Moving toward Board Declassification in Fourteen S&P 500 Companies

Editor’s Note: This post relates to two press releases issued by the American Corporate Governance Institute (the “ACGI”), an organization that Lucian Bebchuk and Scott Hirst are affiliated with. One press release, issued jointly by the ACGI and the Florida State Board of Administration is available here; the other press release, issued jointly by the ACGI and the Nathan Cummings Foundation, is available here.

During this proxy season, the American Corporate Governance Institute (the “ACGI”), an organization with which we are affiliated, assisted two institutional investors in the submission of shareholder declassification proposals. This post reports on the success that these shareholder declassification proposals had in contributing to board declassification in 14 S&P 500 companies.  The declassification of the boards of these companies would produce a 10% reduction in the number of S&P 500 companies with a classified board (currently standing at 139).

The ACGI assisted the Florida State Board of Administration (the “Florida SBA”) in the submission of shareholder declassification proposals for a vote at the 2011 annual meeting of a number of companies. The Florida SBA and the ACGI subsequently negotiated and reached agreements with seven companies, pursuant to which each company will bring a management proposal to declassify its board of directors.

The ACGI also assisted the Nathan Cummings Foundation (the “Foundation”) in the submission of shareholder declassification proposals to a number of companies. The Foundation and the ACGI subsequently negotiated and reached agreements with six companies, pursuant to which each company will bring a management proposal to declassify its board of directors. In addition, following the submission of one of the Foundation’s proposals (to Watson Pharmaceuticals, Inc.), the company announced a plan to bring a declassification proposal to a vote at its 2011 annual meeting.

The fourteen companies (and the annual meeting at which the management declassification proposal is expected to be voted upon) are as follows.

Proposals submitted by the Florida SBA:
» Biogen Idec Inc. (NASDAQ: BIIB) (2011 annual meeting);
» Dean Foods Company (NYSE: DF) (2012 annual meeting);
» E*TRADE Financial Corporation (NASDAQ: ETFC) (2012 annual meeting);
» Fiserv, Inc. (NASDAQ: FISV) (2012 annual meeting);
» National Oilwell Varco, Inc. (NYSE: NOV) (2011 annual meeting);
» NVIDIA Corporation (NASDAQ: NVDA) (2011 annual meeting); and
» Ross Stores, Inc. (NASDAQ: ROST) (2011 annual meeting).
Proposals submitted by the Foundation:
» Baxter International Inc. (NYSE: BAX) (2011 annual meeting);
» CME Group Inc. (NASDAQ: CME) (2012 annual meeting);
» Eaton Corporation (NYSE: ETN) (2011 annual meeting);
» Dr Pepper Snapple Group, Inc. (NYSE: DPS) (2012 annual meeting);
» Hospira, Inc. (NYSE: HSP) (2012 annual meeting);
» Life Technologies Corporation (NASDAQ: LIFE) (2011 annual meeting); and
» Watson Pharmaceuticals, Inc. (NYSE: WPI) (2011 annual meeting).

The case for board declassification has substantial support in the academic literature, and there is significant empirical evidence suggesting that classified boards could be associated with lower valuation and worse performance. In particular, empirical studies suggest that:

  • takeover targets with classified boards are associated with lower gains to shareholders (Bebchuk, Coates, and Subramanian, 2002);
  • classified boards are associated with lower firm valuation (Bebchuk and Cohen, 2005);
  • firms with classified boards are more likely to be associated with value-decreasing acquisition decisions (Masulis, Wang, and Xie, 2007); and
  • classified boards are associated with lower sensitivity of compensation to performance and lower sensitivity of CEO turnover to firm performance (Faleye, 2007); and
  • the stock market reactions accompanying the recent Airgas ruling by the Delaware Chancery court, and its reversal by the Delaware Supreme Court, are consistent with market participants’ viewing board classification as value-reducing for shareholders (Bebchuk, Cohen, and Wang, 2011).

Although one study (Bates, Becher and Lemmon, 2008) reports that classified boards are associated with higher takeover premiums, this study also reports that classified boards are associated with a lower likelihood of an acquisition, and that classified boards are overall associated with lower firm valuation.

Board declassification by the fourteen companies listed above could thus produce significant benefits for their shareholders.  We would like to commend these companies for their willingness to engage in a dialogue with shareholder proponents and their advisers and for their demonstrated responsiveness to shareholders’ concerns about classified boards.

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