Legal Industry News
August 1, 2012
Proxy Season Results Show Dramatic Shift in Company-Shareholder Engagement
A new Ernst & Young LLP report – Four key trends of the 2012 proxy season– reveals four emerging governance trends: the impact of say-on-pay (SOP) goes beyond compensation; shareholder proposal topics shift and agreements for withdrawals are reached; board accountability measures continue to strengthen; and, director opposition votes show change in investors’ voting practices.
In its analysis, Ernst & Young LLP, assurance, tax, transaction and advisory services global firm, finds that company-investor engagement has been a significant component of each of these trends. Companies are using such engagement to respond to investor concerns, secure support for proposals put to shareholder vote and mitigate potential exposure to investor campaigns.
“Engagement can benefit both companies and investors,” said Allie Rutherford, Associate Director of the Corporate Governance Group at Ernst & Young LLP.
“However, the rules of engagement among companies and investors on corporate governance topics are continuing to evolve. What is clear is that the expectations for accountability and transparency as a result of this engagement will grow accordingly.”
Vote results for the 2012 proxy season reveal these four developments:
1. The impact of SOP goes beyond compensation. The continued overall high support for SOP proposals, averaging 90%, is in part due to engagement. For example, proxy statements for companies that received less than 70% support on their 2011 SOP proposals show that nearly all made changes to their compensation programs as a result of SOP related dialogue.
To address the SOP vote, companies are using the proxy statement to communicate the board’s message to investors. This includes letters to shareholders, disclosure that showcases shareholder outreach efforts in the area of executive compensation and executive summaries with improved readability that highlight shareholder-friendly practices.
2. Shareholder proposal topics are shifting and agreements for withdrawals are being reached. Compensation-related proposals are now the smallest category of proposal topics while board-focused and environmental social proposals each represent 35% of the total proposals coming to a vote.
At least 15% of the more than 800 shareholder proposals tracked by Ernst & Young LLP in 2012 were withdrawn following dialogue between companies and shareholders where agreements were reached. Proposals focused on board or environmental and social topics were among those most likely to be withdrawn.
3. Board accountability measures continue to strengthen. Companies have increasingly acted to implement annual board elections, adopt majority vote standards for director elections and appoint independent board leaders in response to long-standing investor support for shareholder proposals on these topics. Investors continue to press for these reforms; proposals on these three topics comprised approximately 20% of all shareholder proposals submitted for 2012 meetings to date.
4. Director opposition votes show changes in voting practices. While 2012 has seen an increase in attention to “vote no” campaigns, overall director opposition votes remain low and, as a result of SOP proposals, compensation is no longer a primary driver of opposition votes.
A review of the more than 600 directors who received greater than 20% opposition in 2012 shows that the following account for the vast majority of the high opposition votes: poor attendance at board and committee meetings, a board’s adoption of a poison pill in the prior year without a contingency provision for shareholder approval, related-party transactions (particularly for directors on key board committees) and failure to act on a shareholder proposal that received majority support.
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