Friday, November 12, 2010

No-contest Proxy War

The headlines often read this way: “Proxy War” or “Proxy Battle” or “Proxy Skirmish.” One then looks for a hotly contested corporate proposal or board of directors slate. Lately it seems the insinuation of fierce confrontation is grossly overrated. In 2010, for example, the thirty-five proposals to separate the CEO and chairman positions received only 28% support. Forty-three board declassification proposals received an average of 62% support, with twenty-nine received a majority of votes in favor.

It is not surprising then that the proxy piece was for the most part overlooked in the recently passed Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The objective was to tip the balance of power slightly in favor of individual shareholders away from corporate insiders and their institutional cronies.

Beginning with the first annual meeting in 2011, companies will need to submit executive compensation packages to shareholders - the so-called Say-on-Pay requirement. The votes are non-binding, but even that is considered a step in the right direction. A review of compensation proposals voluntarily submitted to shareholders in 2010 demonstrates that shareholders are as quick to rubber stamp management’s compensation requests as are directors. Of the 125 proposals submitted to shareholders, 122 were approved. Some war!

Perhaps shareholders recognize that real influence is wielded in the boardroom. The Dodd-Frank bill gave individual shareholders greater access to the proxy process by requiring that all shareholders have the right to nominate candidates for the board of directors. Expect the 2011 season to be the first test of shareholder grit on director nominations. Most likely institutions will be the greatest beneficiaries of Proxy Access. Reportedly, many of the largest activist firms are already compiling lists of potential qualified candidates.

The proxy access rights will be available to shareholders who own or have owned continually for three years and have at least 3% of the company’s voting stock. The ownership threshold might be decreased from 5% to 3% for smaller companies, which will have this new rule set’s implementation delayed for the next three years to allow the SEC to measure success among the largest companies.

The Securities and Exchange Commission is busy working on rules that will guide corporations in implementing the Dodd-Frank requirements. Comments are due by November 18, 2010, on proposals issued last month.

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