75% of 2014 Engagements Have Already Produced Agreements to Declassify

Lucian 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.

In a news alert released last week, the Shareholder Rights Project (SRP), working with SRP-represented investors, announced the high level of company responsiveness to engagements during the 2014 proxy season. In particular, as discussed in more detail below, major results obtained so far include the following:

  • Following active engagement, about three-quarters of the S&P 500 and Fortune 500 companies that received declassification proposals for 2014 annual meetings from SRP-represented investors have already entered into agreements to move towards board declassification.
  • This outcome reinforces the SRP’s expectation (announced in a blog post available here) 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.

» About three-quarters of 2014 Engagements Have Already Produced an Agreement to Declassify: SRP-represented investors submitted shareholder declassification proposals for a vote at the 2014 annual meeting of 31 S&P 500 and Fortune 500 companies with classified boards (a list of the companies that received such proposals is available here). Following active engagement with companies receiving proposals, 23 companies have entered into agreements to bring management declassification proposals for shareholder approval (a list of those companies that have already publicly disclosed the agreed-upon management proposals is available here). The boards of these 23 companies should be commended for their responsiveness to shareholder concerns.

» Towards Declassification at 100 S&P 500 and Fortune 500 Companies: Together with the large number of declassifications that already took place during 2012 and 2013 as a result of engagement with the SRP and SRP-represented investors, the 23 agreed-upon management proposals are expected to bring about a major change in the governance landscape of large publicly traded firms. These 23 agreements reinforce the SRP’s expectation (set forth in its 2012-2013 Report) that, by the end of 2014, the work of the SRP and SRP-represented investors will have resulted in movements toward board declassification by about 100 S&P 500 and Fortune 500 companies.

» Substantial Results Produced During the 2012 and 2013 Proxy Seasons: As briefly discussed in the news alert, and as detailed in the post describing the SRP’s 2012-2013 Report, the work of the SRP and SRP-represented investors during 2012 and 2013, the SRP’s first two years of operations, has already produced:

  • 100 S&P 500 and Fortune 500 companies entering into agreements to move towards declassification as a result of 2012 and 2013 proposals (in addition to the 23 new agreements described in the news alert);
  • 58 precatory shareholder proposals obtaining approval at annual meetings of S&P 500 and Fortune 500 companies, with average support of about 80% of votes cast;
  • 81 S&P 500 and Fortune 500 companies, with aggregate market capitalization exceeding one trillion dollars, already declassifying their boards during 2012 and 2013; and
  • A substantial increase in the incidence of successful engagement by public pension funds, with shareholder proposals by SRP-represented investors representing more than half of all successful proposals by public pension funds during 2012 and 2013.

» 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 five SRP-represented institutional investors submitting proposals to 2014 annual meetings are the Florida State Board of Administration (SBA), the Illinois State Board of Investment (ISBI), the Nathan Cummings Foundation (NCF), the North Carolina Department of State Treasurer (NCDST) and the Ohio Public Employees Retirement System (OPERS).

» 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.

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