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The op-ed commentary and related article below were published in Agenda, a Financial Times private subscription service for corporate directors, and are presented with permission. |
Agenda, August 9, 2010 opinion and article
Op-Ed: Boards and the Dodd-Frank Craps Game
Article published on August 9, 2010 Pat McGurn is special counsel at ISS. The threat of a double-dip recession may cause equity investors to look elsewhere — say Las Vegas — to make up their portfolio shortfalls. If board members desire casino-style thrills, upcoming annual meetings should suffice. The 2011 proxy season does look like a craps game thanks to the new rules now tumbling out of the Dodd-Frank financial reform bill that empower shareholders. Dodd-Frank loaded the dice so SEC Chairman Mary Schapiro and her colleagues at the Securities and Exchange Commission will soon adopt their long-anticipated proxy access rules. While the rule-making bones have not yet come to rest on the felt, SEC watchers have put their money down on the number “five” — that is, a 3% ownership threshold plus a two-year holding requirement for shareholders seeking to nominate candidates. Directors should run the numbers now to come up with a list of investors who might be eligible to roll their nominees onto company ballots next season. Directors’ pre-season outreach should include visits with any wannabe nominators. These gestures need to especially be made to big public employee and labor union pension funds as well as iconoclastic money managers. Directors probably do not need to fear boardroom challenges from mega index managers or brand name mutual funds found on their all-access lists. However, some quick pulse-taking is advisable since these players typically control big voting blocs. For nominating panels, take pains to strengthen or remove weak links in boardroom chains. Such fragile bonds could be easily broken by targeted solicitations for access nominees. Snake eyes issues like sustained poor performance, nosebleed high CEO pay, overboarding, chronic truancy and boardroom homogeneity will draw access candidates to directors’ doorsteps. Consider though that Congress did drop its proposed listing standard cram-down of majority threshold voting in director elections. As a result, activist investors now must get majority voting rules the hard way. Expect to see boxcars loaded with majority voting resolutions pulling into small-cap firms’ meetings next year. Boards at firms where nominees’ high “no” votes failed to resonate with their fellow directors last year would be well-advised to preempt proposals by embracing the majority rule. Meanwhile, management proposed say-on-pay votes will be a first-time ballot item at most U.S. firms in 2011 thanks to Dodd-Frank. While the SEC can still exempt smaller firms, everybody else must throw the dice next year. Compensation panels should engage with big investors before laying their pay plans on the table. Remember that 2010’s management proposed say-on-pay votes showed that excessive perks, overly generous pensions and other non-performance-based practices are sucker bets. Issuers also must offer shareholders the opportunity to vote on the frequency of future management-proposed say-on-pay votes. While many boards will gravitate towards the least frequent (triennial) interval, directors might want to consider waiting for the results of their 2011 debuts before making a decision to shelf annual say-on-pay votes. A say-on-pay clone calling for advisory votes on golden parachute arrangements also made it into the legislative package. The new law requires boards to win approval of change-in-control provisions at the same time as, or prior to, the transactions that trigger them. Contemporaneous votes would be nonbinding, but failure to win majority support could fuel legal challenges and delay or imperil underlying deals. Such uncertainty may lead boards to put severance arrangements up for snap votes during peacetime. After all, morphing plain-vanilla say-on-pay resolutions into up-or-down advisory votes on parachutes might prove troublesome for some boards. This is because severance has emerged as a hot topic in the wake of the SEC’s mandate for enhanced disclosure of payouts. Adapting to the new governance landscape will determine if directors roll a “natural” or “crap out.” Preparation, not luck, will be the key for boards to throw seven or eleven on the “come-out” at their 2011 annual meetings. Investor Group Goes After Directors Who Fail to Win Majority Article published
on August 9, 2010 CII has sent letters to the companies where these votes took place, calling on board chairs to detail how their boards will address the voting results. According to RiskMetrics, CII suggests that the directors who failed to receive a majority of votes should step down, noting that none of the 82 had done so as of early July. The investor group also recommends that these companies enact majority-vote standards in director elections. The companies receiving CII’s letters are mostly small-cap firms. According to RiskMetrics, roughly 70% of S&P 500 companies have majority voting policies in place, but most mid- and small-cap companies do not. The final version of the recently passed Dodd-Frank Act does not include a provision in the Senate bill that would have instructed national stock exchanges to add majority-voting requirements. Majority voting has been an increasing priority for activist investors. In March, Calpers unveiled plans to ask 58 of its biggest portfolio companies to voluntarily adopt the majority-vote standard. Around the same time, the pension’s board voted to remove limits on issuing shareholder proposals so that the group could wage an unfettered campaign for majority-vote standards.
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