It looks like shareholder activists are increasingly getting their way with companies, or at least convincing management that if they don’t compromise they could wind up paying a steeper price down the road.
A number of recent corporate governance developments suggest that activists are starting to gain the upper hand, and companies are reacting by changing policies or proposing alternatives even when they are not required to.
These trends are playing out in the proxy access and say-on-pay movements.
The latest example: Hewlett-Packard reportedly agreed to put a proxy access bylaw proposal on its ballot in 2013 after reaching a settlement with Amalgamated Bank, a long-time activist investor which had filed a nonbinding proposal for the company’s March 2012 meeting. Under HP’s proposal, shareholders who own at least 3 percent of the tech company’s stock for at least three years would be allowed to nominate up to 20 percent of the company’s directors, according to The Wall Street Journal, which stressed the vote would be binding.
Amalgamated Bank’s LongView Fund had planned to submit a nonbinding proposal at HP’s March 2012 annual meeting that presumably would have made it even easier for shareholders to nominate directors.
In January we reported that Western Union and KSW, a microcap heating and ventilating company, submitted No-Action Letters to the SEC Staff seeking to exclude proxy access shareholder proposals so they could submit their own plans to prevent a softer proposal from being voted upon.
Keep in mind that over the years as the proxy access issue has played out at the Securities and Exchange Commission and in the courts, the corporate community has been fiercely fighting the right for shareholders to nominate directors under any circumstance. The fact that several companies are willing to compromise and trot out their own plans is significant.
“Management finally realizes the vote has meaning,” says Charles Elson, corporate governance expert at the University of Delaware. “The threat to replace is real.”
At the same time, companies are starting to respond to low support in say-on-pay votes. Thanks to the Dodd-Frank bill, shareholders at annual meetings can now express support or dissatisfaction with the overall pay of the named executives in the proxy, although they are not binding.
Through September 25, 2011 only about 38 of the 2,746 companies with annual meeting results that included say-on-pay votes failed to receive majority shareholder support for their say-on-pay votes at last year’s annual meetings, according to the law firm Foley & Lardner.
As it turns out, the two companies that received the most opposition — Beazer Homes and Jacobs Engineering — went back and significantly changed the compensation deals with their named executives in time for the 2012 annual meetings, even though they were not required to.
The result: this time around they each recently received around 95 percent approval for their pay packages. So in the end, investor pressure through say-on-pay resulted in meaningful change.
According to Ted Allen, who writes a corporate governance blog for ISS, Jacobs cut its time-based stock awards, decreased the ratio of stock options and aggressively revamped its stock holding requirement. What’s more, total CEO compensation fell 17.6 percent.
Beazer eliminated time-vesting restricted stock, changed its pay-for-performance hurdles and overall made its severance programs more shareholder-friendly, Allen points out.
Meanwhile, Allen notes that Monsanto, which received 65 percent support for its pay package in 2011, sought feedback from the 50 largest shareowners that voted against its pay table.
“Companies are certainly paying attention to the votes even though they are nonbinding,” Allen says. “Say-on-pay is encouraging engagement between companies and shareholders.”
He adds that other companies took steps in 2009 and 2010 when say-on-pay was a nascent movement.
Although proxy access and say-on-pay are different kinds of issues, it has not escaped governance experts that companies are more sensitive these days to activists, who are more aggressive, savvier and in some cases better financed than they were years ago. In addition, these days the serial gadflies are also taken more seriously these days, unlike several decades ago when they mostly seemed like eccentric kooks.
“It would not be an over-characterization to say these are examples of greater efforts by management to address shareholder concerns,” says Allen.
Adds Elson, “You have a reality of shareholder democracy coming into being and companies recognize this.”
