The Harvard Law School Forum on Corporate Governance and Financial Regulation, March 3, 2012 posting

Shareholder Proposals: Trends from Recent Proxy Seasons

Posted by Matteo Tonello, The Conference Board, on Saturday March 3, 2012 at 9:31 am

Editor’s Note: Editor’s Note: Matteo Tonello is Managing Director of Corporate Leadership at The Conference Board, Inc. This post is based on a Conference Board working paper from Mr. Tonello and Melissa Aguilar, Research Associate at The Conference Board, which is available here.

In our paper, which was recently made publicly available on SSRN, we examine shareholder proposals submitted to business corporations registered with the U.S. Securities and Exchange Commission (SEC) that held their annual general shareholder meetings (AGMs) between January 1, 2011 and August 3, 2011 and, at the time of their AGM, were in the Russell 3000 Index. The total sample includes 2,511 companies.

Data reviewed includes proposal volume, topics, and sponsorship. The discussion of voting results is integrated with information on non-voted shareholder proposals—due to their withdrawal by sponsors, the decision by management to omit them from the voting ballot or other, undisclosed reasons.

Aggregate data on shareholder proposals is examined and segmented based on business industry and company size (as measured in terms of market capitalization). For the purpose of the industry analysis, the study aggregates companies within 20 industry groups, using the applicable Standard Industrial Classification (SIC) codes. In addition, to highlight differences between small and large companies, findings in the Russell 3000 sample are compared with those regarding companies that, at the time of their AGMs, were in the S&P 500.

The Russell 3000 Index was chosen as it assesses the performance of the largest 3000 U.S. companies, representing approximately 98 percent of the investable U.S. equity market. Year-on-year comparisons are conducted by referring to the same time period of previous proxy seasons—a fairly comprehensive review since most corporations hold their annual shareholder meetings before the end of July. The study inaugurates a collaboration between The Conference Board and FactSet Research Systems Inc. (FactSet); unless specifically noted, the study aggregates and analyzes data compiled by FactSet and drawn from public disclosure.

The following were the major findings:

Approximately 53 percent of companies in the Russell 3000 sample and 57 percent of companies in the corresponding S&P 500 sample held their annual shareholder meeting in May. In the Russell 3000, the month with the second highest number of shareholder meeting is June (19 percent); in the S&P 500, it is April (24 percent).
Shareholders filed on average 0.28 proposals per company, compared to the average of 0.34 proposals per company submitted in the same period in 2010.
In 2011, shareholders filed fewer proposals than in prior proxy seasons. In the Russell 3000 sample, shareholders filed a total of 691 proposals, 634 of which were related to issues of executive compensation, corporate governance, or social and environmental policy. For the same period in 2010, shareholders had filed 864 proposals, 814 of which related to corporate governance, social and environmental issues; by the end of calendar year 2010, the total number rose to 943 proposals. By comparison, in the S&P 500 sample examined for the purpose of this report, the number of shareholder proposals declined from 681 in 2010 to 544 in 2011.
Proposal volume varies considerably from industry to industry. The financial services sector consistently receives the highest number of shareholder proposals. In 2011, as many as 114 proposals (or 16.5 percent of the total, down from the 21.9 percent observed for the 2010 sample) were submitted by shareholders of financial companies. The industry analysis also highlights a significant increase in the percentage of shareholder proposals filed at Russell 3000 electronic technology (manufacturing) companies: 11.4 percent of the total, up from the 6.7 percent of 2010 and almost as high as the level recorded in 2007. Overall, finance and electronic technology (manufacturing) companies appear to be almost twice as likely as their counterparts in most other industry groups to face a shareholder proposal in any given year. Other sectors facing a relatively higher than average number of shareholder proposals include utilities (9.5 percent of the total in 2011), energy minerals (9.4 percent) and retail trade (8.5 percent). On the contrary, distribution services (1.3 percent) and technology services (1 percent) were the least exposed to shareholder proposals in 2011.
The historical comparison on shareholder proposal volume by sponsor type shows that proposals introduced by activist hedge funds continued to increase from 2010 levels despite the decline registered for all other sponsor types. In the examined 2011 period, hedge funds filed 27 proposals (3.9 percent of the total), compared to 13 proposals (1.5 percent) submitted in the corresponding 2010 period. Another highlight from this analysis is the above-average decline in the number of proposals filed by labor unions over the last five years: 116 in the examined 2011 period (16.8 percent of the total), down from 164 in 2007 (or 27.2 percent of the corresponding sample for that year).
The historical comparison on the number of shareholder proposals submitted by subject shows that proposals on social and environmental policy issues continued to increase from 2007 levels despite the decline observed in other subjects. Specifically, 243 proposals related to matters of social and environmental policy were submitted in 2011, constituting 35.2 percent of the total number of proposals for the sample period. The volume increased considerably from the 28.1 and 29.1 percent observed in 2010 and 2007, respectively. The explanations for this shift should be sought in the momentum that the debate on public policy issues (including global warming and healthcare reform) has gained in recent years as well as the increasing sensitivity of shareholders to the long- term value generation potentials of a cohesive corporate sustainability strategy. By contrast, in 2011, companies in the Russell 3000 received merely a third of the shareholder proposals on executive compensation that had been submitted in 2007. Say- on-pay proposals had been among the most frequent type of proposal on executive compensation introduced by shareholders in the most recent years. The passage in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which mandates that all publicly traded companies submit their executive-compensation plans to shareholders for an advisory vote, is therefore the most likely explanation of the sensible decline in volume for this subject category. Moreover, the greater workload associated with market-wide advisory votes may have deterred some activists from introducing this type of proposals. There was also a less prominent but steady increase, from 2007 to 2011, in the percentage of shareholder proposals on issues of corporate governance.
Individual investors sponsored 41.8 percent of the shareholder proposals submitted at Russell 3000 companies (specifically, 289 proposals in the January 1-August 3, 2011 period). A similar share (43.8 percent) was found in the S&P 500 analysis. For both indexes, the second most represented group among sponsor types was labor unions (which submitted 116 proposals in the Russell 3000 sample and 101 proposals in the S&P 500—respectively, 16.8 and 18.6 percent of the total), followed by public pension funds (which submitted 77 proposals in the Russell 3000 sample and 56 proposals in the S&P 500—respectively, 11.1 and 10.3 percent of the total). None of the proposals submitted at S&P 500 companies were sponsored by activist hedge funds, which filed 27 proposals at smaller cap companies constituting the Russell 3000. In both indexes, mutual funds filed no proposals in the examined 2011 period.
Even across business sectors, individuals rank consistently as the most prevalent type of sponsors of shareholder proposals. In finance companies, in particular, proposals sponsored by single individuals constituted almost half of the total number received by the industry in the 2011 period (53 out of 114 proposals, or 46.5 percent). The only notable exception appears to be the health services sector, where labor unions filed one third of the shareholder proposals received by the industry in 2011 (5 out of 15 proposals, or 33.3 percent). Labor-affiliated shareholders were also well represented among proposal sponsors in other unionized business sectors such as energy minerals (13 out of 65 proposals, or 20 percent) and transportation (3 out of 13 proposals, or 23.1 percent), whereas 21 of the 79 shareholder proposals (or 26.6 percent) received by electronic technology companies were filed by activist hedge funds.
The sponsor-type analysis by subject shows that individual proponents are particularly sensitive to issues of corporate governance. Proposals filed by individual shareholders on this subject (180) are almost three times as many as those on social and environmental policy (67). On the other hand, findings also highlight the presence of sponsor types that are primarily focused on the pursuit of social and environmental policy reforms at companies in their investment portfolio: religious groups (36 of the 43 proposals submitted by this sponsor type pertain to social and environmental policy) and other stakeholders (26 of the 42 submitted related to social and environmental policy). We also found that labor unions have played a dominant role in the introduction of executive compensation proposals, backing 27 of the 66 proposals (or 40.9 percent) filed on this subject at Russell 3000 companies in the 2011 sample.

The full paper is available for download here and contains additional findings (including an analysis by topic within the subject areas) and a detailed set of charts and tables.