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E-MailLucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is a counsel at the SRP. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here.
The Shareholder Rights Project (SRP) just released its final report for the 2012 and 2013 proxy seasons, the SRP’s first two years year of operations. As the report details, major results obtained include the following:
- 100 S&P 500 and Fortune 500 companies (listed here) entered into agreements to move toward declassification;
- 81 S&P 500 and Fortune 500 companies (listed here) declassified their boards; these companies have aggregate market capitalization exceeding one trillion dollars, and represent about two-thirds of the companies with which engagement took place;
- 58 successful declassification proposals (listed here), with average support of 81% of votes cast; and
- Proposals by SRP-represented investors represented over 50% of all successful precatory proposals by public pension funds and over 20% of all successful precatory proposals by all proponents.
Expected Impact by End of 2014: As a result of these outcomes and the ongoing work of the SRP and SRP-represented investors, it is estimated that, by the end of 2014, the work of the SRP and SRP-represented investors will have resulted in:
- About 100 board declassifications by S&P 500 and Fortune 500 companies;
- Declassification of the boards of over 60% of the S&P 500 companies that had classified boards as of the beginning of 2012; and
- A decrease in the incidence of classified boards among S&P 500 companies to less than 10%.
Below is more detailed information about the results and work described in the SRP’s 2012-2013 report:
- 100 Companies Agreeing to Declassify: Negotiated outcomes—whereby the companies have entered into agreements agreed to bring management proposals to declassify—have been obtained with 100 S&P 500 and Fortune 500 companies (see details here); these companies represent over 85% of the companies receiving shareholder proposals from SRP-represented investors in 2012 and/or 2013.
- 81 Board Declassifications: A total of 81 S&P 500 and Fortune 500 companies (listed here) declassified their boards during 2012 and 2013 following agreements with SRP-represented investors and/or successful precatory proposals by SRP-represented investors. The 81 companies whose boards were declassified have aggregate market capitalization exceeding one trillion dollars (as of December 31, 2013). These companies represent about two-thirds of the companies with which engagement took place, and over 50% of the 126 S&P companies that had classified boards as of the beginning of 2012.
- 58 Successful Proposals: 58 precatory declassification proposals brought by SRP-represented investors during 2012 and/or 2013 passed by substantial margins—with average support of 81% of votes cast—at annual meetings of S&P 500 and Fortune 500 companies (listed here). These 58 successful proposals represent 95% of the precatory declassification proposals brought by SRP-represented investors that went to a vote at 2012 and/or 2013 annual meetings.
- A Significant Contribution to Successful Shareholder Engagement: The successful shareholder proposals submitted by SRP-represented investors represented over 50% of all successful proposals by public pension funds in 2012 and 2013, and over 20% of all successful shareholder proposals in that period.
- Many Additional Future Declassifications: In addition to the 81 board declassifications that have already taken place, we expect many additional declassifications by S&P 500 and Fortune 500 companies to result from (i) seven agreed-upon management proposals already committed to by companies entering into agreements during 2012 or 2013 and (ii) a substantial number of additional agreed-upon management proposals that are expected to result from ongoing engagements and the submission of proposals for 2014 annual meetings.
- Expected Results: Overall, the SRP expects that, by the end of 2014, the work of the SRP and SRP-represented investors will have resulted in about 100 board declassifications by S&P 500 and Fortune 500 companies, and a decrease in the incidence of classified boards among S&P 500 companies to less than 10%.
- Benefits of Declassification: Annual elections are widely viewed as corporate governance best practice. Board declassification and annual elections could make directors more accountable, and thereby contribute to improving performance and increasing firm value. The substantial shareholder support for board declassification, and the significant empirical evidence consistent with this support, are described in two pieces by the SRP’s director, entitled Giving Shareholders a Voice and Why Wachtell Lipton was Wrong about the SRP, and in the SRP’s 2012-2013 Report.
- SRP-Represented Investors: The institutional investors that worked with the SRP during 2012 and/or 2013 are the Florida State Board of Administration, the Illinois State Board of Investment, the Los Angeles County Employees Retirement Association, the Massachusetts Pension Reserves Investment Management Board, the Nathan Cummings Foundation, the North Carolina State Treasurer, the Ohio Public Employees Retirement System, and the School Employees Retirement System of Ohio. These investors serve more than three million members and manage assets with a total value of more than $400 billion. Additional information about each of the SRP-represented investors is available here.
- SRP Work: The SRP provides SRP-represented investors with a range of services, including assistance in connection with selecting companies for proposal submission, designing proposals, submitting proposals on behalf of represented investors, engaging with companies, negotiating and executing agreements by companies to bring management declassification proposals, and presenting proposals at annual meetings.
The updated and final version of the SRP’s 2012-2013 Report is available here. This report updates the SRP’s preliminary report, which was released on October 29, 2013, to reflect subsequent outcomes through the end of 2013.
One Comment
I would encourage people to take a look at a recent study by Cremers, Litov and Sepe, “Staggered Boards and Firm Value, Revisited” that challenges the management entrenchment view of staggered boards. The study found that firm value increases if a board changes from a single class of directors to a staggered board. “Staggering up” was found to be associated with a permanent increase in Tobin’s Q. The study’s authors further postulated: “The problem of myopic incentives and the difficulty of committing to long-term firm-specific investments suggest a positive account of staggered boards that can potentially explain our main empirical result. Specifically, directors who do not have to stand for election every year may be less susceptible to making myopic decisions and have longer-term incentives relative to directors who are up for re-election annually. Staggered boards may thus have a positive association with firm value if such boards have an enhanced ability to resist myopic incentives and pursue long-term and/or specific investments.” To put a sharper point on it, “myopic incentives” could include driving EPS by laying off workers, buying back shares, cutting R&D, neglecting customers and quality, all purportedly to serve shareholders but in fact to appease short-term traders at the expense of the corporate endeavor, long-term investors, employees and other important constituents. For long-term investors, such as the Center’s public employee pension funds, might a better governance formula be staggered boards combined with majority voting? Such a formulation would allow directors to focus on long-term performance, while providing shareholders a real accountability mechanism.