Moving Twenty-Two S&P 500 Companies towards Board Declassification

Lucian Bebchuk and Scott Hirst are Professor of Law, Economics and Finance and Lecturer on Law, respectively, at Harvard Law School. Their earlier post about the work of the ACGI is available here.

This post provides a summary of work to declassify corporate boards done during the 2010-11 proxy season by the American Corporate Governance Institute (ACGI). This work contributed to moving 22 S&P 500 companies toward board declassification, which could result in as much as a 15% reduction in the incidence of board classification among S&P 500 companies from the beginning of the 2010-11 proxy season.

During the 2010-2011 proxy season, the ACGI worked with two institutional investors, the Florida State Board of Administration (SBA) and the Nathan Cummings Foundation (NCF), on the submission of shareholder declassification proposals. The ACGI assisted these institutional investors with designing and drafting proposals, selecting companies for submission of proposals, communicating with the Securities and Exchange Commission with respect to no-action requests, engaging with companies to reach negotiated outcomes, and, when such negotiations were not successful, presenting proposals at shareholder meetings.

This work on behalf of the SBA and the NCF during this proxy season resulted in: (i) seven S&P 500 companies passing charter amendments to declassify their boards; (ii) six S&P 500 companies committing to submit management declassification proposals for shareholder approval at their 2012 shareholder meeting; and (iii) passage of shareholder declassification proposals, with average support of 82.2% of votes cast, at nine S&P 500 companies at which SBA and NCF proposals were voted on. We provide further details of each of these results below.

Charter Amendments to Declassify in Seven Companies

Following the submission of proposals, the ACGI assisted the SBA and NCF in negotiating and reaching agreements pursuant to which management agreed to bring charter amendments to declassify their boards of directors to a vote of shareholders. In addition, following the submission of one of the proposals (to Watson Pharmaceuticals, Inc.), the company announced a plan to bring a declassification proposal to a vote at its 2011 annual meeting. Altogether, the ACGI’s work contributed to the passage of seven charter amendments to declassify the boards of directors of S&P 500 companies. Those companies, with the percentage of votes cast and the percentage of outstanding shares supporting the declassification amendment, were as follows:

% Votes In Favor
Of votes
cast
Of shares outstanding
Biogen Idec Inc. (BIIIB) * 99.6% 86.2%
Eaton Corporation (ETN) 99.3% 81.4%
Life Technologies Corporation (LIFE) 99.3% 76.9%
National Oilwell Varco, Inc. (NOV) * 99.5% 82.5%
NVIDIA Corporation (NVDA) * 99.7% 83.8%
Ross Stores, Inc. (ROST) * 98.6% 88.4%
Watson Pharmaceuticals, Inc. (WPI) 99.8% 84.2%
Average 99.4% 83.3%
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Companies marked * received proposals from the SBA; companies marked received proposals from the NCF.

Commitments by Six Companies to Bring Management Declassification Proposals in 2012

In addition to the declassification charter amendments passed in this proxy season, agreements were executed pursuant to which six other S&P 500 companies committed to bring charter amendments to declassify their boards of directors to a vote of shareholders in 2012. The companies that have committed to bring charter amendments in 2012 are as follows:

CME Group Inc. (CME)
Dean Foods Company (DF) *
Dr Pepper Snapple Group, Inc. (DPS)
E*TRADE Financial Corporation (ETFC) *
Fiserv, Inc. (FISV) *
Hospira, Inc. (HSP)
————————————————–
Companies marked * received proposals from the SBA; companies marked received proposals from the NCF.

Votes on Precatory Resolutions to Declassify

Finally, nine declassification shareholder proposals submitted with the assistance of the ACGI were voted on by shareholders during the 2011 proxy season. In all nine cases, the resolutions passed by a substantial margin, with an average of 82% of votes cast in favor of the resolution. These resolutions, with the percentage of votes cast and the percentage of outstanding shares that were voted in favor of the declassification resolution, were as follows:

% Votes In Favor
Of votes
cast
Of shares outstanding
C.H. Robinson Worldwide, Inc. (CHRW) 71.6% 51.2%
CF Industries Holdings, Inc. (CF) * 89.5% 70.8%
Hudson City Bancorp, Inc. (HCBK) 77.3% 49.8%
McDonald’s Corporation (MCD) * 77.5% 52.5%
Pioneer Natural Resources Company (PXD) * 90.6% 70.9%
salesforce.com, inc. (CRM) * 79.4% 66.1%
The Western Union Company (WU) 87.3% 72.5%
Thermo Fisher Scientific, Inc. (TMO) * 86.9% 68.2%
Wyndham Worldwide Corporation (WYN) * 79.6% 69.4%
Average 82.2% 63.5%
———————————————
Companies marked * received proposals from the SBA; companies marked received proposals from the NCF.

We hope that these nine companies will heed the strong support for declassification expressed by shareholders and bring management declassification proposals to a vote at their 2012 annual meetings. Together with the six companies that have committed to bring management to declassification proposals next year, the ACGI’s efforts during this proxy season could result in as many as 15 management declassification proposals in 2012, which is more than 10% of the number of S&P 500 companies that currently have staggered boards.

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