2014 Predictions On New Shareholder Proposals
Straws In The Wind: Our Predictions On ‘Big New Things’ Coming Soon On The Shareholder Proposal Scene
Every year around this time we try to look way, way ahead where Annual Shareholder Meetings are concerned, and to offer our predictions on the “big new things” we foresee as coming down the pike.
We think that our track record has been mighty good: We predicted many years beforehand, for example, that trying to assert that voting for directors was still a “routine matter” – where brokers could vote the absent votes on behalf of their retail customers – could not possibly withstand the sniff test, much less the test of time. We predicted that a “majority voting standard” for director elections would, inevitably, replace the old “plurality standard” – which is happening at an ever accelerating rate …and that it would, indeed turn into an incredibly potent “nuclear option” when shareholder wishes were ignored (a lesson that quite a few company boards never learned ‘til the bomb actually fell – like at Darden Restaurants last week.)
The biggest and boldest prediction we ever made – about “investors increasingly holding Directors’ feet to the fire over their stewardship of corporate assets” – has come to pass in spades - to the point that activist investors are virtually invincible if they can show just a “reasonable sounding way” to deliver bigger and better shareholder returns, faster than the old board has in mind.
Our only big “miss” to date has been on the executive comp front, where we’ve been predicting for about 15 years that this issue would come to the fore…any day now. We have to admit that (a) we severely underestimated the willingness of investors to pay top execs almost anything the comp committee recommends, as long as the company, and they, are doing “OK” and (b) we underestimated the extent to which a “say on pay” would serve as a safety valve, or a sop, that would defuse the issue with a mere “check of a box” to say “OK”.
But now, after the recent flap over employee comp at Coca Cola, we think the jig is up, and that analysts, and activist investors – not to mention corporate squires, and actual fans, like Warren Buffett - will begin to delve much more deeply into the nitty-gritty, ask more questions, run more numbers with more ‘what if’ scenarios and challenge more pay provisions. And we predict, as we did in our last issue, that increasingly, they will do so in the “eleventh hour”, as they did at Coke - to get maximum exposure in the press that will put directors on the spot, and increasingly force revisions to show that boards are “listening”…So that’s prediction number-one.
Prediction number two is that treating the ratification of auditors as a “routine proposal” is also failing the sniff test these days, and will not withstand the test of time either. Point one re: rubberstamping the selection of auditors; Check out the recent report from “peekaboo” that reveals serious deficiencies in roughly 43% of the audits that the PCAOB audits. Point two; The entire accounting industry is finally resigned to the need to disclose the names of the audit partners in charge of every corporate audit. The only issues are when this will happen, and where the disclosures will be made – but with search engines, it hardly matters…And you can bet your life that the same handful of partners and firms will be associated with many of the failed audits that come to light. So look not only for no more rubberstamping, but for actual Vote-No campaigns on auditor ratification, we predict.
Prediction number three is that not only will shareholder proposals to reveal more details on corporate political giving not go away, they will continue to increase dramatically – and will ultimately end in near-universal corporate disclosure of all such giving…and the devil will take the hindmost here. A group of activists recently announced that one million comments have been filed in support of a petition for the SEC to require such disclosures, which, likely they will not do…But remember, it was Supreme Court Justice Antonin Scalia himself who noted in the Citizens United case that he expected the marketplace to demand such information - as it is now doing.
Prediction four is that the push for more disclosures about stock buybacks, perhaps including demands for shareholder approval here, as is the common mode in the EU - will begin to gain much more traction with shareholder proponents, as we predicted back in our second quarter 2011 issue (which is worth a re-reading, we say). Here are just a few other ‘straws in the wind’ – in the form of headlines from recent articles; “Beware Banks Bearing Share-Buyback Gifts” (WSJ 3/17); “Stock Buybacks: Will They Bite Back?” (also from the WSJ in June) – and our favorite, and required reading we say, “Profits Without Prosperity” by William Lazonick, in the September 2014 Harvard Business Review – which, like the open letter to big companies from Blackrock’s Larry Fink in March, blames boards for underinvesting in their companies to fund share-buybacks that basically enrich short-term investors and, as Lazonick very pointedly points out, serve mainly to enrich corporate execs at the expense of regular shareholders by artificially increasing ROE as it relates to their performance targets – and bonuses.
Whether you sign on to our predictions or not, we absolutely guarantee that (1) shareholder proposals will never go away - since a huge and highly-paid army of lawyers, advisors, proxy chasers and muckrakers has grown like Topsy….and accordingly, (2) shareholder proposals are more likely to increase than they are to decrease - at least in terms of their seriousness, and (3) activist agendas will continue to gain traction with voters…making the votes of “regular investors” more important than ever…So please do read our next article with care…and see the Quote of the Quarter too…