With a flagging economy driving down earnings, investors are likely to more closely scrutinize rising pay, and may take a more confrontational stance than they did during the financially heady days of the 2011 proxy season, when a rising economic tide seemed set to lift all boats. They are also likely to be less tentative in casting ‘no’ votes simply because say on pay is now in its second year, a number of insiders predict.
Proxy access and campaign finance disclosure will also be hot topics in the coming months, thanks to the furious fund-raising of the 2012 US presidential election and two recent court decisions that are grabbing shareholder attention. In July a federal appeals court in Washington, DC struck down an SEC rule that would have required companies to list shareholder- nominated board candidates in their proxy materials.
But the legal decision did not prevent an SEC revision of another related regulation – Rule 14a-8 – from taking effect in September. Rule 14a-8 will, for the first time, allow shareholders to use company proxy materials to propose their own board election and nomination procedures, which could result in a number of activist initiatives aimed at filling the void left by the DC court decision.
There’s no guarantee those proposals will aim for the consensus ownership threshold set by the SEC proposal, which would have required nominating directors to own 3 per cent of the company for three years. Some suggest the proposals could go as low as 2 per cent or even 1 per cent.’If people are frustrated, you could see situations where it would be management-unfriendly, which would be unfortunate,’ says Brad Robinson, managing director specializing in corporate governance at proxy firm Eagle Rock. ‘If companies believe they will be targeted and there might be enough support to pass a bylaw, they would be better off opening a dialogue and coming up with a bylaw they can live with.’
Meanwhile, the upcoming US presidential race will be the first since the Supreme Court struck down campaign contribution limits in the 2010 Citizens United case – and various observers expect activist investors to push for disclosure aimed at filling the void. ‘Senior executives right now have enormous discretion to dip into corporate treasuries and fund all manner of charitable and political activities – often with little oversight from boards – and disclosure is scattered among different regulatory agencies,’ says Amy Borrus, deputy director of the Council of Institutional Investors. ‘Shareowners have no idea whether their money is being spent in ways that contribute to shareholder value, or are contrary to companies’ own policies.’
Melissa Aguilar, a research associate at the Conference Board, says more than a quarter of social and environmental proposals filed in 2011 were related to political contributions; one proposal filed at Sprint-Nextel in 2011 garnered 53 per cent of the vote. Many of the proposals were coordinated by the centre for Political Accountability, which has already telegraphed its agenda priority for the year by sending letters to more than 400 companies urging them to adopt some form of disclosure or oversight of political contributions.