2012 Proxy Season Review: Overall Trends in Shareholder Proposals

James Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. This post is an abridged version of a Sullivan & Cromwell publication, titled 2012 Proxy Season Review, available in full here.

The 2012 proxy season saw a continued high rate of governance-related shareholder proposals at large U.S. public companies, including proposals on separation of the roles of the CEO and chair, the right to call special meetings, action by written consent, declassified boards and majority voting. As in prior years, these governance-related proposals received high levels of support, and were the category of proposal that had the best chance of receiving shareholder approval. Proposals on social issues (particularly those related to political contributions and lobbying costs) and compensation-related issues (including equity retention policies) also remained common but, as in the past, these proposals rarely received a majority vote, generally had lower levels of support than governance-related proposals, and served primarily as a vehicle for shareholder activists to express their views.

In this memorandum, we:

  • Quantify and discuss various categories of shareholder proposals voted on this season, and highlight important trends, legal developments and practice points for companies in navigating the shareholder proposal process, including notable exclusion determinations by the SEC staff and trends in management proposals to give shareholders that right to call special meetings and act by written consent;
  • Analyze the key reasons that directors of large companies received “withhold” or “against” recommendations in 2011 and 2012, and the situations in which these recommendations were most likely to translate into a significant reduction in shareholder support;
  • Summarize the discrepancies in director independence definitions used by various shareholders and proxy advisory firms, and the potential negative implication of an adverse independence determination under these definitions;
  • Highlight the increased use by shareholder proponents of new avenues for publicizing their arguments and counterarguments regarding their proposals;
  • Discuss developments in the SEC staff’s treatment of exclusion requests under Rule 14a-8; and
  • Address annual meeting disruptions by protest groups in 2012 and steps that companies can take to deal with the increased likelihood of disruptions at annual shareholder meetings.

2012 also saw the advent of a new class of shareholder proposals – those relating to proxy access. Proxy access was the subject of our memorandum, dated June 19, 2012, entitled “Proxy Access Proposals – Review of 2012 Results and Outlook for 2013,” an updated version of which is attached for your convenience.

This memorandum does not discuss 2012 developments in the area of management say-on-pay proposals, which will be the subject of a separate memorandum that we expect to issue within the next week.

I. Overall Trends in Shareholder Proposals

The following table summarizes, by general category, the shareholder proposals voted on at S&P 500 companies in 2011 and 2012.

Summary of 2011 and 2012 Shareholder Proposals (S&P 500 Companies)
Total Shareholders Proposals Voted On Average % of Votes Cast Shareholder Proposals Passed
Type of Proposal 2012 2011 2012 2011 2012 2011
Governance (Board/Voting Structure) 164 163 51% 47% 68 52
Social and Political Issues 139 147 19% 19% 0 0
Compensation-Related 55 43 26% 26% 0 2
Other 11 13 12% 18% 0 0
Total 369 366

A more detailed analysis of each particular type of proposal follows.

A. Shareholder Proposals on Governance Structure

1. Independent Chair

Independent Chair (S&P 500 Companies)
Total Shareholder Proposals Voted On Average % of Votes Cast Shareholder Proposals Passed
2012 2011 2012 2011 2012 2011
38 25 35% 34% 2 3

This proxy season saw a resurgence of proposals requesting that companies separate the roles of CEO and chair, with 38 such proposals voted on at S&P 500 companies in 2012, an increase of more than 50% from 2011. Large companies have regularly received these proposals since the mid-2000’s, reflecting the views of certain shareholders that having the CEO (or another member of management) serve as chairperson may undermine the independence of the board as a whole. These proposals tend to receive solid shareholder support, though relatively few actually pass. In 2011, the number of these proposals had declined, reflecting the development of an apparent consensus within the governance community that the appointment of a lead or presiding independent director with specified duties can largely address the concerns arising from combining the CEO and chair positions. The 25 proposals voted on at S&P 500 companies in 2011 was a decline of over 25% from 2010.

This lead independent director approach was reflected in ISS policies and the voting policies of many institutional investors, which took the view that they would not support a proposal to separate the CEO and chair roles if the company had a suitably empowered lead independent director. This was also consistent with stock exchange rules adopted in 2003 requiring the appointment of a presiding independent director and SEC rules adopted in 2009 requiring proxy disclosure of board leadership structure, including whether the company has a lead independent director and what specific role that director plays in the leadership of the board.

Due largely to a coordinated shareholder proposal effort among activist shareholders, this issue was given renewed life in the 2012 proxy season, with companies being targeted for proposals based on various governance and performance metrics, but without regard to whether they had already appointed strong lead independent directors.

In addition, ISS adjusted the manner in which it applied its lead director policy during the 2012 proxy season for certain issuers. Historically, companies have worded their lead director duties with some variation from the wording specified in ISS’s policies, particularly with respect to the lead director’s role in approving materials sent to the board and in communicating with large shareholders, but ISS had nonetheless found the substance of the lead director’s duties satisfactory in many of these cases. This year, ISS reversed its position, noting that it would no longer deem the lead director’s responsibility to “consult” or “review” materials (for example, board agendas or information being sent to the board) as equivalent to the authority to “approve” these materials, as required by ISS’s stated policy. This change in approach was not addressed in ISS’s policy updates and was applied inconsistently to issuers this year. It remains unclear whether this approach will be expanded in the future to all the lead director duties required by ISS, making it difficult for issuers with previously acceptable variations in wording to have any certainty as to whether their wording will continue to be acceptable to ISS in the future.

An additional complication is that, even if a company has a lead independent director with “acceptable” duties, ISS, under its existing policies, will recommend in favor of a proposal to separate the CEO and chair roles if the company has what ISS deems “problematic governance or management issues” or if the company’s one-year and three-year total shareholder return is in the bottom half of the company’s four-digit GICS industry group.

In 2012, only two CEO/chair proposals have passed at S&P 500 companies, and only three passed in 2011. However, these proposals generally received strong levels of support, with an average of 35% of votes cast at S&P 500 companies in 2012, slightly up from 2011. ISS’s support has had a significant impact on voting results for these proposals. All the independent chair proposals that passed in 2011 and 2012 had the support of ISS, and the average level of shareholder support at S&P 500 companies was nearly 40% in each of 2011 and 2012 if ISS supported the proposal, but only 24% in each year if ISS recommended a vote against the proposal.

One additional note on excludability of these proposals under SEC rules – during 2012, the no-action letters issued by the SEC staff shed additional light on the limited circumstances in which proposals may use extrinsic definitions of independence for the purposes of defining the level of “independence” that an independent chair should have. The staff had previously indicated that inclusion of a reference to a third-party definition (such as that of the Council of Institutional Investors) causes a proposal to be excludable under Rule 14a-8(i)(3) as “vague and indefinite” because a reader would need to refer to external sources to understand the proposal. In contrast, the staff has allowed proposals to include references to the independence definition contained in the rules of the stock exchange on which the company is listed (presumably because the proxy itself will discuss this definition). In 2012, the staff allowed exclusion of a proposal that contained a reference to the NYSE independence rules, rather than Nasdaq, where the company was listed, as well as a proposal made to an NYSE-listed company that referred to the independence rules of any subsequent exchange on which the company may be listed if it ceases being listed on the NYSE. These no-action letters, together with the letters allowing exclusion of proxy access proposals that reference the requirements of Rule 14-8 itself, indicate that the SEC staff takes a very limited view of the circumstances in which a proposal can define a core term by reference to any extrinsic source.

2. Shareholder Right to Call Special Meetings

Right to Call Special Meetings (S&P 500 Companies)
Total Shareholder Proposals Voted On Average % of Votes Cast Shareholder Proposals Passed
2012 2011 2012 2011 2012 2011
Adopt new right 6 7 52% 41% 4 1
Lower % on existing right 7 20 35% 42% 0 2

a. Shareholder proposals

Shareholders and proxy advisory firms generally support the right of shareholders to call a special meeting because this enables them to act on matters that arise between annual meetings (such as the removal of a director, including in circumstances intended to permit an acquisition offer to proceed). The right to call special meetings should be viewed in conjunction with the movement away from classified boards – in Delaware, directors of a non-classified board can generally be removed by shareholders without cause. Thus, given the trend of declassifying boards in the past several years, the ability to act outside the annual meeting to remove directors without cause can be viewed as the dismantling of what was once a powerful tool to provide directors with additional time to consider hostile takeover proposals and seek superior alternatives. A majority of S&P 500 companies now provide shareholders with some right to call a special meeting, a development driven largely by shareholder proposals and shareholder support for the concept over the past few years.

Shareholder proposals requesting the board to adopt special meeting rights usually seek to grant the right to holders of 10% of outstanding shares, which is a lower level than most companies and many shareholders would see as appropriate. The shareholder proposals generally specify that the shareholder right should not contain any exclusions unless they are also applicable to special meetings called by the company. As discussed below, management proposals for special meeting rights are generally at higher percentage levels and contain exclusions that would not apply to a meeting called by the company.

The chart above shows that adopting a special meeting right does not mean that a company will necessarily be free from future proposals. In 2011 and 2012, most of the proposals voted on at S&P 500 companies were at companies that already had a special meeting right – the proposals were seeking to reduce the threshold for invoking the right.

During 2012, the special meeting proposals at companies that had no special meeting right achieved significantly greater shareholder support (average of 52% support at S&P 500 companies, with four of six proposals passing) than those that sought to lower the threshold for an existing right (average of 35% support at S&P 500 companies, with none passing). This difference in support levels based on the company’s existing rights did not occur in 2011, which may indicate that shareholders, while still supportive of special meeting rights, are becoming more comfortable with the threshold being above 10% or 15%.

This data also indicates that if a company has no special meeting right, then a shareholder proposal to adopt a 10% right is likely to achieve significant support, and has a good chance of passing. Although these are precatory proposals (that is, they merely request that the board take action), directors that do not implement a proposal that has passed will face the prospect of negative recommendations on their re-election from proxy advisory firms or negative votes from shareholders in future years, pursuant to their respective voting policies. In particular, under ISS policies, a negative recommendation will be triggered for all incumbent directors if a proposal gains the support of a majority of the outstanding shares, or gains the support of a majority of votes cast in two of three years, and the board does not act on it in a responsive manner. In such a case, adopting a special meeting right at a threshold above the level specified in the proposal is unlikely to be seen as responsive by ISS.

b. Management proposals

An analysis of shareholder proposals on the topic of special meetings tells only part of the story. Many shareholder proposals on this topic never make it to the proxy statement, because they are excluded under SEC Rule 14a-8(i)(9) as conflicting with a management proposal for a special meeting right. Under Rule 14a-8(i)(9), a company that receives a special meeting shareholder proposal may exclude it from the proxy statement if the company puts its own special meeting proposal up for a vote at the same annual meeting. Dozens of companies in recent years have done exactly that. For that reason, although the increased prevalence of special meeting rights has been driven by shareholder proposals and shareholder support levels, the actual contours and terms of the provisions that are adopted have largely reflected companies’ decisions on how to structure their own proposals.

Even in the absence of a shareholder proposal, boards should consider discussing the terms of a special meeting right that they might find acceptable, if one were ever to be put in place. If it is decided at year-end to put a management proposal up for a vote at the annual meeting, there may be very little time at that stage to evaluate market practice, shareholder views and legal considerations in order to develop an appropriate proposal, particularly if the company will need to submit a no-action letter request in order to exclude a shareholder proposal. In order to avoid a last-minute scramble, it may be useful to have provided background to the board or relevant board committee, and to have discussed potential terms. The following are among the terms that companies may wish to consider including in any management proposal for a special meeting right:

  • Threshold. Though practice varies considerably, 25% has emerged as the most common threshold for special meeting rights at public companies. Both Vanguard and T. Rowe Price have indicated that 25% is an appropriate level in their view. However, ISS’s policies do not give credit, from a governance rating perspective, for anything over 15%, and (as indicated in the preceding section) adopting a 25% threshold (or even a 15% or 20% threshold) does not ensure that the company will not receive a proposal to lower the threshold in future years. Companies should consider working with proxy solicitors to evaluate the resiliency of a particular threshold against future shareholder proposals, based on the company’s current shareholder base, voting trends and other circumstances.
  • Definition of ownership. Many companies require “record” ownership of shares (as opposed to “beneficial” ownership), essentially requiring street name holders to work through their securities intermediaries to become a record holder. This eliminates uncertainty as to proof of ownership, but introduces an additional administrative step for shareholders seeking to use the right. In addition, an increasing number of companies have introduced a “net long ownership” concept into their special meeting provision – essentially reducing the shareholders’ actual ownership level by any short positions or other hedging of economic exposure to the shares. Companies that do not include a “net long” concept should nevertheless ensure that the information required to be provided by the requesting shareholders includes details of any hedging transactions, so that the company and other shareholders can have a full picture of the requesting shareholders’ economic stake in the company.
  • Pre- and post-meeting blackout periods. In order to avoid duplicative or unnecessary meetings, many companies provide that no meeting request will be valid if it is received during a specified period (usually 90 days) before the annual meeting, or during a specified period (usually 90 or 120 days) after a meeting at which a similar matter was on the agenda. Some companies have extended the post-meeting blackout to 12 months, though in most such cases the companies carve out election-related matters from the blackout (otherwise, there would be no ability to raise election-related matters at a special meeting because elections occur at every annual meeting).
  • Limitations of matters covered. Special meeting provisions typically provide that the special meeting request must specify the matter to be voted on, and that no meeting will be called if, among other things, the matter is not a proper subject for shareholder action. Generally, the only items that may be raised at the special meeting will be the items specified in the meeting request and any other matters that the board determines to include.
  • Timing of meeting. Companies typically provide that the board must set the meeting for a date within 90 days from the receipt of a valid request by the requisite percent of shareholders. Often, the special meeting provisions provide that, in lieu of calling a special meeting, the company may include the specified item in a meeting called by the company within that same time period.
  • Holding period. A few companies, though not most, require the requesting shareholders to have held the requisite number of shares for a specified period of time prior to the request (most commonly, one year, though one company has adopted a 30-day holding period requirement).
  • Inclusion in charter versus bylaws. Companies should consider whether to include the special meeting provisions in the charter, the bylaws, or a combination. In most cases, companies include the critical provisions (such as ownership threshold) in the charter so that shareholders cannot unilaterally amend them, but provide the details and mechanics in the bylaws, so they can be adjusted by the board without a shareholder vote.

Market practice in this area is developing continuously. We have worked with numerous clients in evaluating market practice and crafting potential special meeting provisions. Companies should feel free to contact us for more information.

3. Shareholder Right to Act by Written Consent

Right to Act By Written Consent (S&P 500 Companies)
Total Shareholder Proposals Voted On Average % of Votes Cast Shareholder Proposals Passed
2012 2011 2012 2011 2012 2011
19 32 45% 48% 5 11

a. Shareholder proposals

One of the most successful – and controversial – developments in the shareholder proposal area has been the increased rate, and success levels, of shareholder proposals requesting that the company grant shareholders the right to act by written consent. The number of these proposals was down in 2012 compared to 2011, but remained high in comparison to earlier years.

The corporate laws of most states provide that shareholders may act by written consent in lieu of a meeting unless the company’s certificate of incorporation provides otherwise. Commonly, public companies provide in their charters that shareholders may not act by written consent, or that they may act by written consent only if the consent is unanimous (as opposed to permitting a written consent to be executed by shareholders representing the percentage of the voting power that would be necessary to approve the action at a meeting).

Many shareholders believe that shareholders should be permitted to act by written consent because this provides a mechanism for shareholder action outside the normal meeting cycle. The concern that companies have about giving shareholders the right to act by written consent is that the written consent process, by its nature, is not conducive to an orderly debate on the merits of the proposed action, as would occur if it were raised at a shareholder meeting. Moreover, action by written consent can be seen as inherently coercive in that consent solicitations do not give shareholders the benefit of the notice and disclosure requirements applicable to proxy solicitations. In addition, in the context of a hostile acquisition coupled with a written consent solicitation to remove the board, the uncertain timetable created by the fact that the removal is effective upon the delivery of the requisite number of consents could cause potentially interested third parties to be reluctant to enter into negotiations, given the risk that the board they are negotiating with could be removed at any time. Any concern that shareholders should be able to act between annual meetings could be addressed by giving shareholders the right to call special meetings, as an increasing number of companies have done (as discussed above).

Although the number of shareholder proposals on written consent was down in 2012 as compared to 2011, these proposals continued to garner significant shareholder support, and a significant number passed, as indicated in the chart above. Companies that received written consent shareholder proposals generally argued in their opposition statement that, as noted above, the right to call special meetings is a preferable mechanism for ensuring that shareholder action between annual meetings occurs in a deliberative and organized manner. Nevertheless, shareholders continued to support these proposals at a high rate (with average support of 45% of votes cast for 2012 proposals at S&P 500 companies).

Of the 19 proposals voted on at S&P 500 companies in 2012, all but one were at companies that had no right to act by written consent at all. In contrast to special meetings (where half of the 2012 proposals were requests to lower the threshold on existing rights), only one proposal in 2012 was to remove restrictions on a previously adopted written consent right. This proposal, at Home Depot, received the lowest level of support of any written consent proposal (26% of votes cast), suggesting that shareholders may not be overly concerned about reasonable restrictions placed on a written consent right (as discussed further in the next section).

b. Management proposals

As with special meetings, shareholder proposals in the written consent context are generally precatory, meaning that they are not self-effecting, but merely request that the board take action. But, as discussed above, if a precatory shareholder proposal receives sufficient support from shareholders, the board will need to take action that ISS and others would deem “responsive” in order to avoid potential negative recommendations or votes on director elections in future years.

This year, certain issuers whose shareholders supported these proposals in prior years proposed their own written consent provisions in 2012 with terms that ISS found responsive (including some or all of those terms described below). To date, however, ISS has not addressed in detail what limitations on the right of written consent it would find responsive. In addition, this year a number of issuers chose to propose a written consent provision that conflicted with a concurrent shareholder proposal, and were able to exclude the shareholder proposal through the no-action process under Rule 14a-8(i)(9).

Given the limited number of management proposals to date, and the fact that the operative terms of the written consent right have varied considerably among these proposals (including the extent to which they include any or all of the terms described below), with no clear market consensus yet evolving, as well as the possibility that ISS may choose to issue a voting policy on what limitations it finds to be responsive, careful thought needs to be given to any management proposal to permit action by written consent.

If a company does determine to put a written consent right in place, then the board and management should consider provisions such as the following, which have been adopted at some large companies and are intended to cause the consent process to work in a deliberative and organized manner (and, in many ways, to provide for similar timing and disclosure as a shareholder meeting):

  • Ownership threshold for request. To ensure that the soliciting shareholders have a reasonable level of support before the process is initiated, a number of companies have provided that it is a prerequisite to action by written consent that a specified percentage (e.g., 10% to 25%) of shareholders have requested the board to set a record date to determine shareholders entitled to consent.
  • Provision of information. Companies should consider requiring the soliciting shareholders to provide specified information to the company, similar to what is called for under advance notice bylaws (such as record and beneficial stock ownership levels, derivative or other hedging or short positions, relationships with the company or other interested parties, and, in the case of a director nomination, information regarding the nominee), so that the company and other shareholders will be in a position to make a fully informed judgment.
  • Establishing a timeline. To encourage a deliberative process and the consideration of potential alternatives, the provision might require the request for a record date be sent to the company at least 90 days (or some other reasonable period) prior to the signing or delivery of any consents. In addition, it may be helpful for the provision to specify the amount of time the board has, following receipt of a valid request, to set a record date for the consent solicitation.
  • Limitation of matters covered. As with special meeting provisions (discussed above), companies should consider limiting the matters that may be the subject of written consents in order to avoid unnecessary or duplicative actions, including the exclusion of matters that are not a proper subject for shareholder action or that are identical or substantially similar to another matter that has been or will be on a meeting agenda within a specified period of time.
  • No selective solicitation. In order to prevent some shareholders from being disenfranchised and to encourage transparency, some companies have required the soliciting shareholders to solicit consents from all other shareholders, which solicitations must be conducted in accordance with the SEC proxy rules under Section 14A of the 1934 Act.

4. Other Common Governance-Related Proposals

Social Policy Proposals (S&P 500 Companies)
Total Shareholder Proposals Voted On Average % of Votes Cast Shareholder Proposals Passed
2012 2011 2012 2011 2012 2011
Political issues 66 55 21% 26% 0 0
Environmental issues 30 40 17% 18% 0 0
Sustainability report 11 11 26% 18% 0 0
Labor issues 10 11 26% 19% 0 0
Human rights 8 12 12% 16% 0 0
Animal rights 7 6 5% 4% 0 0
Other social policy issues 7 12 7% 5% 0 0

The shareholder proposals that have had, by far, the greatest success rate this season are those that seek to bring the governance practices of certain companies in line with what many shareholders see as baseline practices for good governance at large public companies – in particular, the removal of classified boards, the adoption of majority voting in director elections (rather than plurality voting) and the elimination of supermajority voting provisions (that is, provisions in the charter or bylaws requiring a supermajority to remove directors, amend the charter or bylaws or approve major transactions, among other things). In particular, the number of board declassification proposals in 2012 was markedly up from 2011, at least some of which can be attributed to the Harvard Law School Shareholder Rights Project, which has focused on this area in particular. According to the Project’s website, they have reached negotiated outcomes on declassification with dozens of other public companies.

A sizeable majority of large public companies have already enacted these governance changes since 2000, largely in response to shareholder pressure and evolving views of market practice. A number of companies, however, continue to believe that the elimination of these types of anti-takeover protections is not ultimately to the benefit of the company or its shareholders, because these provisions can encourage continuity and stability on the board and better position the board to protect all shareholders from the coercive tactics of shareholders that are seeking a change in control of the company.

Nevertheless, as indicated in the table above, a sizeable majority of these proposals passed at S&P 500 companies (and, in fact, at those smaller companies at which they were proposed), in many cases by very wide margins. Although these proposals are typically precatory (not binding), directors at companies where these proposals have passed may face the prospect of negative recommendations from proxy advisory firms or negative votes from shareholders in future years if they do not take action that is deemed sufficiently responsive to the proposal, as discussed above in the sections on special meetings and action by written consent.

Another common governance proposal that receives a significant amount of support (though almost never passes) relates to cumulative voting. Cumulative voting means that a shareholder is entitled to cast a number of votes per share equal to the number of directors to be elected, and may apply all of those votes in favor of a single nominee, or may spread them among nominees as the shareholder sees fit. Companies, as well as certain shareholder organizations and corporate governance commentators, have expressed concern about cumulative voting for a number of reasons. Most fundamentally, it may permit a minority shareholder to elect a candidate that is opposed by the holders of a vast majority of the stock. Cumulative voting can also be seen as fundamentally at odds with majority voting, in that it allows the election of directors that are not supported by a majority of the voted shares. As indicated above, cumulative voting proposals typically receive a solid level of shareholder support, though generally well below the level required to pass.

5. Change in NYSE Broker Voting Policy for “Good Governance” Proposals

One interesting development during 2012 involved a change in NYSE broker voting policies that made it more likely that management proposals for governance changes would fail, even if they were seen as governance enhancements by shareholders in general. In January 2012, the NYSE issued an Information Memo relating to the application of NYSE Rule 452 to “certain types of corporate governance proposals … for example, proposals to de-stagger the board of directors, majority voting in the election of directors, eliminating supermajority voting requirements, providing for the use of consents, providing rights to call a special meeting, and certain types of anti-takeover provision overrides.” Under this new interpretation, brokers would no longer be permitted to vote on these proposals without instructions from the beneficial owners. In past years, brokers would generally vote uninstructed shares in favor of these so-called “good governance” proposals, considering that management, proxy advisory firms and shareholders generally were all supportive of the proposal.

Because retail shareholders often do not provide instructions to vote their shares, the NYSE interpretive change removes a significant number of “for” votes from the voting pool. In 2012, this did not have a significant impact on the support for these proposals measured as a percentage of votes cast – virtually all shares that were voted continued to be in favor of these proposals. It did, however, have a significant impact on the support for these proposals measured as a percentage of total shares outstanding, which is the measurement that generally applies as a state law matter in the case of a charter amendment. Many companies have a requirement in their charter that certain amendments must be approved by the affirmative vote of a supermajority (often two-thirds or 80%) of shares outstanding. For these companies, it was significantly more likely in 2012 that a management proposal for a charter amendment that is seen by shareholders as a governance enhancement will nevertheless fail to receive the vote necessary to effect the charter amendment.

For example, in 2012 the average level of shareholder support for management proposals to eliminate supermajority voting provisions (which the company was proposing, in many cases, in response to a successful shareholder proposal in an earlier year) was 70% of shares outstanding, compared to 84% in 2011, with the difference being attributable almost entirely to fewer shares being voted. In 2012, these management proposals to eliminate supermajority voting failed at eight companies, double the number from 2011. Similar results occurred for other so-called “good governance” management proposals, including proposals to de-stagger boards, adopt majority voting in uncontested elections and provide shareholders with the right to call special meetings or act by written consent. Although the vast majority of these proposals passed, they failed at significantly more companies than they have in prior years, due largely to the NYSE policy change.

B. Social Policy Shareholder Proposals

Compensation-Related Proposals (S&P 500 Companies)
Total Shareholder Proposals Voted On Average % of Votes Cast Shareholder Proposals Passed
2012 2011 2012 2011 2012 2011
Stock retention 25 9 24% 24% 0 0
Limit golden parachutes 10 6 37% 45% 0 2
Link pay and performance 6 4 30% 35% 0 0
Other compensation-related 14 24 19% 21% 0 0

Social policy proposals have been increasing in prevalence – and in support levels – in recent years, though 2012 seemed to represent a leveling off on both counts as compared to 2011. The most significant change from 2011 to 2012 was a notable increase in the number of proposals relating to political issues – generally, a request for additional disclosure on political expenditures and/or lobbying costs or, in some cases, calls for an advisory vote or prohibition on political spending. As indicated in the chart above, the average support level for these proposals at S&P 500 companies declined in 2012, though it should be noted that (as in past years) the range of support levels for these proposals varies greatly – some proposals (notably, those calling for advisory votes or prohibitions on spending) received as little as 1% support, while others (such as those calling for expanded disclosure) received well over 40% at some companies. However, no proposals on political issues passed in 2011 or 2012.

See Section IV.B in the full report for a discussion of developments during 2012 in the SEC staff’s analysis of whether particular proposals involved “significant social policy issues,” such that they may not be excluded under the Rule 14a-8 “ordinary business” exclusion.

C. Compensation-Related Shareholder Proposals

Overall, the number of compensation-related shareholder proposals was somewhat higher in 2012 than in 2011, though the average level of support declined. These proposals continue to be far less frequent than they were in the few years before 2011 – the advent of universal advisory say-on-pay votes beginning in 2011 has provided an alternative mechanism for shareholders to express concerns over executive compensation, and reduced the need for shareholder proposals on these matters.

Not surprisingly, the primary focus of compensation-related proposals in 2012 was on a topic that is not covered by the say-on-pay vote – executive stock retention policies. The number of these proposals nearly tripled in 2012 as compared to 2011 (though there were still fewer than there were in 2010). Typically, these proposals call for companies to require executives to retain a specified amount (often 75%) of shares acquired through compensation plans for a specified period, generally extending past retirement. These proposals (like compensation-related shareholder proposals more generally) tend to receive a significant amount of shareholder support, but rarely (if ever) do they pass.

Companies that were able to exclude compensation-related proposals under SEC rules for substantive reasons most often relied on either the argument that they had substantially implemented the proposal already (and thus could exclude it under Rule 14a-8(i)(10)), or that the proposal addressed compensation for employees other than senior executives (and thus could be excluded under the Rule 14a-8(i)(7) “ordinary business” exclusion).

D. Exclusive Forum Shareholder Proposals

In 2012, for the first time, four companies received shareholder proposals requesting that the board amend the bylaws to remove “exclusive forum” provisions that the board had adopted unilaterally. These bylaw provisions, which have become increasingly common in the past few years, establish Delaware as the exclusive forum for specified corporate litigation, including shareholder class actions and derivative suits. The unilateral adoption of these provisions by Delaware corporations has yielded more than just shareholder proposals – a number of shareholder class actions have been filed against Delaware companies challenging the unilateral adoption of these provisions on various bases, and are currently pending in the Delaware Court of Chancery. Generally speaking, the arguments made in these lawsuits would not apply in the case of provisions that were in place at the time of a company’s IPO (in which case shareholders would have bought stock with awareness of the provisions) or provisions that were approved by shareholders (e.g., those included in a shareholder-approved charter amendment). The vast majority of companies that adopted exclusive forum provisions in recent years did so unilaterally – only a handful of companies put the provision up to a shareholder vote.

ISS changed its approach to exclusive forum proposals in its 2012 policy updates. Previously, ISS had a policy of recommending a vote against management proposals to adopt exclusive forum provisions unless the company had a specified set of good governance practices. Beginning in 2012, ISS views these proposals on a case-by-case basis, adding to the governance factors a consideration of whether the company disclosed in its proxy that it has been materially harmed by shareholder litigation outside its jurisdiction of incorporation. ISS applied this same test in assessing shareholder proposals to remove an exclusive forum provision. Despite the neutral phrasing of the current ISS policy, its ultimate recommendations were universally in opposition to exclusive forum provisions (that is, in favor of all shareholder proposals to remove these provisions, and against all company proposals to adopt these provisions).

Despite the positive ISS recommendation, the two shareholder proposals that went to a vote in 2012 failed, each obtaining the support of between 35% and 40% of shares voted. In addition, management proposals to adopt exclusive forum provisions generally received strong shareholder support in 2012, despite negative ISS recommendations. Four of the six management proposals passed with a majority of votes outstanding, and five of six received the support of a majority of votes cast.

Shareholder support for these management proposals was significantly higher in 2012 than in 2011. Although it is difficult to tell from such a small data set, this may indicate that institutional shareholders recognize the potential benefit to all shareholders of reining in the increasing costs of multi-jurisdictional litigation.

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One Comment

  1. Matt Powell
    Posted Sunday, July 22, 2012 at 11:27 am | Permalink

    With the recent decision from the Supreme Court in Citizens United v. Federal Election Commission, I hope to see more shareholder concern regarding political expenditures. At first glance the Citizens case seems to threaten our electoral system, however with enlightened shareholders we may see some interesting shareholder involvement in political spending.

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