Risk & Compliance

Voting, Pay Top Shareholder Agendas

With dissatisfaction with CEO performance at big-name companies apparently on the upswing, executive pay was bound to gain investor interest this y...
Sarah JohnsonJanuary 25, 2007

While voting rights tops the priority list for shareholder proposals this proxy season, executive pay is also likely to be the focus of a push by institutional investors, according to Institutional Shareholder Services.

Indeed, ISS has tracked 104 pending proposals aimed at giving shareholders more power in voting for directors, and ninety-four out of more than 150 such proposals made it to a vote last year. Besides heightened interest from investors, more attention from the Securities and Exchange Commission is likely to boost the momentum for majority voting in board elections will likely continue for 2007, according to ISS.

Indeed, while majority voting is not standard practice at public companies, many have moved away from the plurality model for board elections that long held sway. Under the plurality system, a director can be voted in even if only a few shareholders give the director approval, since voters do not have the choice to vote “against” a candidate. With majority voting, however, shareholders do have that choice, and, to be elected, each nominee must get more votes in favor of his or her election rather than against it.

More than 180 companies changed their election policies and bylaws by during 2006. Some shareholders have criticized the plurality model for its “whoever runs, wins” perception, contending that it almost always guarantees that nominees slated by the board win in uncontested elections. Majority voting “was at first considered a radical idea, but over the last year or so that impression has changed dramatically,” says Carol Bowie, vice president for governance research services at ISS.

The increased focus on the issue hasn’t missed the attention of the SEC, which was last criticized on this issue in 2003 for proposing a shareholder election rule that could have conflicted with state law, said SEC commissioner Paul Atkins at the Corporate Directors Forum earlier this week. The SEC later dropped the proposal, which would have required companies to include a list of shareholder nominees in their proxy materials.

The SEC has visited the issue several times since the 1940s and will likely do so again soon because many companies are asking the regulator to provide clarity on the issue, Atkins said. Still, there are many questions the commission and Chairman Christopher Cox must answer first. One is, “what authority does the SEC have to mandate the inclusion of shareholder nominated director candidates on the company proxy statement?” Atkins said. “Second, what are the unintended consequences of doing so?” (Earlier this week, the SEC weighed in on the side of some big shareholders by deciding not to express an opinion on whether Hewlett-Packard could omit a proposal that would boost the shareholders’ power to nominate directors.)

Although Pfizer is often credited with paving the way to a new“majority rules” mindset nearly two years ago, it has actually adopted a so-called “plurality-plus” or “plurality-modified” approach. In the Pfizer approach directors are expected to offer their resignation if they do not receive the majority of stockholder votes, although they can stay on the board for 90 days or until a replacement is named. A less popular method is true majority voting, first adopted by Intel and also adopted by at least 40 companies. Under that method, the directors would immediately give up their seats if they don’t receive a majority.

After majority-voting proposals, shareholder moves to get companies to tie executive pay to performance are likely to be among the most prominent proposals in 2007, according to ISS. Forty-four shareholder proposals are pending on the issue, the firm reported. In 2006, 17 out of 24 such proposals came to a vote.

Compensation-related proposals are bound to gain stakeholder interest this year, since dissatisfaction with the performance of highly paid chief executives at big-name companies like Home Depot, seems to be on the rise.

Further, companies will be disclosing more information about executive pay under new SEC rules recently put into effect. The average shareholder support for pay-for-performance resolutions was more than 35 percent last year, up from 30 percent in 2005, according to ISS.

Shareholders who vote for changes in pay practices are likely to have the support of Rep. Barney Frank, the chairman of the House Financial Services Committee. Earlier this month, the congressman said he plans to introduce legislation that would increase shareholders’ ability to vote on executive compensation. “We’re going to try to work out the details, including what happens if they were to vote no,” Frank said at the National Press Club.