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With ‘proxy season’ comes hope for reform of some bad corporate habits.
It’s “proxy season” again for most public companies — called that because most shareholders submit their votes via proxy rather than attend the companies’ annual meetings in person. This year’s season represents a critical juncture in public company corporate governance because of the 2012 season, which earned the moniker “Shareholder Spring” in some circles. The reference was to the dramatic “Arab Spring” across the Middle East, which was marked by wide-scale protests seeking reform within autocratic governments.
In a similar way, many shareholders used their proxy votes to try to steer companies away from certain long-held corporate governance practices that were inconsistent with forward-thinking companies and in some cases were a cause of scandals (for example, Chesapeake Energy, Green Mountain Coffee, Groupon).
The catalyst for last spring’s revolt was the 2010 Dodd-Frank financial reform. That law’s provisions caused institutional shareholders to question decisions being made in boardrooms, and who was making them. In particular, shareholders began to analyze executive compensation packages that even some Wall Street veterans found egregious.
This year’s shareholders can pick up the torch from last year’s and continue to push for additional initiatives to improve overall corporate governance, or regress to the days when many shareholders just automatically signed their votes — and power — away. Action on several key issues, including say-on-pay, splitting of the CEO/chair positions and board composition, will determine whether the 2012 Shareholder Spring bears fruit.
Say-on-pay: Dodd-Frank requires most public companies to provide shareholders the opportunity to cast a nonbinding vote on executive compensation packages for top management. In 2012, proxy advisory firm Institutional Shareholder Services advised client shareholders of 278 companies to vote against proposed compensation packages. But shareholders in only 53 (or 19%) of these companies followed that advice and rejected the packages. Although that is up from 11% in 2011, why weren’t more shareholders up in arms about the excessive compensation in many of these companies, particularly where compensation was not tied to performance benchmarks?
Splitting CEO/chair duties: A phenomenon that continues to baffle almost all corporate governance experts is the reluctance of shareholders to split the role of chief executive officer and chairman or chairwoman of the board. In 2012, 56% of S&P 500 companies had dual arrangements of CEO/chair, down from 68% in 2005, according to GMI Ratings, a research and ratings firm. Although there is a need for executive board members who have the best access to information and insight into what is happening in a company, one would hope this could be accomplished without combining the two roles. An independent board chief provides an appropriate measure of checks and balances and would be in the best position to represent shareholder interests.
The number of proposals to split the CEO/chair position is expected to increase this season, but it is not clear that shareholders will embrace such reform. For example, Disney shareholders recently voted against splitting the two positions after CEO Robert Iger retires in 2016.
Board composition: The breakdown of the “Old Boys Club” (you know the one: “You serve on my board and I’ll serve on yours”) is happening, albeit too slowly for some. Companies are being forced to come to terms with the way the competitive global market often requires a shake-up in the boardroom. Specifically, industry-expert board members should replace professional board members. A recent Society of Corporate Secretaries and Governance Professionals report from a survey of nearly 200 corporate secretaries found that the top attribute sought in new directors is industry expertise. This finding opens the door to a new class of director candidates, expanding on what typically is a pool consisting only of current directors and officers.
Many shareholders will also be voting on proposals to implement majority voting in the election of directors. This is considered a corporate governance best practice that would replace a plurality voting process that could, in certain circumstances, allow a candidate with only one affirmative vote to be elected. Majority voting also serves to hold directors more accountable. The result should be a more diverse boardroom — diversity of perspective, gender, expertise, race and skill sets.
The manner in which shareholders address these issues will determine whether we see a “Shareholder Spring, Part II,” marked by a true commitment by shareholders to improve corporate governance.