Economics: Shareholder Activism: Most initiatives struck down in corporations' annual investors meetings

MarketWatch carries an important article by Chuck Jaffe, "A proxy for victory--Despite losing most shareholder votes, investors come up winners (May23,2k7)

Boston -- ... For investors, proxy-voting season is coming to a close and with most shareholder initiatives going down to defeat it's much harder to recognize that the real winner this year has been the individual investor.

The vast majority of shareholder-friendly proposals have gone down to defeat yet again this year, but the results have been closer than ever before and there is little doubt that Corporate America has taken notice. More importantly, there's a good chance that many companies will react rather than waiting to come out on the losing end of a vote.

"...[O]ne of the big efforts for shareholders and legislators this year has been "say on pay" rules, where investors get an advisory vote on executive compensation. Dozens of companies were targeted with say-on-pay proposals this year, up from a handful in 2006; the US House of Representatives recently passed a bill that would give investors the right to an advisory vote on pay.

Most companies faced with say-on-pay proposals have been fighting them, but , the insurance company most recognized for the duck in its advertising, changed its policy in February, giving shareholders a say on pay beginning in 2009.
By then, there may be a lot of companies joining them on that line, with or without law to push the idea of a nonbinding poll of investors.

More say on pay

In early May, 57% of the shares in Blockbuster Inc. who voted to take a more active role in compensation; just a hair over half of the shares were voted in favor of the change.

Shareholders in J.C. Penney also voted for a voice in compensation. That's no surprise after the company last year fired a new chief operating officer after just six months on the job, with her compensation -- including stock and options awards -- totaling about $10 million.

Economics USA > Corporate Governance

There are about 20 companies facing say-on-pay votes during the current proxy season. There have been some well-publicized defeats of say-on-pay proposals -- such as AMR Corp. beating back a proposal from American Airlines' pilots union -- but even those have been remarkably close. In the past, the majority of shareholder votes that the board recommended voting against would get a tiny percentage of shareholder support. The AMR defeat, by comparison, still netted 38% of the outstanding vote. A proposal at Merck failed by the narrowest of margins, getting 49% of the vote.

Even those losses bode well for a future with investors having their nonbinding say on pay.

"With the success from this year, I think it will be everywhere next year, you will see one proposal after the next," says Kurt Schacht, managing director of the CFA Centre for Financial Market Integrity. "And I think the votes are starting to show you that this one is going the shareholders' way. Rather than lose, companies facing this vote will simply adopt these measures." ...

Winning without a fight

"...[S]everal other potential proxy fights on different issues have been settled by agreements, with no vote ever being taken. Home Depot and Applebee's International gave money-management firms a seat on their board, ostensibly to avoid facing an election of directors with a dissident candidate. A year ago, dissidents won election about 40% of the time.

The most frequent proposal facing corporations has been over a requirement to have a majority vote in order to elect directors. Institutional Shareholder Services, a Maryland firm that tracks and consults on proxy issues, estimated that proposals on the issue were drawn up at nearly 140 companies. Roughly 90 of those votes were withdrawn, but the main reason to back away from the vote was that the companies caved in, agreeing to adopt majority-vote standards rather than having the rules crammed down past their objections.

In short, shareholders are staring at headlines talking about close votes, proxy defeats and hinting at a lack of progress, but what they are really seeing is a big victory and the start of something bigger next year. ...

In conjunction with the theme of "Directors retain edge over shareholder activists under Sarbanes-Oxley Act USA, see my discussion of some thawts of UCLA Professor Stephen Bainbridge.