The 2010 Proxy Season
HIGH STAKES
THIS ISSUE: THE 2010 PROXY SEASON
Recent rules issued by the U.S. Securities and Exchange Commission (SEC) have set a new standard of transparency and accountability for the 2010 proxy season. But with investor confidence still reeling from the global financial meltdown, the foremost challenge for public companies as annual meetings begin isn’t simple compliance; it is finding ways to go above and beyond what is required and articulate leadership in an era of drastic change.
In this issue, we outline how best to navigate the top three issues likely to generate investor ire during the 2010 proxy season …Gain insight from corporate governance expert Todd Lang of Weil, Gotshal & Manges LLP…Examine at the top blogs covering proxy issues…And look ahead to how further SEC rulemakings and congressional action promise to set the proxy bar even higher in 2011.
Strategies: Alignment is the name of the game
From executive compensation and risk management to board member qualifications and the implications of the Supreme’s Court’s recent ruling on campaign spending by companies and other organizations, investors are seeking to have their voices heard on a wide array of issues in 2010. Public companies that successfully align the corporate vision with that of their shareholders stand to gain investor support and build market confidence. Those that don’t will remain symbols of the old guard at a time when a new way forward is on every investor’s mind.
Annual meetings are often critical forums for leaders to define their visions. It's a time to inspire as well as provide specifics on where the company is going and how it plans to get there. In many ways, 2010 is no different. But in others, this proxy season promises to be among the most challenging in recent memory – in terms of the transparency now mandated by the SEC and the accountability expected from increasingly activist and empowered investors who have had enough of business as usual.
As we embark on a new proxy era, here’s a look at the top three issues likely to create a stir among shareholders in 2010 and how they can best be leveraged to articulate a commitment to putting investors’ interests first.
Executive Compensation. This year, the relationship between compensation and risk has fundamentally altered how public companies must address executive pay issues. New SEC rules now require public companies to address pay policies that are “reasonably likely to have a material adverse effect on the company” in their proxy statements. According to the executive compensation data and research firm Equilar, the words “excessive risk” were found in only two CD&A (Compensation, Discussion and Analysis) disclosures in 2008. In 2009, that number ballooned to 235. In 2010, expect another dramatic increase.
While risk issues promise to dominate the executive pay debate in 2010 – and will force companies to clearly demonstrate how pay policy has been aligned with risk management strategy – they have not replaced the fundamental investor concern that executive compensation is simply too high to justify in many cases. That means communicating precisely what shareholders are getting for their investment in leadership remains a top priority as well. By clearing defining the metrics that determine executive success, and providing detailed analyses of how those goals are being met, public companies can help to inoculate themselves against the populist attacks that have rung out from Wall Street to Capitol Hill in recent years.
Board Member Qualifications. New SEC rules have also had an impact on board members and nominees. Public companies are now required to disclose the expertise and qualifications that make the director or nominee an asset to the company. Public companies must also now disclose any board members’ directorship of a public company or registered investment firm in the last five years.
Of course, with increased proxy access looming on the horizon, board members are going to want to go further than mere compliance with the SEC’s new standard of transparency. They need to demonstrate accountability to the investors they represent and a mastery of the issues that are most significantly affecting the bottom line. Simply put, board members must be perceived as more engaged than ever before in 2010 or risk losing their seats when the proxy fights expected in 2011 come to pass.
Corporate Campaign Spending. When left-leaning voices are calling Citizens United v. the Federal Election Commission the Supreme Court’s most damaging ruling since 1857’s Dred Scott decision and those on the right are cheering it as a repeal of “one of the worst abridgments of the First Amendment since the infamous Alien and Sedition Acts of 1798,” you know you have a hot issue on your hands. The High Court’s recent decision to allow a potential flood of money from companies and other organizations into political campaigns has much of the public up in arms – and the investor community is no different.
Earlier this month, a group of shareholder organizations headed up by ShareOwners.org announced the launch of a major proxy effort to, as ShareOwners.org Acting Executive Director Maureen Thompson put it, “Ensure that the interests of investors are not steamrolled in the pursuit of unrestrained corporate politicking.”
While there is much we don’t yet know about how this new empowerment will be applied in practice, there is no question that it’s a hot button for investors this year.
Industry insight: Corporate governance expert Todd Lang of Weil, Gotshal & Manges LLP
Todd Lang is a Senior Partner in the law firm of Weil, Gotshal & Manges LLP with more than 50 years of experience in matters of corporate governance. He has served as chair of the Committee on Corporate Governance of the American Bar Association’s Business Law Section and has been extensively involved in the activities of the Section’s Committee on Federal Regulation of Securities. He also serves as Chairman of the Board of Advisors for the Center for the Study of Corporate Law at Yale Law School.
As a leading authority on how a torrent of investor and regulatory activity has affected the 2010 proxy season, Mr. Lang shared his thoughts on the matter with High Stakes™:
What do you expect will be the most striking feature of the 2010 proxy season?
Todd Lang: Executive compensation and corporate governance are both front and center in terms of investor and regulatory attention. The role of the compensation committee is necessarily expanded because the corporation will need to focus on the relationship of risk to the compensation program and the use of clawbacks and other measures to minimize or recover compensation upon the occurrence of defined adverse events. The committee will need to use independent consultants and relate the compensation program to corporate strategy. The allocation of compensation between stock and cash and the deferral of payments have become an integral part of the structure of these arrangements.
The proxy rules have been amended to require enhanced disclosure as to compensation programs as well as such governance items as the qualification and experience of directors and nominees and the leadership structure of the corporation. While these are separate requirements, they are substantively intertwined as a governance matter.
All of this amounts to a significant amount of preparatory work by the corporation, including its board of directors and committees, and the development and implementation of policies that are consistent with disclosure on the particular subject matter. The quality of disclosure will be subject to close examination by the staff of the SEC.
Given all that the SEC has on its plate currently, is there more for the Commission to do with respect to shareholder access to proxies? If so, what would that entail?
Todd Lang: The SEC proxy access proposal consists of 250 pages and propounds over 500 questions. The subject matter is complex and highly controversial. Proxy access will, when adopted, apply to more than 10,000 publicly-held corporations.
It is time to reach a decision on access given the seven years it has been under discussion. Final rulemaking, which is anticipated for early spring, requires resolution of a number of issues, including:
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Providing a clear definition of purpose, which would serve as a guideline to the content of the rule;
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Providing a reasonable transition period during which corporations, through director or shareholder action, can establish or conform to the terms of the rule;
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Defining the extent to which shareholders have a choice, including an opt-out right;
Outlining the means by which the corporation, through its directors or shareholders, can adapt the access right to the corporation’s governing documents and arrangements and deal with future events and opportunities; -
Offering guidance on shareholder use of the corporation’s proxy materials, under the shareholder proposal rule, to propose an access bylaw assuming that the director election exclusion is eliminated or modified; and
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Defining the workability of the process, which involves – in part – the extent and nature of its prescriptive terms.
On adoption, proxy access will enter a new phase with significant activity by corporations, their shareholders and the SEC.
How do you expect that the investor/regulator anger that still exists toward Corporate America will play out during this proxy season?
Todd Lang: The past couple of years have been characterized by scandals, joblessness, foreclosures, and other events that have raised serious concerns and a lack of confidence in the management of many companies. While these problems are essentially systemic in nature, there has already been impact on the amount and terms of executive compensation, the rewarding of effectiveness for participating in activities which involve meaningful risk to the enterprise, and the enhanced proxy disclosure requirements with respect to corporate leadership, compensation, risk and other governance matters.
The very human premise is that while many people suffer, others receive excessive rewards for activities which involve untoward risks and insufficient business judgment. Most corporations have started to adopt measures to deal with these issues, and the SEC and other regulators have prescribed enhanced disclosure and other means to deal with them. If the efforts to effect change from the past are real, credible to investors and the public alike, and carefully implemented in a transparent manner, confidence can be restored. This is a year of transition, but by next year, investors, regulators and others should be in a position to make the judgment as to the effectiveness of these measures.
Does proxy access necessarily constitute a “best practice?” Should it be a matter of shareholder choice?
Todd Lang: It is not axiomatic that the shareholders of every corporation favor the federal adoption of a right of proxy access. There are other alternatives, such as reimbursement by the corporation of solicitation expenses. Some believe that access establishes the basis for divisive action on the board of directors which could impede its effective functioning. Others are not convinced that access would be used for non-control purposes and suggest that the SEC proposal establishes a means of “access creep” –meaning that over time, directors elected through access may be inclined to act together with major control and influence implications.
In order to create confidence in the use of the right of proxy access, its purpose needs to be defined so that clear parameters are established to prevent its misuse. Principally, the proxy access right could be exercised by long-term shareholders with no-control intent or effect who have a meaningful interest in the corporation. Further, the shareholders of one corporation may have a different view on access than the shareholders of another corporation and, therefore, an “opt-out” right could be adopted to enable shareholders of each corporation to make their own choice. An alternative is to establish access by providing shareholders with the right to “opt-in.”
With the economy beginning to improve, would you forecast an increase or a decrease in proxy fights in the coming year?
Todd Lang: There is a great deal of initial activity which suggests that there may be a substantial number of proxy contests in the coming year. This is based on economic opportunity, the increased ability of shareholders to seek and obtain board representation, and the number of issues which may favor change. While a proxy access rule would not be operative for the current year, depending on its terms, it certainly will encourage this kind of activity and, particularly, an increased use of the short slate. For practical purposes, a proxy contest means an election where there are more nominees than director slots to be filled and, therefore, this does not necessarily involve control.
Blogs and proxy season
From the latest SEC actions, to developments on the executive compensation front, to the best practices that are changing the definition of effective investor relations, the blogosphere is a rich source of insight and commentary essential to keeping up with a rapidly changing proxy landscape.
Here’s a look at five blogs you should be watching:
Proxy Democracy Blog
http://proxydemocracy.wordpress.com/
Proxy Democracy Blog, updated and maintained by a Harvard Ph.D. candidate, provides regular updates and commentary on the role and influence of shareholders in producing positive changes in the companies they own.
http://proxydemocracy.wordpress.com/
Proxy Democracy Blog, updated and maintained by a Harvard Ph.D. candidate, provides regular updates and commentary on the role and influence of shareholders in producing positive changes in the companies they own.
IR Web Report
http://www.irwebreport.com/daily/
IR Web Report publishes daily research and news about online investor relations practices across the globe. This is a must-read for anyone interested in gaining insight into up-to-minute best practices.
http://www.irwebreport.com/daily/
IR Web Report publishes daily research and news about online investor relations practices across the globe. This is a must-read for anyone interested in gaining insight into up-to-minute best practices.
RiskMetrics Blog
http://blog.riskmetrics.com/
Maintained by a leading risk analysis and corporate governance firm, this blog covers key developments and news related to investor relations, corporate governance, securities litigation, and more.
http://blog.riskmetrics.com/
Maintained by a leading risk analysis and corporate governance firm, this blog covers key developments and news related to investor relations, corporate governance, securities litigation, and more.
NYT’s DealBook
http://dealbook.blogs.nytimes.com/
The New York Times’ DealBook is among the most widely read business blogs in the world. It is a reliable and authoritative source of breaking financial news from the world’s global financial capital.
http://dealbook.blogs.nytimes.com/
The New York Times’ DealBook is among the most widely read business blogs in the world. It is a reliable and authoritative source of breaking financial news from the world’s global financial capital.
WSJ's Deal Journal
http://blogs.wsj.com/deals/
Self-described as an “up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street,” this Wall Street Journal blog features exclusive commentary and analysis and is an essential resource in corporate decision-making.
http://blogs.wsj.com/deals/
Self-described as an “up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street,” this Wall Street Journal blog features exclusive commentary and analysis and is an essential resource in corporate decision-making.
What's Next? Mandated proxy access and a "say on pay" in 2011
Proxy access and a “say on pay” are two shareholder issues that have gained traction in the wake of global financial crisis and the resulting anger and mistrust aimed at Corporate America. While government action on these investor protection priorities hasn’t come in time to impact the 2010 proxy season, that likely won’t remain the case in 2011.
With the SEC having already issued proposed rules related to increased proxy access and the President and Congress poised to act on executive compensation, those that act now to reflect the prevailing public sentiment will not only be better prepared for the inevitable; they will reap the reputational benefits that are borne of leading on key corporate governance reforms at a time when most are being led by them.
Proxy Access. With the advent of SEC rules intended to enhance investor power to nominate candidates to corporate boards, the 2011 proxy season may mark the first time that there are more candidates for directorship at many public companies than available slots.
While granting proxy shareholder access in line with the SEC’s proposed rules likely isn’t in the cards for most public companies in 2010, that doesn’t mean that directors can’t make a powerful statement about their commitment to effectively serving the investors they represent. As we said back in the July 2009 issue of High Stakes™, either directors will begin thinking more like their shareholders, or shareholders will being thinking about new directors – so the sooner directors get started, the better.
Say on Pay
A measure that would require companies to hold an annual shareholder vote on executive compensation was a key piece of the financial reform bill passed by the U.S. House of Representatives in December 2009. With Senate Banking Committee Chairman Chris Dodd having made his preference for a mandatory “say on pay” vote widely known, it’s looking more and more likely that shareholders are going to have a non-binding say on executive compensation policy in time for the 2011 proxy season.
According to recent data from the RiskMetrics Group, 47 U.S. companies have either already held a “say on pay” vote or have committed to do so in the near future. – with big names such as Microsoft and Bristol-Myers headlining the list.
These companies understand that the “say on pay” movement represents an opportunity to demonstrate (and not just talk about) transparency and accountability. For companies that want to articulate their commitment to the new way forward, “say on pay” votes offer the very real possibility to do just that.
This month's top posts on Levick's...
At the outset of the recent Toyota recalls, Gene Grabowski takes a look back at Tylenol’s “gold standard” recall response and outlines how troubled brands can bounce back from product liability crises.
Dallas Lawrence shares six strategies for best leveraging employee participation in the online space – whether responding to crisis, ensuring quality customer service, or buttressing traditional marketing efforts.
Bulletproof’s Vlog interview series continues as Michael Robinson interviews Steptoe & Johnson’s Lucinda Low on the global compliance challenges facing companies in an era of stepped up Foreign Corrupt Practices Act (FCPA) enforcement.
As more companies and brands make their first forays into the world of Facebook, Twitter, and YouTube, Dallas Lawrence highlights six of the most successful tactics utilized by the savviest social media minds,
With blogs continuing to assert themselves as key media venues, Dallas Lawrence outlines six tips to remember when building blog media lists.
Making Your Point
Making Your Point, a new book by Levick Senior Vice President David Bartlett, examines the fundamental strategic considerations driving effective communication. It defines that key component called “emotional intelligence.” It provides the simple powerful tools to make a point in person, prepare and deliver effective speeches and presentations, get messages across in a media interview, and communicate during crises. Making Your Point is an easy-to-use communications guide for professionals and non-professionals alike. Order your copy today.
Making Your Point, a new book by Levick Senior Vice President David Bartlett, examines the fundamental strategic considerations driving effective communication. It defines that key component called “emotional intelligence.” It provides the simple powerful tools to make a point in person, prepare and deliver effective speeches and presentations, get messages across in a media interview, and communicate during crises. Making Your Point is an easy-to-use communications guide for professionals and non-professionals alike. Order your copy today.
Stop the Presses: The Crisis and Litigation PR Desk Reference – now in its second edition – is a survival manual for corporate leaders, board members, lawyers, and communications specialists. This book provides the dos and don’ts of crisis planning and communications and articulates the essential strategic guidelines for navigating myriad bet-the-company issues. Order your copy today.Future High Stakes™ issues:
Maximizing Social Media's Potential:
Blogs, Facebook, and Twitter are shaping buying decisions like never before. Do you know the rules of social media engagement?
Patents & IP Litigation:
High-profile intellectual property cases threaten to sink stock prices. How can companies protect themselves in the wake of a negative ruling?
High-profile intellectual property cases threaten to sink stock prices. How can companies protect themselves in the wake of a negative ruling?
CEO Departures:
Whether in the midst of crisis or at the end of a long and successful run, CEO departures present critical communications challenges. Do you know how they are best overcome?
More to come:
- Coming to America
- Diversity
- Education
- Executives Behind Bars
- Food
- Global Capital Markets
- Intellectual Property
- Internal Communications
- Internal Investigations
- Monetizing Moments
- Money Laundering/Money Transfers
- New Media/Social Networking
- Product Liability
- Professional Services Crises
- Public Equity
- Whistleblowers
- Reputation Management – Celebrity
- Reputation Management – Corruption
- Reputation Management – SEC Investigations
- Tourism
- Trade
Next month in High Stakes™: THE ART OF APOLOGY
After a seemingly endless string of high-profile mea culpas in recent months, High Stakes™ takes an in-depth look at what makes for an effective apology in an era of increased transparency and accountability