Florida SBA Confronts Recent Corporate Governance Issues at Home and Abroad

Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (the “SBA”). This post is based on an excerpt from the SBA’s 2011 Corporate Governance Report by Mr. McCauley, Jacob Williams and Lucy Reams. Mr. Williams and Ms. Reams are Corporate Governance Manager and Senior Corporate Governance Analyst, respectively, at the SBA. The complete report is available here; further information regarding the SBA’s governance activities, including proxy voting data, is available here.

Global Proxy Voting

In 2010, the SBA worked with The Corporate Library to analyze its proxy voting among nine externally managed foreign equity portfolios totaling approximately $9 billion. The vote audit examined a total of 33,729 individual ballot items (proxy voting decisions) across 257 distinct voting categories. The purpose of the foreign equity proxy vote audit was to evaluate the external managers’ voting activities as well as to benchmark those voting decisions against similar SBA votes and those of a major corporate governance research provider. The vote audit examined aggregate voting results, voting by each individual manager, and benchmarked external manager voting against SBA internal voting decisions.

While the managers adhered to responsible voting practices, the SBA found a variety of voting strategies in place. While this variance was to be expected across a diverse range of investment mandates, SBA staff determined it was more efficient to align its international proxy voting practices by transitioning to in-house proxy voting. Under the new practice, to be implemented in April 2011, international shares will be voted by SBA staff in accordance with the SBA’s Corporate Governance Principles and Proxy Voting Guidelines.

As global markets and investors are becoming increasingly integrated, the SBA continues to seek meaningful international standards for corporate governance, fair treatment of foreign and minority shareowners, equal access to information, and corporate transparency. The SBA’s international efforts include advocating for greater shareowner voting rights in various capital markets and continuing to improve corporate governance and regulatory standards throughout global equity markets. The SBA seeks to develop better corporate governance standards through interaction with several international shareowner organizations including the International Corporate Governance Network (ICGN). In addition, the SBA works closely with the members of the Council of Institutional Investors’ Ad-hoc International Committee, which is Co-Chaired by SBA staff.

In addition to individual equities, the SBA also receives proxy statements for mutual fund shareowner meetings. For mutual funds, the issues brought before investors frequently deal with amendments to fundamental investment policies or the realignment of fund structure within fund families. Such voting items are covered within the SBA ‘Proxy Voting Guidelines’ Mutual Fund segment.

2010 Proxy Season

Key issues during the 2010 proxy season – which focuses on the months of April through June – included heightened scrutiny of executive compensation and related “say-on-pay” advisory votes, increased prevalence of climate risk and environmental shareowner resolutions, as well as management proposed amendments to corporate bylaws/charters allowing opt-out for proxy access (many firms decided to act ahead of anticipated reforms by the SEC to allow for proxy access).

Over four years after its initial introduction, the SEC approved an amendment to the New York Stock Exchange rule to eliminate broker discretionary voting in uncontested director elections. Broker discretionary votes in uncontested director elections were generally voted in favor of the management slate. Beginning in January 2010, brokers were prohibited from voting the shares of retail shareholders in either contested or uncontested director elections unless the broker was instructed by the retail shareholder about how to vote. The amendment eliminated potential shareowner dilution and conflicts of interest between brokers and company management.

Historical legislation was being crafted by the Congress and anticipated by companies for implementation in the 2011 proxy season. The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in July of 2010 and included several major corporate governance reforms.

In January, the SEC issued final rules providing shareowners with a right to three precatory (advisory) votes on executive compensation. “Say-on-Pay” requires companies to provide shareowners with an advisory vote on executive compensation at least once every three years. The rule also requires companies to provide additional disclosure in their annual meeting proxy statement including whether the vote is non-binding and if and how the results will be considered.

“Say when on Pay” requires companies to allow shareowners to vote on how often they would like to be presented with a “Say-on-Pay” vote: every one, two, or three years. This rule also requires companies to disclose the frequency vote in their proxy and whether the vote is non-binding. Smaller companies, however, are exempt for two years and are not required to conduct a say-on-pay or frequency vote until January 2013.

All companies are required to allow shareowners to vote on “Golden Parachutes” or compensation arrangements with executive officers in connection with a merger, acquisition, consolidation, proposed sale or other disposition of company assets. All transactions must be disclosed no matter the structure including going-private or third-party tender offers. Agreements and understandings that the acquiring and target companies have with the named executive officers of both companies must be disclosed in both narrative and tabular formats.

Majority Voting

In mid-2010, the SBA focused on increasing the use and adoption of majority voting at companies within the Russell 3000 stock index that employed a plurality standard or a weaker form of majority voting procedures (normally plurality plus the presence of a resignation policy) in their director elections. The engagement process was undertaken in two phases. The first, centering on sending letters to approximately 508 companies in the Russell 1000 Index and, the second, sending approximately 1,647 letters to the remaining firms in the Russell 2000 index. In total, letters were sent to 2,155 companies.

SBA staff has received a very high level of response, and are updating its records to reflect recent bylaw amendments for those firms that have adopted majority voting procedures and/or have forwarded our concerns to the Board’s Governance & Nominating Committee for further consideration. Dialogue continues with numerous firms and the SBA actively engages companies on the policy topic.

Shareowner Proposals

The SBA sponsored a shareowner proposal for consideration at Hospitality Properties Trust (HPT) in an effort to remove the company’s 75 percent super majority vote requirements to amend specific sections within its certificate of incorporation and by-laws and the two-thirds vote requirements to remove certain directors/trustees. The proposal received 86,490,619 votes, or 70 percent of the votes outstanding, which was less than the 92,535,251.25 votes (75 percent of the outstanding shares) required for its adoption. So, although the SBA’s resolution received the backing of almost 89 percent of the votes cast, due to the company’s super majority voting requirements, the proposal needed close to 95 percent of the outstanding shares to be considered passing (on average, approximately 85 percent of a company’s outstanding shares are voted).


As a member of Ceres and the Investor Network on Climate Risk (INCR), the SBA participated in an investor outreach effort involving 58 global investors with $2.5 trillion in assets under management. Investor letters were sent to 27 oil/gas companies, including ExxonMobil and Petrobras, and 26 insurance firms worldwide. Each firm was asked to respond by November 1, 2010.

The oil/gas letter included questions on five key topics: company investments in spill prevention and response activity, including offshore drilling and spill response capability; spill contingency plans for managing deepwater blowouts; lessons learned from the BP spill, including their position on possible new regulations and more robust enforcement on offshore drilling in the Gulf and elsewhere; possible actions to improve their safety contractor selection and oversight practices; and governance systems for overseeing management of offshore oil and gas operations. The insurance letter asked if insurers were: considering adjustments to their overall exposure to offshore oil and gas operations, including possible changes in policy volume; considering changes in their underwriting criteria; supportive of new regulations that would reduce offshore drilling risks.

As of mid-November, Ceres and INCR had received responses from 22 of the 27 oil companies that received the letter. SBA staff continues to work with Ceres and INCR to develop a summary report and evaluate company responses.

Investor Advocacy

In a continued effort to increase the transparency of voting decisions and governance actions, the SBA posts historical and current proxy voting records, as well as other information about investments and corporate governance activities on its website [www.sbafla.com]. Votes are disclosed as they are cast, typically 10 days prior to the company meeting. Voting information is fully searchable based on date, calendar range, company name, and SBA portfolio. Voting data covers every publicly-traded equity security for which the SBA retains voting authority.

During the last fiscal year, the SBA continued to collaborate with a nonprofit project called ProxyDemocracy which allows stakeholders to analyze and compare the voting decisions of the SBA to those of a large universe of institutional investors and mutual funds. The ProxyDemocracy site provides information about how designated institutional investors plan to vote at upcoming shareowner meetings and provides additional historical profiles covering the funds’ corporate governance and proxy voting activities.

The SBA recently partnered with another online voting source called Moxy Vote which advocates enabling better analysis of voting records. Moxy Vote is an on-line voting service and interactive community focused on the retail shareholder. Their web based service enables individuals to gather information from other shareholders and advocacy organizations. Shareowners can interact with each other via message boards and vote their shares online.

Both comments and trackbacks are currently closed.