Manhattan Institute Proxy Monitor Finding 3

Corporate Governance

Board Leadership, Voting Rules, and Shareholder Latitude are Key Issues

Individual Shareholder Activists Dominate Overall, but Unions Lead Charge on Board-Chairman Independence

The Manhattan Institute’s ProxyMonitor.org database contains information on shareholder proposals submitted to Fortune 100 companies, from 2008 through 2010, as part of proxy statements voted on in corporate annual meetings. These proposals have garnered increased attention in recent years, and various provisions of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act have increased shareholder power over corporate boards of directors.[1]

This spring, in anticipation of the 2011 proxy season, the Manhattan Institute is releasing “findings” drawn from the Proxy Monitor database. Our first finding, focused on executive compensation, showed the prominent role played by labor-union pension funds in sponsoring proposals tied to executive pay.[2] Our second finding, focused on shareholder proposals related to social and policy goals, found an increased emphasis on corporate political spending, expected to grow in the wake of the Supreme Court’s Citizens United[3] decision.[4]

This finding focuses on shareholder proposals involving more traditional corporate-governance questions, such as voting rules, shareholders’ power to act between meetings, and board leadership. While not as numerous as shareholder proposals related to various social and political issues,[5] these types of proposals have shown themselves much more likely to pass muster: as noted in an earlier Manhattan Institute report,[6] 19 percent of corporate-governance-related shareholder proposals submitted to Fortune 100 companies between 2008 and 2010 were approved. While less controversial, these proposals, when passed, have the potential to further empower shareholder activists in other areas, particularly contested director elections that may become more commonplace under “proxy access” rules promulgated by the Securities and Exchange Commission pursuant to Section 971 of Dodd-Frank.[7]

This Manhattan Institute Proxy Monitor Finding looks more carefully at corporate-governance proposals using data gathered from the Institute’s ProxyMonitor.org database to examine:

a) Major areas of focus for corporate-governance proposals;

b) Key sponsors of corporate-governance proposals; and

c) Voting trends.

a) Major areas of focus for corporate-governance proposals;

From 2008 to 2010, shareholder proposals related to corporate governance submitted to Fortune 100 companies were focused on three main issues: shareholders’ power to call meetings or otherwise act by written consent outside shareholder meetings; voting rules for electing directors and amending corporate bylaws; and the independence of board chairmen (see graph left).

In the last three full calendar years, shareholders of Fortune 100 companies voted on 73 shareholder proposals attempting to empower shareholders to act outside the annual meeting schedule. Nine of these proposals would authorize shareholders to act by written consent outside of annual meetings, and 64 would permit the owners of a certain percentage of shares to call for special meetings. The proponents of these proposals argue that permitting shareholders to act outside the annual-meeting process is an important tool of shareholder governance, allowing shareholders to elect new directors or otherwise take action when prompt shareholder consideration is necessary. When management opposes such proposals, it is usually on the grounds that such measures improperly empower a majority of shareholders—as few as ten percent in recent proposals—to impose significant costs on corporations and potentially advance an agenda contrary to the interests of a majority of shareholders, who are protected by boards fulfilling their fiduciary duties and who themselves already have the power to call special meetings.

The second largest category of corporate-governance proposals submitted for a vote at Fortune 100 companies in that time period—66 proposals in total—involved changes to voting rules. Specifically, these proposals called for simple-majority voting or for cumulative voting. Twenty proposals called for adopting simple majority-voting rules, such that directors in uncontested elections would have to obtain a majority of votes to be seated, as well as—for some proposals—allowing shareholders to amend corporate bylaws by simple majority vote. Supporters of these proposals maintain that majority voting is an essential component of shareholder power; opponents contend that at least for bylaw amendments, supermajority voting requirements can preserve important long-run shareholder interests. The most numerous category of voting-rule proposals called for cumulative voting, which would allow shareholders to aggregate all their votes in director elections in support of a single candidate. Supporters claim that permitting such targeted voting would enable a clearer expression of shareholder preferences in elections; opponents argue that cumulative-voting rules would instead empower the election of “special interest” directors who would pursue agendas that may conflict with the interests of most shareholders.

The third largest category of corporate-governance proposals involved rules requiring that the corporation’s board chairman be independent. Such rules would disqualify current and former chief executives from holding board chairmanships. Forty-nine of these proposals were submitted to a vote at Fortune 100 companies between 2008 and 2010. Supporters of these proposals argue that an independent chairman is best able to protect shareholders’ interests. Joint chairmen-CEOs, these supporters maintain, face an inherent conflict between their management and shareholder-protection roles. Opponents of these proposals argue that there is no one-size-fits-all solution for board leadership. Combining the role of chaiman and CEO, these opponents say, has a long history and can be more appropriate than separating the positions, depending on a company’s circumstances, including the value added by inside-management knowledge in leading board activities.

b) Key sponsors of corporate-governance proposals

Unlike executive-compensation and social-policy shareholder proposals,[8] proposals related to corporate governance tend to be sponsored by individual shareholder activists (see graph right).

A small number of shareholders—Evelyn Davis (the largest sponsor of shareholder proposals overall), and the Steiner, Chevedden, and Rossi families—dominate activity in this area, having sponsored 118 of the 198 identified corporate-governance proposals to have come to a vote at Fortune 100 companies from 2008 to 2010. All twenty-four of the proposals backed by Davis have called for cumulative-voting rules. The other individual sponsors of corporate-governance proposals have backed a more diverse array of proposals, focusing on voting rules and shareholder actions outside the annual meeting, in addition to less-common proposals, like reincorporation in North Dakota (a state whose coporate-law regime is viewed by shareholder activists as among the friendliest in the nation). Only one proposal among these large groups of individual sponsors involved the independence of board chairmen, that sponsored by the Chevedden Family Trust.

The principal sponsors of proposals calling for a separation of the roles of board chairman and chief executive officer were instead labor unions, who proposed 58 percent of all such proposals with an identified sponsor. The key role played by unions in this area parallels their role as sponsors of executive-compensation proposals.[9] Moreover, union support for such proposals reinforces the view that unions’ activity in this arena is motivated by a desire to extract concessions from management.

c) Voting trends

Although nineteen percent of corporate-governance proposals were approved by shareholders of Fortune 100 companies from 2008 through 2010, the passage rates varied widely by type of proposal:

Shareholder action between meetings: 35 percent of proposals related to taking shareholder action between annual meetings, though proposals calling for shareholder action by written consent were much more likely to pass (78 percent) than were the much more numerous proposals authorizing shareholders to call for special meetings (28 percent).

Voting rules: 21 percent of proposals related to voting rules passed, including 70 percent of those calling for simple-majority voting. No proposals calling for cumulative voting were approved by shareholders, though a majority of such proposals received over 30 percent of votes, with a high of 44 percent in favor of a cumulative-voting proposal submitted by Evelyn Davis for Aetna in 2008.

Chairman independence: Only one proposal calling for a separation of the board chairman and CEO positions was approved, having been sponsored by the Service Employees International Union (SEIU) for Bank of America in 2009. Seven other such proposals received at least 40 percent of shareholders’ votes.

In summary, proposals calling for shareholder action by written consent and for simple-majority-voting rules have been among the most likely to pass of all shareholder proposals, with more limited support for shareholders’ ability to call special meetings. Although there has been essentially no majority support for proposals calling for cumulative voting or independent board chairmen, such proposals have garnered sufficient support that they should be watched going forward.

This report analyzes information gathered from the Manhattan Institute’s ProxyMonitor.org database, which contains information relating to all shareholder proposals submitted for shareholder vote between 2008 and 2010, for the 100 largest American public companies.

ENDNOTES

[1] See generally Manhattan Institute Proxy Monitor Report (Winter 2011), available at http://www.proxymonitor.org/Forms/Reports.aspx.

[2] See Manhattan Institute Proxy Monitor Finding 1 (2011), available at http://www.proxymonitor.org/Forms/Findings.aspx.

[3] Citizens United v. Federal Election Commission, 130 S. Ct. 876 (2010).

[4] See Manhattan Institute Proxy Monitor Finding 2 (2011), available at http://www.proxymonitor.org/Forms/Findings.aspx.

[5] See Manhattan Institute Proxy Monitor Report (Winter 2011), available at http://www.proxymonitor.org/Forms/Reports.aspx.

[6] See id.

[7]The proposed rule has been stayed pending litigation. See Jesse Westbrook, SEC Delays Proxy-Access Rules amid Legal Challenge, Bloomberg Businessweek, Oct. 4, 2010, available at http://www.businessweek.com/news/2010-10-04/sec-delays-proxy-access-rules-amid-legal-challenge.html.

[8] See Manhattan Institute Proxy Monitor Finding 1 (2011), available at http://www.proxymonitor.org/Forms/Findings.aspx; Manhattan Institute Proxy Monitor Finding 2 (2011), available at http://www.proxymonitor.org/Forms/Findings.aspx.

[9] See Manhattan Institute Proxy Monitor Finding 1 (2011), available at http://www.proxymonitor.org/Forms/Findings.aspx.