Category Archives: Corporate Elections & Voting

Financial Innovation and Governance Mechanisms

The following post comes to us from Henry T. C. Hu, Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law.

Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. My new article, Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency (forthcoming in Business Lawyer, Spring 2015) focuses on two phenomena: “decoupling” (e.g., “empty voting,” “empty crediting,” and “hidden [morphable] ownership”) and the structural transparency challenges posed by financial innovation (and by the primary governmental response to such challenges). In decoupling, much has happened since the 2006-2008 series of sole- and co-authored articles (generally with Bernard Black and one with Jay Westbrook) developed and refined the pertinent analytical framework. In transparency, the analytical framework for “information,” developed and refined in 2012-2014, can contribute not only to the comprehensive new SEC “disclosure effectiveness” initiative but also to resolving complications arising from the creation of a new parallel public disclosure system—the first new system since the creation of the SEC.

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Shareholder Activism: Who, What, When, and How?

Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. The following post is based on a PricewaterhouseCoopers publication, available here.

Who are today’s activists and what do they want?

Shareholder activism spectrum

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“Activism” represents a range of activities by one or more of a publicly traded corporation’s shareholders that are intended to result in some change in the corporation. The activities fall along a spectrum based on the significance of the desired change and the assertiveness of the investors’ activities. On the more aggressive end of the spectrum is hedge fund activism that seeks a significant change to the company’s strategy, financial structure, management, or board. On the other end of the spectrum are one-on-one engagements between shareholders and companies triggered by Dodd-Frank’s “say on pay” advisory vote.

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A Say on “Say-on-Pay”: Assessing Impact After Four Years

Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

The 2015 proxy season is the fifth one in which shareholders of thousands of publicly traded corporations have cast non-binding votes on the executive pay programs of the companies in which they are invested. The holding of such a vote, commonly known as Say-on-Pay, is required under Section 951 of the Dodd-Frank law. [1] That requirement applies to most publicly traded companies. Following are some observations on Say-on-Pay.

Results of Votes

In each of the four years of Say-on-Pay—2011-2014 proxy seasons—at the Russell 3000 companies holding Say-on-Pay votes (i) the executive pay program received favorable votes from over 90 percent of the shareholders voting at 75 percent of those companies and (ii) 60 or fewer companies had a majority of votes cast disapproving the executive pay program. [2]

Evaluating the Impact

Following are two propositions on how well Say-on-Pay is working.

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Proxy Advisors Clarify Proxy Access and Bylaw Amendments Voting Policies

The following post comes to us from Ariel J. Deckelbaum, partner and deputy chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum.

On the heels of SEC Chair White’s direction to the Division of Corporation Finance to review its position on proxy proposal conflicts under Exchange Act Rule 14a-8(i)(9), both Institutional Shareholder Services (“ISS”) and Glass Lewis have issued clarifying policies on proxy access, entering the fray of what is becoming the hottest debate this proxy season. The publication of ISS’s updated policy in particular means that market forces may have outpaced the SEC’s review process. In order to avoid risking a withhold or no-vote recommendation from ISS against their directors, many companies will be faced with the choice of (i) including any shareholder-submitted proxy access proposal in their proxy materials (either alone or alongside a management proposal) (ii) excluding the shareholder submitted proposal on the basis of a court ruling or no-action relief from the Division of Corporation Finance on a basis other than Rule 14a-8(i)(9) (conflict with management proposal) or (iii) obtaining withdrawal of the proposal by the shareholder proponent.

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Proxy Access—a Decision Framework

Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum.

Recent high-profile developments have thrust proxy access back onto the agenda for many U.S. public companies. Here is a framework for how to approach the topic.

Proxy access is back in the news and back on the agenda for many U.S. public companies. Four years after the DC Circuit invalidated the SEC’s proxy-access rule, we are seeing company-by-company private ordering with a vengeance, including a record number of Rule 14a-8 shareholder proposals in the current 2015 proxy season. Events have moved at high speed in the past few weeks, leading many companies to wonder whether they should be initiating their own approach to proxy access.

As we argued in 2009 in response to an earlier SEC proxy-access proposal, we believe that each company’s approach to proxy access should be grounded in a consideration of its particular circumstances. Despite recent high-profile adoptions of proxy-access procedures, we don’t believe that most U.S. public companies should, in knee-jerk fashion, be preparing to revise their bylaws proactively. We do, however, think that boards should be assessing on an ongoing basis the broader issues of board composition, tenure and refreshment, which are not only important in their own right but also relevant to potential vulnerability to proxy-access proposals. We also think that boards should communicate a willingness to exercise their discretion in considering all shareholder suggestions regarding board membership in order to assure shareholders of a means of expressing their views and to create a level playing field for shareholders.

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2015 Benchmark US Proxy Voting Policies FAQ

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). The following post relates to ISS’ 2015 Benchmark Proxy Voting Policies.

ISS is providing answers to frequently asked questions with regard to select policies and topics of interest for 2015:

Proxy Access Proposals

1. How will ISS recommend on proxy access proposals?

Drawing on the U.S. Securities and Exchange Commission’s (SEC) decades-long effort to draft a market-wide rule allowing investors to place director nominees on corporate ballots, and reflecting feedback from a broad range of institutional investors and their portfolio companies, ISS is updating its policy on proxy access to generally align with the SEC’s formulation.

Old Recommendation: ISS supports proxy access as an important shareholder right, one that is complementary to other best-practice corporate governance features. However, in the absence of a uniform standard, proposals to enact proxy access may vary widely; as such, ISS is not setting forth specific parameters at this time and will take a case-by-case approach when evaluating these proposals.

Vote case-by-case on proposals to enact proxy access, taking into account, among other factors:

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Ensuring the Proxy Process Works for Shareholders

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today’s [February 19, 2015] Roundtable on Proxy Voting is certainly timely since over the course of the next several months, thousands of America’s public companies will hold annual shareholders meetings to elect directors and to vote on many important corporate governance issues. The start of the annual “proxy season” is an appropriate time to consider the annual process by which companies communicate with their shareholders and get their input on a variety of issues. Whether it’s voting on directors, executive compensation matters, or other significant matters, the annual meeting is the principal opportunity for shareholders—the true owners of public companies—to have their voices heard by the corporate managers of their investments. At these annual meetings, shareholders can express their support, or disappointment, with the direction of their companies through the exercise of their right to vote.

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SEC to Review Excluding Conflicting Proxy Proposals under Rule 14a-8

The following post comes to us from Robert B. Schumer, chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum.

SEC Chair Mary Jo White has directed the Division of Corporation Finance (“Corporation Finance”) to review its position on Rule 14a-8(i)(9), which allows a company to exclude a shareholder proposal from the company’s proxy materials if it “conflicts” with the company’s own proposal to be submitted to shareholders at the same meeting. As a result of this direction, Corporation Finance will express “no views” on the application of Rule 14a-8(i)(9) this proxy season.

The catalyst for this development was a shareholder proposal submitted by proponent James McRitchie to Whole Foods Market, Inc., requesting that the company adopt “proxy access” procedures generally to allow one or more shareholders owning at least 3% of the company’s voting securities for three or more years to nominate up to 20% of the board of directors via the company’s proxy materials. Whole Foods countered with its own proposal that included significantly different share ownership and holding period thresholds and director nominee caps, but nevertheless was granted no-action relief by Corporation Finance, allowing it to exclude the McRitchie proposal under Rule 14a-8(i)(9) on the basis that it conflicted with Whole Foods’ proposal and the proposals would “present alternative and conflicting decisions for the Company’s shareholders that would likely result in inconsistent and ambiguous results”. Thereafter, Mr. McRitchie, the Council of Institutional Investors and others have called for the SEC to review its position on these “conflicts”, which SEC Chair White has now done. Corporation Finance has since effectively rescinded its no-action relief to Whole Foods and stated that it has no view of Rule 14a-8(i)(9).

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Advance Notice Bylaws: Trends and Challenges

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Mr. Gallardo, James Hallowell, Elizabeth Ising, Gillian McPhee, and Stephenie Gosnell Handler.

Shareholder activism continues to dominate the corporate landscape and attract daily headlines in the financial press. And, as the pace of activism accelerates in 2015, a number of legal battles over the last two years between companies and activists has put in the spotlight the permissible scope and function of advance notice bylaws—a term that we broadly define for these purposes to cover bylaw provisions establishing timing, procedural and informational requirements for shareholders seeking to present director nominations and other business proposals to a shareholder vote. [1]

A typical advance notice bylaw requires that shareholders submit to the corporate secretary notice of all director nominations and business to be put to a vote at an annual meeting within a thirty-day window that opens and closes on specified deadlines preceding the anniversary date of the prior year’s annual meeting date (or, less common, related proxy statement). Such a notice often must be accompanied by information about the nominee or business, and the proposing shareholder. This information is generally intended to enhance the board’s ability to advise shareholders regarding the nominee or proposal, as well as potential sources of conflict between the proponent and other shareholders.

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ISS 2015 Equity Plan Scorecard FAQs

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). This post relates to ISS’ Equity Plan Scorecard for 2015.

General Questions

1. What is the basis for ISS’ new scorecard approach for evaluating equity compensation proposals?

The new policy will allow more nuanced consideration of equity incentive programs, which are critical for motivating and aligning the interests of key employees with shareholders, but which also fuel the lion’s share of executive pay and may be costly without providing superior benefits to shareholders. While most plan proposals pass, they tend to get broader and deeper opposition than, for example, say-on-pay proposals (e.g., only 60% of Russell 3000 equity plan proposals garnered support of 90% or more of votes cast in 2014 proxy season, versus almost 80% of say-on-pay proposals that received that support level). The voting patterns indicate that most investors aren’t fully satisfied with many plans.

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