While I would be unwilling to estimate the magnitude of the growth in CEO pay from 2011 to 2012, I am pretty confident about predicting that it will increase. I am even more confident about predicting a continued increase in the level of shareholder activism during the 2013 US proxy season.
After an incredibly successful year last year, shareholders can smell victory and, rather than relax because of it, it is far more likely that they will pursue further triumphs.
While only successful at two companies last year, proxy access – the ability of shareholders to place their own nominees on the official ballot sheet – is liable to be one of the most fiercely fought battles in 2013. As a result of a 2011 court ruling that overturned Securities and Exchange Commission (SEC) rules mandating universal proxy access, the Business Roundtable and the national Chamber of Commerce prevailed in their mistaken defence of corporations. However, the ruling also upheld shareholders’ ability to submit shareholder proposals requesting proxy access. That such proposals were successful at all was a surprise, though given the governance disasters at the companies – Chesapeake Energy and Nabors Industries – where the proposals received majority support, it might perhaps have been more shocking if they had been rejected. Chesapeake has moved more swiftly to remaking its board, but Nabors will be forced to follow.
Companies that present similar problems and similar shareholder discontent, for example Vornado Realty Trust and Cablevision Systems, should beware. Last year, these companies had majority votes against three each of their directors, and, in the case of Vornado, large withhold votes against almost all directors. Vornado, for example, had a negative vote on compensation in 2011 and very significant majorities supporting majority votes for directors and the declassification of the board in 2012. In addition, Norges Bank filed proxy accessproposals at Charles Schwab, CME Group, Western Union and Wells Fargo. Each of these received a very significant minority vote, and I would be surprised if they were not resubmitted or if the bank targeted similar firms where it was unhappy with the board.
The Shareholder Revolution
Governance-related proposals, according to proxy advisory firm Glass Lewis’ Season Reviews, received unprecedented support in 2012 and this is likely to continue in 2013. For example, such shareholder proposals received an average of 49.3% support, said Glass Lewis. Some were more popular than others. Only approximately 10% of proposals calling for a declassified board didn’t receive majority support. Much of the success surrounding declassification proposals can be laid at the door of the Shareholder Rights Project run out of Harvard Law School which has supported and inspired many of the proposals. This work will continue in 2013.
As last year, it is likely that the number of proposals requesting the separation of the chairman and CEO will increase again in 2013. With such a level of support for governance proposals (almost half of them received majority support), companies will see increased votes against directors if they do not implement the proposals. This is because the other major US proxy advisor, ISS, has indicated that it will recommend votes against the whole board in 2013 if majority-supported shareholder proposals remain unimplemented.
Say on Pay
Moving from shareholder proposals to management proposals, another main area of shareholder discontent – executive remuneration – will also continue to foment. 2012 saw a significant increase in unhappiness over pay compared to 2011. In the Russell 3000, in 2012, 55 companies lost their advisory vote on compensation (Say on Pay), while 286 saw a significant vote against (30% or more). This compares to 44 failed votes in 2011 and 157 with significant minorities.
Law firms have launched several Say on Pay lawsuits against companies that lost the vote but these have been largely unsuccessful, thanks to specific language in the Dodd-Frank Act, the act that mandated the vote on pay. For this proxy season, however, the plaintiffs’ shareholder bar has developed a new tactic: filing class action lawsuits against companies before the annual meeting alleging incomplete and misleading pay disclosures. These claim that insufficient information about pay is preventing shareholders from making informed decisions, and could, if allowed, force a company to delay or cancel an annual meeting leading to enormous additional costs and serious embarrassment. Many suits have been filed already and many more are expected prior to the coming proxy season and could provide serious problems for a number of corporations.
The Social Problem
Possibly reflecting the fact that 2012 was an election year, almost two-thirds of social issue shareholder proposals called for increased disclosures surrounding political spending and lobbying, far outweighing any other issue on the ballot. According to Glass Lewis, these received an average level of support of around a fifth of shares in 2012. This was lower than in 2011,when such proposals received around a third of votes, though there were more proposals in 2012.
Whether concerns about political spending will continue into 2013 now that President Obama has been re-elected remains to be seen, but my guess is that at least some of the heat will go out of the debate, despite the enormous amount of spending by political action committees (PACs).
Environmental-based shareholder proposals centered, according to Glass Lewis, on the production of a sustainability report and on climate change issues in 2012. This situation is unlikely to change in 2013, despite the fact that many corporations have acted on the significant minority support for sustainability reports. A third of the climate change/energy related shareholder proposals were related to renewable energy, while two-thirds called for emissions disclosures or reductions. Again, I cannot see this emphasis changing in 2013, particularly as concerns about climate change grow ever more urgent.
Paul Hodgson is an Independent Governance Analyst