RESULTS OF THE 2008 PROXY SEASON
At the start of the 2008 proxy season, it was anticipated that executive compensation would continue to be a major issue for governance activism. In fact, though a few directors were targeted because of compensation concerns, overall, the success of compensation-related proposals was mixed. "Say-on-pay" proposals that came to a vote increased in number from 41 in 2007 to 69 in 2008, but support for these proposals stayed the same at roughly 42 per cent. Notably, at seven financial companies that faced similar proposals last year, support for say-on-pay proposals dropped in 2008. Pay-for-performance proposals that reached a vote decreased in number from 38 in 2007 to 20 in 2008, and on average these proposals received less shareholder support than in 2007. Proposals brought to a vote regarding claw-backs of executive bonuses in the event of restatement, shareholder approval of golden parachutes, and supplemental executive retirement plan (SERP) policies also declined in number. Overall, companies responded to the United States Securities and Exchange Commission's (SEC) enhanced disclosure rules regarding executive compensation by disclosing (in increasing numbers) the goals in their executive compensation plans, using plain English in the descriptions of their pay programmes, adopting claw-backs of incentive compensation in the event of misstatements, adopting share-ownership requirements, and generally implementing more shareholder-friendly compensation practices.
Outside of the executive compensation arena, other governance proposals also declined in number. As more companies adopted majority voting in the form of a policy, by-law or charter provision, majority voting proposals declined to only 27 voted upon in 2008, as compared to 38 in 2007 and 84 in 2006. The average support was 50 per cent in 2008, the same level of support as in 2007. Proposals on independent board chairs declined from 40 in 2007 to 26 in 2008, with support increasing slightly from 25 per cent to 30 per cent. Proposals to rescind supermajority voting requirements declined from 20 to 12 in 2008, and support dropped from 68 per cent to 59 per cent.
One of the primary lessons to emerge from the 2008 proxy season is that effective company-shareholder communication does make a difference. This season saw the practical impact of effective and improved communication in reducing the number of proposals that were brought to a vote and the amount of support that proposals received. The United Brotherhood of Carpenters and Joiners withdrew more than half of its pay-for-performance proposals after negotiations with targeted companies. Carpenters and other investors withdrew more than 30 pay-for-performance resolutions after discussions with targeted companies, compared to 17 in 2007. At all six financial firms targeted by labour funds, directors met with shareholder representatives. At ExxonMobil, proponents of an independent chairman position claimed that their proposal would have done better if the company had not engaged in an "unprecedented outreach effort ... to solicit votes from institutional and retail investors". At Verizon, a say-on-pay resolution was withdrawn as the company had committed to holding an investor pay vote in 2009.
Drawing on the experience of 2008, the 2009 proxy season is likely to bring even more examples of successful communication among companies and their shareholders, particularly as all parties concentrate on the important issues of stability, strategic direction, and long-term share value. In this context, boards of directors need to be careful that, in negotiating with shareholder activists, they do not give up too much to obtain withdrawal of a shareholder proposal. Certainly, in the context of takeover defences, companies need to consider carefully how an agreement with a shareholder activist may make them more vulnerable to opportunistic raiders in the future. Likewise, in regard to executive compensation, management teams may find themselves with limited flexibility to retain senior executives if the company has unduly limited its options. As companies struggle to succeed in a difficult economic climate, it is to be hoped that shareholders will be less concerned with gaining influence on compensation decisions and more interested in ensuring that the board has the ability to attract and retain strong senior management.
For the 2009 proxy season, executive compensation is expected to remain in the spotlight. In addition to say-on-pay proposals, the passage of the Troubled Asset Relief Program under the Emergency Economic Stabilization Act of 2008 (known as the TARP legislation), as well as renewed calls for regulation of executive compensation, is expected to bolster governance activists in the upcoming proxy season. Even in the absence of increased regulation, executive compensation remains a key issue. Institutional Shareholder Services (ISS)/RiskMetrics withholding vote recommendations against compensation committee members are likely to increase significantly in light of the number of underperforming companies. Compensation discussion and analysis, or CD&A, disclosure is likely to have increased prominence during the 2009 proxy season as investors look to hold boards of directors accountable for what they perceive to be excessive executive compensation. Compensation committees should use the CD&A as an opportunity to highlight the key aspects of pay-for-performance policies as well as adding in discussions about avoidance of undue risk in the design of bonus and compensation structures.
TAKEOVER DEFENCES IN THE CURRENT ENVIRONMENT
The importance of takeover defences in a down market cannot be overstated. It appears that shareholders may agree, as support for eliminating takeover defences appears to be waning. Support for proposals to end staggered boards and to eliminate supermajority requirements for by-law changes and other matters declined compared to last year. Proposals to give shareholders the right to call special meetings also received less support this year than last year, although the number of such proposals more than doubled from 22 in 2007 to 51 in 2008. The number of proposals to eliminate poison pills also continues to decline; only four were voted upon this year as compared to 14 in 2007.
As share prices fall in the troubled market and hostile and unsolicited takeover offers increase, companies are recognising that takeover defences play an important role in their strategic plan. In fact, 2008 brought a dramatic increase in the number of poison pill adoptions; SharkRepellent, a web-based newssheet focusing on US public companies' takeover defences, reports that 76 US public companies adopted their first-ever poison pill last year, as compared to 42 original pill adoptions in 2007. Companies have also started to recognise that activist hedge funds have been using derivative positions to obtain large holdings without disclosing their ownership levels or intentions; as a result, some companies are considering broadening the language of their poison pill triggers and advance notice by-laws in order to include all forms of economic and voting interests.
The threat of takeover is very real. A significant percentage of pill adoptions and renewals in 2008 were undertaken while the company was "in play", and most pill-adopting companies did so without seeking shareholder approval; this is despite the fact that ISS recommends that its clients withhold votes for directors at companies who adopt or renew a poison pill without requiring shareholder ratification. Though the total number of US companies with poison pills may continue to decline, as it has since 2001, the decline is slowing, and fewer companies are proactively terminating their poison pills before their expiration dates. It appears that the ISS voting policy has led a number of companies to decide to let their poison pills expire, with boards of directors determining that they can adopt a new poison pill in the face of a threat, as opposed to having a poison pill in place as a deterrent. In the United States, the poison pill is a board-implemented mechanism and thus can be adopted quickly. Boards of directors are recognising that they are much better off adopting an effective poison pill that works in the face of a real threat rather than adopting a watered-down version of a poison pill that will meet the standards generally necessary to achieve shareholder approval.
Interestingly, management proposals to declassify boards increased to 79 proposals in 2008 from 54 in 2007 (there were 72 management proposals in 2006). It may be that management has felt pressure to take this step in order to improve the company's corporate governance ratings, a concern which, as we have noted previously, would be misplaced. If so, one would expect this number to decline significantly in 2009 as companies and shareholders properly shift their focus back to company fundamentals and away from superficial and frequently counterproductive governance metrics. The fact that there was an increase in proxy fights during the 2008 proxy season may also discourage companies from declassifying their boards.
The lesson of the recent proxy season is that in troubled financial times, the fundamentals seem increasingly important. As economic hardship is expected to continue in 2009 and possibly beyond, companies and their shareholders seem likely to take the long-term view towards increasing share value through strong leadership and sound strategic direction. Good communication and effective takeover defences are crucial to ensuring that executives, directors and shareholders are on the same page with respect to a company's future. In a down market particularly, takeover defences are crucial: they enable a company to determine its own destiny and to protect shareholder value in the event of a negotiated sale or through continued independence. Moreover, effective takeover defences empower a board of directors to negotiate from a position of strength when faced with an opportunistic takeover bid, thus promoting the long-term best interest of the corporation and its shareholders. Based on the 2008 proxy season, which perhaps saw the beginning of some trends in the right direction, we are optimistic that the near-term future of corporate governance in the United States will include a healthy dose of pragmatism.