The Corporate Library Blog

Financial Executive Magazine: The Year of the Shareholder

Paul Sweeney has an excellent article in Financial Executive Magazineas a part of its special issue on what's ahead for 2010.  Provocatively entitled "Will 2010 Be the Year of the Shareholder," it opens:

A constellation of forces is coalescing to give investors more clout over such thorny issues as executive pay, the composition and election of corporate boards, board transparency and responsiveness to shareholder concerns....In addition, continued shareholder outrage at overly generous pay packages to top executives — often at poorly performing companies — is further tilting the balance of power.

While Sweeney predicts some pushback from corporate executives, who argue that these pay packages are necessary for retention and to provide incentives,

even a respected source such as the executive search firm Spencer Stuart urges boards of directors to recognize that much governmental and shareholder scrutiny is deserved. “The perceived — or, in some cases, real — disconnect between company performance and executive compensation is fanning the flames of shareholder discontent,” Spencer Stuart notes in its comprehensive 2009 survey on the state of corporate boards. “In light of these pressures,” the report adds, “boards need to be sure they are operating as effectively as possible and have good governance practices in place.”

Sweeney quotes Hye-Won Choi, the head of corporate governance at TIAA-CREF, on the impact of the rule change that eliminates automatic votes in favor of board candidates.  “The end of discretionary broker voting means that management can no longer expect elections to be routine. It will level the playing field. Now the vote will be a clearer expression of shareholder sentiment.”  And he notes that even before this rule change went into effect, the percentage of votes against directors has been rising. 

Through August 2009, 9.8 percent of unopposed director nominees had at least 20 percent of shares voted against them or withheld, a 78-per- cent increase above the 5.5 percent figure in 2008.  The percentage of directors with a majority of shareholders registering opposition to their candidacy tripled, to 0.6 percent in 2009 compared with 0.2 percent in 2008. It may seem a tiny number, but amounts to 84 director nominees at 49 companies.

Sweeney predicts a rise in shareholder resolutions on compensation, governance, and climate change. 

The proxy season, in combination with significant congressional legis- lation and additional SEC rule making, could make the year 2010 among the most historic in the annals of corporate governance. The consultancy Spencer Stuart puts it this way: Events this year “could potentially reshape the corporate governance landscape as dramatically as Sarbanes-Oxley. And just as with SOX, it may take several years before the full impact of the changes becomes apparent.”

Nell Minow - Editor

Francis Byrd Interviews Holly Gregory

Be sure to take a look at the Francis Byrd's interview of Holly Gregory for the Altman Group, published on the website of the Harvard Law School Forum on Corporate Governance and Financial Regulation.  Byrd, formerly at Moody's and the New York City Comptroller's office and Gregory, long-time colleague of Ira Millstein at Weil, Gotchal & Manges, are two of the most highly-respected and influential experts in this field, and this is an excellent opportunity to see the current thinking from the corporate perspective.

On proxy access:

According to proponents, this is necessary to make directors more accountable to shareholders. What we will have to see play out is whether more frequent contests for board seats results in positive gains from heightened accountability. Some believe that boards are already under an unhealthy degree of shareholder pressure for immediate and ever rising share price gains.

...

If the concerns that I’ve described are realized, proxy access will not be the panacea that the regulators intend, and shareholders as a whole will not be better off. In that scenario the primary beneficiaries will be shareholders who use proxy access to forward a specific objective or strategy that is not broadly shared by the entire shareholding body.

On the impact of say on pay:

This is the time for boards and management teams to be gearing up and thinking about shareholder relations in new, more creative and more engaged ways. Improved engagement with shareholders is the best hope companies have of avoiding or mitigating [the concerns raised above].

On the consequences of pay abuses and excesses:

Many of these issues are not new, but at times boards and managements have exhibited tone-deafness or an unwillingness to set forth in plain and rational terms the legitimate justifications for certain pay practices. It is no longer enough to simply cite competition and retention concerns to justify large packages and grants.

On proxy advisory services:

There are legitimate concerns about the power of certain of the proxy advisory firms and about their capacity to provide the kind of nuanced company-specific analysis that will only become more important to our economic system as shareholders gain power.

Nell Minow - Editor

Effective Communications with Retail Investors

Thanks to IRWEB for pointing us to a new paper from White & Case attorneys Colin Diamond, Tal Ganani and Pouria Saidi reviewing the current state of retail annual meeting communications, with recommended steps for companies to improve the way they inform their investors.  They note increased majority voting provisions, the tendency of retail investors to buy and hold, and the potential for using new technologies like twitter in emphasizing the importance of effective communications with retail investors.

Nell Minow — Editor