Our 2010 Meeting Season Roundup

What, If Anything, Can We Learn - To Better Prepare For 2011?

What a surprise! After more than a year of whining, wailing and gnashing of corporate and proxy-solicitor teeth about the loss of the broker vote, the Spring 2010 Annual Meeting Season turned out to have less activism and far fewer unpleasant surprises than usual.

Maybe all that whining and wailing paid off, and made companies and their solicitors tune up their vote-getting act…But just as likely, as Pat McGurn of ISS suggested, activist investors were focusing a lot of efforts elsewhere, on all the new rules and regulatory actions the Dodd-Frank Act will engender. And maybe, as he also suggested in his remarks at a recent SSA conference, most of the big activist objectives have been achieved, since, as he also pointed out, correctly we think, most companies have really cleared the decks of practices that are most likely to draw fire from activist investors:

The average number of votes cast against directors actually declined – by a full percentage point according to ISS stats – to 6% in 2010 vs. 7% in 2009. Only one Fortune 500 director failed to get a majority vote, McGurn said, while 70 directors – a few more than last year, but all from small and mid-cap companies – got less than a majority vote in favor of reelection.

In most instances the “failing directors” were elected anyway, because a plurality voting standard applied: But, as we keep reminding, these numbers don’t mean a thing if one of YOUR directors gets dumped on…especially if it comes as a surprise to them. And, despite the averages, we saw more small-cap companies than ever before where the no votes and withheld votes against comp committee directors were in the 30% - 40% range. This is really a bad sign, which needs to be addressed when planning for 2011. Make no mistake; small and mid-cap companies will be undergoing more scrutiny than ever before - mainly because the big guys mainly “got it” - but those activists need to stay in business.

Proxy fights were way down too – around 48 vs. last year’s 84 or so – mainly due to pre-meeting settlements, which was sad news to proxy solicitors, most of whom were expecting more fights than ever.

Nonetheless, there were a few other warning flags waving, that smart companies will want to take into account when planning for 2011: The biggest bad sign from our perspective was the fact that three big companies – Motorola, Occidental Petroleum and KeyCorp – failed to get their pay-plans ratified in their first year with a Say-On-Pay. With say-on-pay now certain to be mandatory going forward, thanks to Dodd-Frank, and with all 13-f filers having to disclose their votes on executive comp proposals too before too long, and with the provision that companies will have to disclose the ratio of CEO pay to average pay, the focus on executive compensation is sure to increase. But most institutional investors say that they are much less interested in the levels of pay than they are in tying comp to long-term performance. So the biggest challenge is simply to get a passing grade on the essay question…and to studiously avoid any plans or perks that might attract the attention of increasingly attentive investors.

Don’t be surprised, however, if the level of focus on executive comp suddenly ratchets up – especially if the economy flags or your own results lag: The multiple of CEO pay to average-worker pay is still extraordinarily high by historic standards. And CEOs are still taking an overwhelming share of the pay and bonus pool at most companies, despite earlier calls for “internal pay equity,” which seem to have fallen on deaf ears, as have the earlier calls for boards to consider “total wealth accumulation” in awarding pay. Many people say the gross amounts of pay that top execs get at many companies are…simply gross…and asking, “isn’t enough enough already?” Other executive pay hawks – like Warren Buffett – have also been questioning how much of the profits are really due to the performance of one single person – and whether there are really so many CEO jobs out there that CEOs will “walk” if not constantly rewarded with more pay.

Another issue to watch, and ideally to address up front in next year’s proxy statement, is succession planning: About 10 proposals were floated this year for more disclosure on the process, and on the specifics of the plan itself - which is kind of problematic - and the numbers were much bigger than firstyear proposals usually get; somewhere in the mid-30% range.

Expect investor demands for even more risk-management disclosure…and new calls for crisis-management-plan dis- closure…thanks to BP: We think this will be a major “new frontier” for institutional activists and “social and environmental activists”…and probably a good thing for investors, and companies too, to focus on more rigorously.

A closing note: There was a noticeable uptick in unruly meetings this year…and a return to picketing and noisy demonstrations (mostly outside the meeting hall, thank goodness) at a level we haven’t seen since the bad old days, so be prepared: This is a good time, we think, to read our article below on Meeting admission procedures…and the article on our website about Annual Meeting Security…and to think about Virtual Meetings too – not just as a crowd-control and space-control measure, but as a way to size-up a the hot issues, and to discuss them in a robust and civilized and well-managed way…and to assure that safety - and sanity - will prevail at the physical meeting site.