January 30, 2023

Volume XIII, Number 30


January 27, 2023

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The 2012 Proxy Season — A Review of Significant Trends and Developments

The 2012 proxy season revealed some significant trends and developments. These developments are instructive to public companies and their counsel as they approach and plan for future annual meetings and the proxy solicitation process in general. This article reviews a few of these broader trends and developments and discusses implications for public companies.

1. Say on Pay

This was the second year in which U.S. public companies were required, pursuant to Section 951 of the Dodd- Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and Exchange Act Rule 14a-21(a), to hold non-binding advisory votes to approve the compensation of named executive officers (“say-on-pay votes”). In its inaugural proxy season last year, the say-on-pay regulatory regime required all U.S. companies subject to the proxy rules to hold an advisory say-on-pay vote and also put before their shareholders the question of whether, going forward, subsequent say-on-pay votes would be held once every one, two or three years. Last year, most companies’ shareholders expressed a preference for an annual frequency of say-on-pay votes. Consistent with that preference, most companies held a second say-on-pay vote this year.

As with last year, the vast majority of companies saw their shareholders approve executive compensation by large margins. Across all U.S. companies and all S&P 500 companies, the average percentage approval of executive compensation so far this year has approximated 90% and the percentage of U.S. companies receiving less than 70% approval (a key percentage benchmark for ISS) is only approximately 10%. There has been, however, a slight uptick in the number of failed say-on-pay votes (i.e., instances in which executive compensation garnered approval from less than 50% of the votes cast) since 2011. At last count, 55 companies had failed say-on-pay votes, constituting roughly 2.5% of all U.S. companies holding a say-on-pay vote.

The say-on-pay voting results confirm the continuing influence of negative recommendations of ISS and other proxy advisory firms. The average percentage support for companies that received a negative say-on-pay recommendation from ISS was only 65% for all U.S. companies and 58% for S&P 500 companies. That is a slightly stronger influence (strictly as measured by percentages) than was seen last year.

In almost all cases where ISS made a negative recommendation, the company receiving the negative recommendation scored poorly with respect to ISS’s pay-for-performance criteria. Other issues noted by ISS — such as problematic change-in-control arrangements, concerns with peer group benchmarking, non-performance-based compensation elements and concerns with compensation committee effectiveness — were not nearly as prevalent. For companies that received a negative say-on-pay recommendation and failed to achieve majority support for their compensation program, the most prevalent quantitative red flag from ISS was misalignment of CEO pay to total shareholder return, and the most prevalent qualitative factors were (1) failure of incentive compensation to be rigorously performance based and (2) benchmarking above a peer group median.

Most of the companies with failed say-on-pay votes in 2011 bounced back in 2011, not only gaining ISS support, but also getting approval from shareholders. Of the 40 companies with failed say-on-pay votes in 2011, only four failed again. The keys to reversing course seemed to be significant shareholder engagement, enhancement of the pay-for-performance link in compensation program design, addressing the specific problems noted by ISS in 2011 and clear disclosure of the improvements made in proxy statements and other shareholder communications.

2. Proxy Access Shareholder Proposals

In August 2010, the SEC adopted Rule 14a-11, a mandatory proxy access rule, which would have allowed shareholders (or groups of shareholders) who had held 3% of the company’s voting securities for a three-year period to include director nominees in the company’s proxy materials. At the same time, the SEC amended Rule 14a-8 to

narrow the basis for excluding shareholder proposals that deal with shareholder elections. As discussed in detail in one of our previous alerts (available here), the U.S. Court of Appeals for the D.C. Circuit vacated Rule 14a-11 in its entirety, holding that the SEC did not adequately assess its costs and benefits. [1] However, the amendment to Rule 14a-8 survived the vacating of the mandatory access rule and went into effect in September 2011. This opened the door to “private ordering” of proxy access — that is, the development of a market standard for proxy access arising from shareholder proposals and engagement with company management over time.

In 2012, slightly over 20 shareholder access proposals were submitted to U.S. public companies. Some of these proposals were binding (i.e., if approved, the company would be required to make applicable changes to its by-laws), while others were merely advisory and non-binding in nature. The following details the most prevalent proposals in the 2012 proxy season.

a. U.S. Proxy Exchange — Non-Binding/Advisory Proposals: The most widely submitted proxy access proposal was based on a model issued by the United States Proxy Exchange, a shareholder advocacy group. This advisory, non-binding proposal requested a bylaw amendment permitting shareholders who have owned 1% of the outstanding stock of the company for at least two years, or alternatively 100 holders who satisfy the eligibility requirements of Rule 14a-8, to include director nominees in the company’s proxy statement. The proposal would permit each eligible shareholder or group to nominate up to one-twelfth of the board. The proposal also included a provision stating that an election of proxy access nominees would not be a “change in control” of the issuer. Every company that sought to exclude this proposal under SEC rules was successful in doing so. The SEC staff agreed with the companies that this proposal could be excluded on two separate bases: (1) The proposal constituted multiple proposals in violation of Rule 14a-8(c), due to the inclusion of the provision regarding a change in control; and (2) the proposal was vague and indefinite under Rule 14a-8(i)(3) because it referred to the eligibility requirements of Rule 14a-8 without explaining what these requirements were.

The U.S. Proxy Exchange issued a new form of proposal that eliminated the provisions upon which exclusion was based. This form of proposal has been submitted to a handful of companies. Those seeking to exclude the new proposal were denied no-action letter relief, but the proposals have not come up for a vote yet.

b. Norges Bank Investment Management — Binding Proposals: Norges Bank submitted a number of binding bylaw amendment proposals that would give a proxy access right to a shareholder or group that holds 1% of the outstanding stock and has held those shares for at least one year. Each eligible shareholder or group would be permitted to nominate up to 25% of the board and there was no overall limit on the number of nominees, though the number of access nominees actually elected to the board could not exceed 25% of the board. Most companies that received the Norges Bank proposal submitted exclusion requests to the SEC staff, arguing that the proposal was excludable as vague and indefinite. But only one received a no-action letter as a result of a drafting error in the proposal. This proposal failed to gain majority support at any annual meeting where it was brought to a vote, despite receiving a “for” recommendation in all cases from ISS.

c. Pension Fund Coalition Proposals — Non-binding/Advisory: A coalition of state and municipal pension funds submitted non-binding, advisory proposals at Nabors Industries and Chesapeake Energy seeking to create a proxy access right for 3% shareholders (or groups) who have held their stakes for at least three years (the same thresholds as in the vacated Rule 14a-11). These proposals passed at both Nabors (with the support of 56% of votes cast) and Chesapeake (with the support of 60% of votes cast).

3. Other Shareholder Proposal Activity

A review of other shareholder proposal activity during the 2012 proxy season also reveals some interesting trends. As in the past, a large number of governance-related shareholder proposals were submitted to large public companies in the United States during this year’s proxy season. These types of proposals typically saw a high level of support and were most likely to achieve majority shareholder approval. Proposals on social issues, on the other hand, while also prevalent, were much less likely to meet with success.

a. Corporate Governance Proposals

  • Independent Board Chair Proposals: The 2012 proxy season brought a more than 50% increase in the number of proposals among S&P 500 companies seeking an independent board chair separate from the company’s CEO. But the average percentage of votes cast for such proposals was approximately 35% and only two out of 38 such proposals actually passed. This may signal that a governance structure utilizing a strong lead independent director is an acceptable position on this issue for most shareholders. Under ISS voting policies, ISS, subject to certain conditions, will recommend a “no" vote on independent board chair proposals if there is an effective lead independent director.
  • Shareholder Right to Call Special Meeting / Shareholder Written Consent Proposals: The number of proposals allowing shareholders (typically holding at least 10% of outstanding shares) to call special meetings and proposals to allow shareholders to act by written consent were down somewhat this year compared to 2011, reflecting in part that many companies have already adopted these measures or that shareholder proposals on the topics may be preempted by management proposals on the issues. With respect to the special meeting proposals, those proposals seeking to establish the right received more support and were more likely to succeed than proposals that merely sought to lower the percentage threshold of shares needed to call a special meeting where meeting call rights already existed. Shareholder written consent proposals continued to have a relatively high level of support and about a quarter of them passed in 2012.
  • Other Good Governance Proposals: Board declassification proposals, which increased this year, continued to enjoy significant support, with almost all such proposals that came to a vote receiving majority support. Majority vote director election proposals and proposals to eliminate supermajority voting provisions from company charters and by-laws likewise received strong support.

b. Social Policy Proposals: Shareholder proposals on various social policy issues continued to be prevalent. Proposals on political issues such as political spending or lobbying were up in 2012. Proposals on environmental issues were less prevalent this year compared to last year, while the number of proposals on subjects such as sustainability reports, human rights, animal rights or labor issues remained fairly steady. None of the proposals brought to a vote at S&P 500 company annual meetings received majority support.

4. ISS Negative Recommendations Against Directors

To date in 2012, ISS has issued just over 100 adverse director election recommendations to S&P 500 companies in the United States. The following are the most significant factors spurring such action:

  • Board Responsiveness to Shareholder Proposals: This was the most common reason for ISS to issue an adverse recommendation. ISS recommends a negative vote for all incumbent directors if the board fails to act on a shareholder proposal that was supported by a majority of shares outstanding in the prior year, or that was supported by a majority of votes cast in two of the last three years. Most directors that received less than majority support in 2012 had this issue raised as a red flag by ISS.
  • Executive Compensation Deficiencies: ISS also made negative recommendations against directors this year for perceived deficiencies in oversight and management of executive compensation matters, including approval of problematic pay practices, failure to adopt best practices and pay-for-performance disconnects. Depending on the circumstances, ISS will either make recommendations against compensation committee members only or the entire board. Notwithstanding ISS recommendations, the average level of shareholder support for these directors at S&P 500 companies was 94% of votes cast, signaling that shareholders may now view the say-on-pay vote as the primary vehicle for registering dissatisfaction with compensation practices.
  • Other Issues Prompting Negative Director Recommendations: A variety of other reasons were cited by ISS as justification for adverse director recommendations. In some cases, ISS took issue with board members’ independence. In other cases, ISS cited the absence of a formal nominating committee. In a handful of cases, ISS cited poor attendance and “overboarding” as problems.

Also of Interest

SEC Adopts Rules Requiring Listing Standards Concerning Compensation Committees and Compensation Advisers

In late June, the SEC approved a rule that directs national securities exchanges to adopt listing standards relating to compensation committees and compensation advisers. The new rule, required by the Dodd-Frank Act, requires exchange listing standards to address:

  • The independence of the members of a compensation committee;
  • The committee’s authority to retain compensation advisers;
  • The committee’s consideration of the independence of any compensation advisers; and
  • The committee’s responsibility for the appointment, compensation, and oversight of the work of any compensation adviser.

Once an exchange’s new listing standards are in effect, a listed company must meet the standards in order for its shares to continue trading on that exchange. The new rule and related rule amendments took effect July 27, 2012 and the national exchanges have until September 25, 2012 to propose the new listing standards.

For a detailed discussion of the new rule and rule amendments, see our Public Company Alert here.

SEC Sets Date for Meeting to Consider Final Conflict Mineral Rules

The SEC recently announced that it will hold an open meeting on August 22, 2012 to consider adopting a final rule to implement the conflict minerals disclosure requirements of Section 1502 of the Dodd-Frank Act. Proposed rules were issued in December 2010 and the final rules were originally due in April 2011. Last month 58 Democratic members of the House of Representatives sent a letter to SEC Chairman Mary Schapiro expressing concern over the SEC’s delay in acting on this issue. The Dodd-Frank Act requires the SEC to adopt rules requiring disclosure in periodic reports when “conflict minerals” (certain minerals determined to be financing conflict in the Democratic Republic of Congo or an adjoining country) are necessary to the functionality or production of a product manufactured by a company that files periodic reports under the Exchange Act.

ISS Issues Policy Survey for 2013

ISS has issued its annual policy survey for 2013. This survey, which seeks input from institutional investors, issuers and other corporate governance participants, often provides insight into the issues at the top of the ISS priority list and may foreshadow the content of policy changes that ISS will promulgate in November 2012 with application beginning in February 2013. This year’s survey, which closes on August 17, 2012, includes 31 questions of relevance to the U.S. market. Among the subject matters covered by the survey questions are: (1) overboarding and director independence, (2) various executive compensation issues and (3) proxy access and other shareholder proposals. A copy of the complete survey can be found here.

Broadridge Publishes Its Report on 2012 Proxy Season Statistics

This month, Broadridge released its report of key statistics and performance ratings for the 2012 proxy season. Among the notable items included in the report are the following:

  • Average quorum levels were 82.7% (as compared to 83.5% in 2011). A decrease in broker votes was offset this season by a higher percentage of shares voted with instructions.
  • 95.5% of all of the shares voted through Broadridge were voted electronically through ProxyEdge, ProxyVote.com and automated voice response.
  • Over 60% of all mailings were either delivered through electronic platforms or consolidated, by specialized processing, into a single delivery or e-delivery for households and managed accounts, a 13% increase over last season and an all-time high for Broadridge.
  • 445,000 votes were cast through the mobile ProxyVote.com platform, a fourfold increase over last season.

FASB Removes Loss Contingencies Project From Its Technical Agenda

On July 9, 2012, the Financial Accounting Standards Board (“FASB” or “the Board”) voted to remove from its agenda its ongoing project regarding proposed loss contingency disclosure, ASC Topic 450: Disclosure of Certain Loss Contingencies (formerly FAS 5). The Board noted that the current requirements under Topic 450 are sufficient, and that addressing any concerns with the adequacy of loss contingency disclosures is an issue of compliance and enforcement rather than standard-setting. FASB commenced the project in 2007 and issued two exposure drafts. The controversial proposal, which had generated substantial commentary, would have expanded both the number and type of loss contingencies that were required to be disclosed and the extent of disclosure of specific quantitative and qualitative information about those loss contingencies. It remains to be seen if the SEC will take up the gauntlet and seek additional disclosure in this area in the wake of this announcement.

SEC Office of the Chief Accountant Issues Final Staff Report on Global Accounting Standards

On July 13, 2012, the Office of the Chief Accountant of the SEC published its final staff report on the Work Plan for Global Accounting Standards and further called into question the likelihood of full scale adoption of international accounting standards in the United States. The report, which the SEC commissioned to help it evaluate the implications of incorporating International Financial Reporting Standards (“IFRS”) in the U.S. financial reporting system, examined IFRS and the arguments for and against various forms of adoption. The report stated that full-scale adoption of IFRS has little support and few investors or companies are prepared for it. The report also stated that a wholesale switch to international standards would strain the resources of U.S. companies and a staged transition has more support. The report made no specific recommendations, but outlined in detail the many drawbacks of IFRS. Given this latest development, the manner and schedule for incorporation of international standards, even one accomplished by gradual transition, is still very much in question. SEC commissioners could decide differently but are unlikely to ignore the conclusions and tenor of this report.

1  In April 2012, SEC Chairman Mary Schapiro indicated that the SEC has no immediate plans to repropose the rule.

© 2023 ArentFox Schiff LLPNational Law Review, Volume II, Number 219

About this Author

With long-standing expertise in the federal securities laws, Schiff Hardin provides public companies across the United States with the full range of services necessary to compete effectively in today's global and dynamic marketplace. Our primary goal is to know our clients, learn their businesses and their industries, and work closely with them to quickly, effectively and efficiently address the many legal, regulatory, and other challenges that public companies face.