Manhattan Institute Proxy Monitor Finding 5
Proxy Season 2011
Shareholders Seek Special Meetings and Political Disclosure
Early Returns Show Shareholders Approving Executive Pay but Seeking Annual Review
The Manhattan Institute’s ProxyMonitor.org database contains information on all shareholder proposals submitted to Fortune 100 companies since 2008. The first four “findings” drawn from information in the database have examined the types of proposals, key proponents, and industries targeted in the proxy process over the last three years. This fifth finding explores trends emerging in the 2011 proxy season, which begins in earnest this week (whereas only twelve companies in the Fortune 100 have held their annual meetings thus far in 2011, seventeen more are holding meetings between now and the end of April, and most companies will have held their annual meeting by the end of June).
Looking at the twenty-nine companies with scheduled meetings through April 30th, this finding examines:
- Early returns for executive compensation voting mandated by Dodd-Frank;
- The composition and key sponsors of shareholder proposals in 2011; and
- Trends to watch this proxy season.
a) Early returns for executive compensation voting mandated by Dodd-Frank
Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires all publicly traded corporations to submit executive compensation to shareholders for a non-binding advisory vote. Of the twenty-nine Fortune 100 companies that have held or are scheduled to hold annual meetings before April 30, all but one have held meetings after the effective date of Dodd-Frank. Each of these companies is holding two votes on executive-compensation proposals: first, an advisory vote on executive pay packages; and second, a vote on whether shareholders wish to review compensation annually, biennially, or triennially.
As suggested in the first Proxy Monitor finding, shareholders have generally opted to review executive pay on an annual basis. The boards of the first four Fortune 100 companies to hold Dodd-Frank-mandated votes in 2011 recommended that shareholders review compensation triennially, but shareholders of three of the four companies instead opted for annual review. Since then, directors have appeared to adjust strategy: the board of each Fortune 100 company to vote on the issue since has recommended annual shareholder review of executive compensation. The boards of three companies with forthcoming scheduled votes in April—IBM (April 26), AT&T (April 29), and Berkshire Hathaway (April 30)—have recommended triennial review; and Pfizer (April 28) is the first company to recommend biennial shareholder review of executive compensation. The voting results for IBM, Pfizer, and AT&T should test shareholders’ appetite for non-annual review of corporate pay.
All but one of the Fortune 100 companies to hold a vote to date have approved executive compensation packages, with all but three companies garnering at least 88 percent support. The shareholders of Hewlett-Packard disapproved of their company’s executive pay plan, in a narrow vote (48.25 percent of shareholders voted for the compensation package). The shareholder rejection of HP’s executive pay proposal demonstrates the power of the proxy advisory firm Institutional Shareholder Services (ISS), which recommended a vote against the plan and hailed the result as a victory, prompting a fierce reaction from HP chairman Ray Lane. HP’s pay proposal included not only prospective pay packages but the compensation of former CEO Mark Hurd, who left the company in August 2010; HP shares have declined over 9 percent since Hurd’s departure, while the overall market has risen, which may be a factor in shareholders’ decision to reject the compensation plan.
b) The composition and key sponsors of shareholder proposals in 2011
Unsurprisingly, with executive-compensation votes mandated under Dodd-Frank, the percentage of shareholder proposals relating to executive pay has dropped off markedly in 2011: whereas such proposals constituted 30 percent of all shareholder proposals from 2008 through 2010, they constitute only 15 percent of those submitted thus far in 2011. (Most of the 2011 executive compensation proposals submitted to date involve stock option grants.) Social-policy proposals unrelated to either executive pay or traditional corporate governance measures make up 55 percent of the shareholder proposals submitted to Fortune 100 companies with meetings scheduled before May.
In keeping with recent trends, labor-union pension funds, individual investors, and “socially responsible” investment funds and other activist organizations have each played a major role in sponsoring shareholder proposals in 2011. So-called “social funds” like Walden Asset Management and Domini Social Investments and organizations ranging from the People for the Ethical Treatment of Animals to the Sisters of Charity of Saint Elizabeth have exclusively sponsored social-policy proposals thus far this year. While labor union funds have submitted only 31 percent of all proposals, they have backed 86 percent of proposals relating to executive compensation—again suggesting that organized labor may be using the shareholder-proposal process to gain leverage over management. Individual investors have varied in their preferred shareholder proposals.
As predicted in Finding 2, the percentage of social-policy proposals devoted to monitoring corporations’ political spending has increased: fully 35 percent of proposals submitted to Fortune 100 companies with meetings through April 30 have called for companies to disclose or prepare reports on political, lobbying, or public policy expenditures or priorities. Environmental and animal-rights-related proposals also continue to comprise a significant fraction of all shareholder proposals.
Note: Numbers total more than 100% due to rounding error.
c) Trends to watch this proxy season
In the upcoming proxy season, observers interested in corporate governance should pay close attention to three key trends: say-on-pay votes, political spending votes, and votes on shareholder action outside ordinary annual meetings.
- Say on pay. In the wake of shareholders’ decision to reject the pay package at Hewlett-Packard, will shareholders at other major companies likewise take on their companies’ proposed compensation? If other pay packages are voted down—or approved by narrow majorities—it will be important to monitor the role played by proxy advisory firms like ISS, whom critics charge wield a disproportionate weight in driving institutional investors’ proxy votes; as well as other factors, such as share performance and the extent to which recommended pay deviates from industry norms or is targeted at past versus future management teams.
- Political spending. Between now and the end of April, nine shareholder proposals concerning political spending will be up for consideration at five Fortune 100 companies: Citigroup (April 21), IBM (April 26), Pfizer (April 28), Valero Energy (April 28), and AT & T (April 29). Those interested in how shareholder proposals are targeting political spending in the wake of the Supreme Court’s decision last year in Citizens United will be watching these votes closely—as well as Home Depot’s looming vote on June 2, which is the first vote calling on companies to submit their political expenditures to a shareholder advisory vote.
- Shareholder action outside annual meetings. To date, 71 percent of shareholder proposals related to corporate governance have involved empowering shareholders to take action outside the annual meeting process, either by calling special meetings or acting through written consent. Nine such proposals will be up for a vote at six Fortune 100 companies by the end of April: Citigroup (April 21), Honeywell (April 25), IBM (April 26), Dupont (April 27), Pfizer (April 28), and AT&T (April 29).
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 since 2008, for the 100 largest American public companies.
See Manhattan Institute Proxy Monitor Findings 1, 2, 3 & 4 (2011), available at http://www.proxymonitor.org/Forms/Findings.aspx.
- Walgreens held its annual meeting on January 12, before Section 951 went into effect; it will implement Dodd-Frank’s required votes on executive compensation at its next annual meeting.
- See Manhattan Institute Proxy Monitor Finding 1 (2011), available at http://www.proxymonitor.org/Forms/Findings.aspx.
- The company for which shareholders supported management’s recommendation for triennial review, Tyson Foods, has a dual-share structure that gives insiders effective voting control.
- Berkshire Hathaway will presumably approve triennial review, as recommended by the board: the large insider-voting stake of Warren Buffett, who controls about one-third of the conglomerate’s voting shares, virtually assures that the positions of the board and management will be approved in any shareholder vote.
- See Aaron Ricadela, Hewlett-Packard Shareholders Vote against Executive Compensation Packages, Bloomberg, Mar. 23, 2011, available at http://www.bloomberg.com/news/2011-03-23/hewlett-packard-shareholders-vote-against-executive-pay-1-.html.
- See Manhattan Institute Proxy Monitor Report (Winter 2011), available at http://www.proxymonitor.org/Forms/Reports.aspx.
- Seediscussion at Manhattan Institute Proxy Monitor Report (Winter 2011), available at http://www.proxymonitor.org/Forms/Reports.aspx; Manhattan Institute Proxy Monitor Findings 1, 3 & 4 (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.
- See Citizens United v. Federal Election Commission, 130 S. Ct. 876 (2010).
- See discussion of such proposals in Manhattan Institute Proxy Monitor Finding 3 (2011), available at http://www.proxymonitor.org/Forms/Findings.aspx.