GOVERNANCE MAP

Shareholders Turn their Attention on Board Elections: 2006 Proxy Season

The wave of proxy submissions that traditionally heralds the start of a new proxy season has not yet begun. Yet even at this stage at least three proxies containing proposals calling for a majority vote standard to be applied to director elections have been filed with the SEC. Predications are that this number will exceed 100.

The three are:

Analog Devices (Meeting date: March 14, 2006),
Hewlett Packard (Meeting date: March 15, 2006), and
Ciena Corp. (Meeting date: March 15, 2006)

All three of these resolutions were filed by the United Brotherhood of Carpenters and Joiners of America. None of these three companies faced this resolution last year.

Resolutions calling for a majority vote threshold in director elections showed the largest increase in levels of shareholder support from 2004 to 2005.

In 2004 13 such proposals were filed, averaging 11 percent support (counting votes for as a percent of votes for and votes against).

In 2005 60 such proposals were filed, 58 of which came to the vote, with an average support of 44%. Fourteen resolutions achieved majority shareholder support.

Analysis of funds’ voting behaviour as reported in N-PX filings showed a similar increase in support. Whereas in 2004 almost no funds supported resolutions calling for the majority vote threshold to be applied to director elections, in 2005 the 45 fund families studied supported this resolution 60 percent of the time, and many supported all such resolutions across their portfolio companies (most notably, the SRI funds).

However, this is not the only way in which shareholders are attempting to pry open the boardroom doors. So far this season two resolutions requiring cumulative voting in director elections have been published in early proxy filings by Tri-Continental Corp. (Meeting date: May 4, 2006 ) and WGL Holdings (Meeting date: March 1, 2006)

And at least two proxies published so far this season contain resolutions calling for declassification of the board: Analogic Corp (Meeting date: January 27,2006) and Span America Medical Systems (Meeting date: February 28, 2006)

In fact these three types of proposals (majority vote threshold for director elections, cumulative voting in director elections and declassification of the board) may be seen as part of a broader strategy by shareholders to achieve, in a limited way, what was lost when the SEC dropped the ball on the proposed 'Proxy Access Rule'.

This rule, initially proposed in draft form in October 2003, gave shareholders a glimmer to hope for achieving some say in board elections, albeit very limited. When the SEC failed to proceed with implementing this rule in 2004 shareholders had already started to dream of promoting board candidates who would truly represented their interests.

While majority voting in director elections gives shareholders limited power to keep certain nominees off the board, it does not allow shareholders to actually nominate their own candidates.

In 2005 proposals at Alaska Air Group and Nortel Networks called for shareholder say in proposing board candidates. In a high profile case, AFSCME filed a lawsuit against American International Group for excluding from its proxy a resolution that would have required the company to allow shareholders to nominate directors (see: Majority-Vote Director Election Shareowner Resolutions To Top 100, Dominate Proxy Season.

Perhaps this season will see more such resolutions. Perhaps companies will attempt to deter this type of shareholder action by adopting the less threatening majority vote rule, as many already have.

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News Update: The SEC and Electronic Reporting

Two recent developments suggest a greater commitment by the SEC to transparency via electronic reporting.

All public companies in the US are required to file the bulk of their public reports in electronic format. The repository of these documents (known as EDGAR – Electronic Data Gathering and Reporting) is made publicly available via the SEC’s website. This repository, known as EDGAR (Electronic Data Gathering and Reporting), goes back to 1996. It represents a hugely valuable resource for investors, analysts and corporations themselves and is the largest and most comprehensive such system in the world.1

1. Earlier this month SEC's new chairman, Christopher Cox, expressed his support for introducing the XBRL2 reporting format more widely: “SEC's New Chief Has a Thing for High Tech”.

Presently, the SEC only requires that ownership filings on forms 3, 4 and 5 be filed in eXtensible Markup Language (XML) format.

Since the beginning of 2005 the SEC has had in place an XBRL Voluntary Program. It is, as yet, an experiment to determine the costs and benefits of widespread adoption. Companies that wish to do so can file reports in XBRL format, based on US GAAP standards of financial reporting. A handful of companies appear to have experimented with this system in filing some 8-K and 10-Q reports. These remain unofficial, unaudited documents, supplemental to the official documents filed in HTML or text format.

2. On Tuesday the SEC announced that it was proposing a rule change that would let companies and proponents of competing solicitations post their corporate election materials on the Internet: “SEC Plan Would Let Firms Put Ballot Materials Online”.

This rule change supposedly entails reduced costs to issuers as well those mounting challenges to incumbent management. Furthermore, online availability of corporate election materials may increase the efficiency of the communications with beneficial owners via intermediaries, such as banks and brokers.

The Business Roundtable last year proposed rule changes to the current shareholder communications system, particularly with respect to companies’ access to intermediaries’ (such as brokers and banks) beneficial shareholder lists, in order to facilitate more direct communication between companies and shareholders.

This petition has been widely opposed by shareholder democracy advocates as well as smaller companies, mostly with reference to the advantage that this would give larger companies in corporate elections relative to shareholder activists, who would not have access to the same channels of communications or resources to exploit them. It is interesting to consider how the proposed rule change on electronic reporting of corporate election communications relates to these concerns.

Furthermore, the proposed provisions would not be binding – it appears that companies will be able choose whether or not to make use of this rule change. It is unlikely that they would opt-in to such a system where incumbent management fear this could weaken their position in corporate elections.

The important test of this proposal will, therefore, be whether it shifts the balance of control over the shareholder communications process (already skewed against shareholder activists) even more in favour management of public corporations.

The discussion period over the next 60 days will shed some light on the implications for shareholder democracy.

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^{1. The Canadian counterpart of EDGAR, SEDAR (System for Electronic Document Analysis and Retrieval)), is an electronic repository of Canadian public company reports, mostly in Portable Document Format (pdf). It is the project of the Canadian Securities Administrators.}

^{2. XBRL, which stands for eXtensible Business Reporting Language, comprises a set of standards for presenting business and financial information in a XML format using a standard set of tags. This will facilitate automatic comparisons across companies, reporting periods, groups of companies, and even reporting jurisdictions using different accounting standards. XBRL International is the international non-profit consortium that has been driving this process since 1998.}

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Board Elections and Scandal Directors

In an article entitled Teflon Directors published today at the Forbes website, Maya Roney reports on the present whereabouts of the directors who served on the boards of Enron, Global Crossing, Worldcom, Adelphia, Tyco and Waste Management during the 'scandal' periods.1

Between them, these directors still hold in excess of 120 directorships at other public listed US companies.

We know that shareholders have a difficult time challenging board nominations supported by incumbent boards. However, withheld votes in director elections indicate general levels of shareholder dissatisfaction with the status quo.

In 2003, shortly after the breaking news of corporate scandals, average votes for the 'teflon directors' listed in the article was 3% less than that of all other nominees to US public company boards. Since the average level of support for board nominees is around 95%, 3% makes quite a big difference in guaging general levels of shareholder confidence.

However, the margin has narrowed to 1.3% in 2004 and 0.5% in 2005. This suggests that shareholders become complacent or, as Roney points out, are not informed about the past failures of board nominees: "...many companies don't make it easy for shareholders to find out where their directors have been..." omiting mention of Enron, Global Crossing or WorldCom from directors' bios.

The Corporate Library maintains a database of 'problem directors', amongst which are listed many of the teflon directors. Now that the majority vote standard is taking hold, reputation may start counting for something in director elections.

1. This blogger was quoted in the article.

Technorati Search Tags: corporate governance, director elections, majority vote, shareholder democracy