Chairman Mary Schapiro, Commissioner Luis Aguilar, former SEC chairman Arthur Levitt, the CFA Institute, the Consumer Federation of America, AARP, the North American Securities Administrators Association, the AFL-CIO, and AFSCME, are among those who have raised concerns about the broad reach of the House legislation.  

“[T]he bill would seriously hurt investors by reducing transparency and investor protection and, in turn, make securities law enforcement more difficult. That is bad for ordinary Americans and bad for the American economy,” Aguilar said in a March 16 statement. “Investors are the source of capital needed to create jobs and expand businesses. True capital formation and economic growth require investors to have both confidence in the capital markets and access to the information needed to make good investment decisions.”

In an editorial, Bloomberg News warned that the House bill would “gut many of the investor protections established just a decade ago in the 2002 Sarbanes-Oxley law." 

“A wave of accounting scandals--think Enron and WorldCom--had destroyed the nest eggs of millions of Americans and upended investor confidence in Wall Street. The relief would extend beyond small businesses and apply to more than 90 percent of companies that go public,” the Bloomberg editorial noted. --Ted Allen, Governance Counsel

Meetings to Watch

This section alerts readers to forthcoming shareholder meetings that have particularly interesting or controversial issues on the agenda.

Microwave Filter Co.


March 28, 2012


A proxy fight, which also includes a proxy access proposal on the dissident ballot, is taking place at Microwave Filter, a small company with $5 million in sales in FY2011 and a market capitalization of approximately $2.6 million. Activist investor Daniel Rudewicz, the managing member of Furlong Financial LLC, which holds 3 percent of Microwave Filter's shares, has initiated a proxy fight and is seeking two seats on the board. He has also submitted a proxy access shareholder proposal on the dissident ballot to permit a group of no more than five shareholders holding 15 percent of the outstanding shares for at least one month access to management's ballot at future shareholder meetings. Hummingbird Capital, which as of March 5 owned 14.5 percent of the outstanding shares, has publicly announced that it has voted in favor of the dissident. Furlong argues that the amendment would serve to increase director accountability. The company argues that the access proposal, with its 15 percent threshold and short holding period, is designed to benefit Hummingbird Capital and Furlong, as opposed to the broader shareholder base and longer-term shareholder interests. Microwave Filter, based in East Syracuse, N.Y., makes electronic filters for radio and microwave frequencies that prevent unwanted signals from disrupting operations. --Stephen Farr and Bimal Patel, U.S. Research


Comments Welcome: For comments on the content of the newsletter, please contact Ted Allen. To ask questions, comment, or participate in discussions on these articles, please go to Governance Exchange. You can also find a searchable database of Governance Weekly articles on Governance Exchange.

Governance WeeklyTM is published by ISS, an MSCI brand.

Mission Statement: ISS' flagship publication on corporate governance, Governance Weekly, provides news and analysis of corporate governance developments, including insights and reporting found in no other media. While we exercise due care in compiling this newsletter, we assume no liability with respect to the consequences of relying on this information for investment or other purposes.

Head of Publications - Ted Allen | Editor - Mason McAllister | Production Editor - Rob Yates
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