Recent public and private sector policy shifts have given shareholders more power than ever, and they’re not shy about using it. This year’s annual meeting season -- most companies hold their get-togethers between March and June -- will likely feature more hotly contested votes on more shareholder proposals and director candidates than any before it, say governance experts.
Already this season several companies -- including Electronic Data Systems, Lehman Brothers and Wells Fargo -- have ceded to pressure for their directors to be elected by a majority shareholder vote. The American Federation of State, County and Municipal Employees pension fund withdrew proposals seeking majority voting at those companies after they changed their bylaws, but it is proceeding with a similar proxy initiative at biotechnology concern Genzyme Corp.
Majority voting is just one of several changes giving investors unprecedented sway in boardrooms. About 300 companies, led by Pfizer and Intel Corp., instituted majority voting during the 18 months preceding the current proxy season amid widespread investor dissatisfaction with the traditional system, which virtually guarantees that management’s candidates win, because there is no option to vote “no.” In most cases, directors currently need just one vote to be elected. Another weapon in activists’ arsenal is a September court decision upholding their right to submit proxy proposals concerning director nominations. Some see the ruling as a green light to seek to nominate director candidates on the official corporate ballot instead of having to mount a proxy fight.
“Boards will be more accountable because of these changes,” says Patrick McGurn, special counsel at proxy adviser Institutional Shareholder Services. “They will be more responsive to shareholders.”
Investors plan to exploit majority voting by targeting specific directors. Julie Gozan, corporate governance chief for Amalgamated Bank’s LongView funds, pledges to vote against those who have approved “egregious” executive pay packages. The AFL-CIO Office of Investment also will target directors, says its head, Daniel Pedrotty, declining to elaborate: “We’re still deciding who and when.”
The potential for access to the corporate proxy could have a bigger impact. At issue is shareholders’ ability to put alternatives to management’s director nominees on the official proxy ballot. After the Securities and Exchange Commission aborted a plan to mandate such access in 2005, Afscme and other activists targeted individual companies, proposing that they allow shareholder nominees on their ballots. Insurer American International Group received SEC permission to omit one such proposal from its 2006 proxy. Afscme sued, and in September a federal appeals court ruled that AIG couldn’t exclude the petition. Since then the union has proposed that Hewlett-Packard Co. let investors put nominees on the official proxy. That measure will be voted upon March 14. Richard Ferlauto, Afscme’s head of pension policy, says more such proposals are coming; he won’t reveal targets.
Activists are also preparing a broader array of proposals this proxy season. Many focus on the hot issue of executive pay. Nearly 30 companies, including 3M and Yahoo!, face a proposal from the United Brotherhood of Carpenters and Joiners of America pension fund seeking to link pay to performance. The fund is also proposing that 16 companies, including AT&T and Wells Fargo, limit supplemental executive retirement benefits. Afscme has submitted proposals to a host of companies, including Citigroup and Ingersoll-Rand Co., seeking to give shareholders a vote on pay packages.
“In the U.K. similar shareholder votes on pay have promoted greater communications with shareholders before compensation schemes are designed,” says Ferlauto. “They have generally led to greater alignment between pay and performance.”
Two pending rule changes should give activists even more power in the future. In July the SEC will let shareholders file proxy materials electronically, thereby making proxy fights cheaper. And a New York Stock Exchange rule to take effect in 2008 will bar brokerages from voting shares held for clients who don’t provide them with voting instructions. That measure alone, estimates ISS’s McGurn, could sway anywhere from 5 percent to 30 percent of votes in director elections.
