Tag: Shareholder voting


Shareholder Activism and Executive Compensation

Jeremy L. Goldstein is founder of Jeremy L. Goldstein & Associates, LLC. This post is based on a publication by Mr. Goldstein. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

In today’s environment in which all public companies—no matter their size, industry, or performance—are potential targets of shareholder activists, companies should review their compensation programs with an eye toward making sure that the programs take into account the potential effects of the current wave of shareholder activism. In this regard, we have provided below some considerations for public company directors and management teams.

“Say on Pay”: Early Warning Sign

Low levels of support for a company’s “say on pay” vote can serve as an early warning sign for both companies and activists that shareholders may have mixed feelings about management’s performance or a board’s oversight. An activist attack following a failed vote may be particularly inopportune for target companies because a failed vote can result in tension between managements and boards. Moreover, activists will not hesitate to use pay as a wedge issue, even if there is nothing wrong with a company’s pay program. Companies should get ahead of potential activists by (1) understanding how their pay programs diverge from standards of shareholders and proxy advisors, (2) developing a robust, year-round program of shareholder engagement by management and independent directors, and (3) considering appropriate changes to pay and governance structures if advisable. Companies that are the most aggressive at shareholder outreach and develop the best relationships with both the investment and the governance representatives of their major holders will be best able to address an activist attack if it occurs.

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Proxy Monitor 2015 Mid-Season Report

James R. Copland is the director of the Manhattan Institute’s Center for Legal Policy. The following post is based on a memorandum from the Proxy Monitor project, available here.

As we near the close of corporate America’s “proxy season”—the period between mid-April and mid-June when most large, publicly traded corporations in the United States hold annual meetings to vote on company business, including resolutions introduced by shareholders—a clear picture has begun to emerge. By May 27, 2015, 211 of the nation’s 250 largest companies by revenues, as listed by Fortune magazine and in the Manhattan Institute’s ProxyMonitor.org database, had filed proxy documents with the Securities and Exchange Commission. This post bases its analysis on those companies’ filings, as well as voting results for 186 of those companies that had held their annual meetings by May 22.

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US Proxy Season Halftime Report—Governance Trends

Frank B. Glassner is the Chief Executive Officer of Veritas Executive Compensation Consultants, LLC (Veritas). This post is based on a Veritas publication.

As we hit the halfway point for the 2015 U.S. proxy season, a number of trends related to governance practices are carrying through from recent years, an analysis of ISS Voting Analytics data shows.

Director Elections

Shareholders have largely endorsed directors standing for election in 2015, with average support levels of upwards of 96 percent, similar to last year. However, as is the case every year, a number of directors have not fared well at the ballot box. Fourteen directors have failed to receive majority support so far this season, compared with 12 board members at this time last year.

The lion’s share (12 of the 14) of year-to-date 2015 failed director votes have been at firms outside the Russell 3000 index. On a sector basis, most of the failed director elections have occurred at firms in the Technology Media and Telecom sector (with seven failed votes) and financial services firms (3 failed votes). Companies in the financial services sector topped last year’s list with the most failed director votes.

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Shareholders Defeat Mandatory Deferral Proposal

John R. Ellerman is a founding Partner of Pay Governance LCC. The following post is based on a Pay Governance memorandum by Mr. Ellerman, Lane T. Ringlee, and Maggie Choi.

Many large U.S. based multinational banking and financial services corporations have implemented executive compensation clawback policies that require the cancellation and forfeiture of unvested deferred cash awards or performance share unit awards. These policies typically condition the cancellation of deferred compensation if it is determined that an executive engaged in misconduct, including failure to supervise or monitor individuals engaging in inappropriate behaviors that caused harm to the organization’s operations. Policies also apply to unvested deferred awards that could be vested and paid based on inaccurate financial statements. Most of the clawback policies have been implemented in response to the Dodd-Frank financial legislation of 2010 that requires public companies to adopt clawback policies to protect shareholder interests. The Securities and Exchange Commission is expected to release final guidance with respect to clawbacks later this year.

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Are Companies Impermissibly Bundling Proposals for Shareholder Votes?

Randall S. Thomas is a John S. Beasley II Professor of Law and Business at Vanderbilt Law School. This post is based on the article Are Companies Impermissibly Bundling Proposals for Shareholder Votes? by Professor Thomas, James D. Cox, Fabrizio Ferri, and Colleen Honigsberg. Related research from the Program on Corporate Governance about bundling includes Bundling and Entrenchment by Lucian Bebchuk and Ehud Kamar (discussed on the Forum here).

Recognizing that shareholders face a distorted set of choices when management “bundles” more than one separate item into the same proxy proposal, in 1992 the SEC enacted a pair of rules meant to protect shareholders from this practice. Bundling deprives shareholders of the right to convey their views on each separate matter being put to a vote, and instead forces them to cast a vote on the single proposal as a whole. This management practice may force shareholders to choose between rejecting the entire proposal or approving items they might not otherwise want implemented (as with the proverbial spoonful of sugar to help the medicine go down, shareholders may be required to accept the good with the bad). To better protect the shareholder franchise, the SEC’s bundling rules prohibit joining together multiple voting items into a single proposal with a single box on the ballot. While these basic principles are easily stated, in practice the rules have been difficult to implement.

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DuPont’s Victory in the Proxy Fight with Trian

Francis J. Aquila is a partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Aquila, H. Rodgin Cohen, Melissa Sawyer, and Lauren S. Boehmke. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

On May 13, 2015, E. I. du Pont de Nemours and Company, a major chemical company with a market cap of approximately $68 billion, defeated a proxy campaign run by Trian Fund Management, L.P., the activist fund led by Nelson Peltz that owns approximately 2.7% of DuPont. Trian was seeking four seats on DuPont’s board of directors. DuPont announced this morning that all 12 of its incumbent directors were reelected at DuPont’s annual meeting of shareholders. Although the two most influential proxy advisory firms, Institutional Shareholder Services Inc. and Glass Lewis & Co., both supported Trian’s slate of director nominees, DuPont’s three largest institutional shareholders, The Vanguard Group, Blackrock, Inc. and State Street Corporation, all voted in favor of DuPont’s slate.

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Shareholder Activism: Are You Prepared to Respond?

Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. The following post is based on a PricewaterhouseCoopers publication. Related research from the Program on Corporate Governance about hedge fund activism includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Activist investors are increasing in number and becoming more assertive in exercising their influence over companies in which they have a stake. Shareholder activism comes in different forms, ranging from say-on-pay votes, to shareholder proposals, to “vote no” campaigns (where some investors will urge other shareholders to withhold votes from one or more directors), to hedge fund activism.

Activism can build or progress. If a company is the target of a less aggressive form of activism one year, such as say-on-pay or shareholder proposals, and the activists’ issues are not resolved, it could lead to more aggressive activism in the following years. (For more background information, see a previous PwC publication, discussed on the Forum here.)

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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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  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Robert J. Jackson, Jr.
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

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    Joseph Bachelder
    John Bader
    Allison Bennington
    Richard Breeden
    Daniel Burch
    Richard Climan
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    John Finley
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    Carl Icahn
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    Theodore Mirvis
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