The biggest take-away from this season – as we noted last issue too – is the ease with which Says On Pay sailed by: A just-released Conference Board study, “A Closer Look at Negative Say On Pay Votes” that reports on the roughly 2200 of the Russell 3000 Index companies that held meetings through June 17 reveals that only 36 companies ended up with NOs on their Say On Pay proposals.
But the dirtiest and least-noted “secret” we think, is that the vast majority of the “failures” would have sailed by too…if only corporate issuers, and sometimes the not-so-savvy proxy solicitors they’d hired …actually knew what they should have known and done what they should have done: At most of the companies where CTH&A Inspectors oversaw the voting, individual investors were typically voting ten-to-one – and many times as high as 90 to one in favor of the Pay plan. But at most of these same companies, individuals were voting only 10% to 15% of the shares they owned as a group…And in several cases we saw with our own eyes, individual investors held between 30% and 40% of the total voting power! Ouch! Just a few well-placed calls or emails to a few well-placed holders could have turned the tide – on pay, or on many other matters we saw where the management position failed to carry the day.
We also saw more than a few companies where executive officers – and directors – with very large positions in the aggregate - failed to vote their own proxies…And, though we are not privy to ALL the votes by such folks, since we don’t normally look for this (it’s the issuers’ job – and the proxy solicitors job) - and many such positions are in Plans, or in street-name, where they are not visible to onlookers - we’d bet big that they alone could have turned the tide in many cases where there were close votes!
Another important take-away; Clearly, those Proxy Advisory Firms do not have nearly the clout thatsomeproxy solicitors - ndwaytoomanyhystericalcorporations too –seem to have thought they have: Through June 17, ISS recommended NO votes on Pay Plans at 276 companies…while only 36 companies ended up with failures, as noted…And at least half of them could have avoided failure with relative ease, as also noted above.
The most important take-away, perhaps – and something else we’ve been pointing out with regularity – small cap companies are the most vulnerable to NOs on Say On Pay – and are usually the least prepared to counter, as well: 17 of the 36 companies with NO votes had market cap of $1 billion or less…and most of such companies, in our experience, don’t seem to know there is a problem – with say on pay or any other issues – until it’s too late to turn around.
Arealproblemwith NOsonpay, however- for this yearatleast is that four derivative suits have been filed against directors at such companies, alleging breach of duty and “waste of corporate assets” due to “too-high pay” - and another 18 cases are under study, the Conference Board reported: We would not expect these suits to go far, although a few seem to be getting settled. Read the excellent and reassuring posting in the Harvard Law School Forum on Corporate Governance and Financial Regulation by Paul Rowe of Wachtell, Lipton, we advise, which reminds that “a negative vote on say on pay does not change the board’s fiduciary duty to implement compensation policies that the directors believe are the best way to attract, retain and incentivize top-quality managers…Directors face no prospect of legal liability if they decide to act in a manner contrary to a negative say on pay vote…[i]f a Board follows appropriate procedure in determining not to revise compensation.”
One of the newer, and more bizarre - and more troubling tactics we observed at several large-cap companies this year - were agreements to allow “floor votes” on matters that had not been presented to all shareholders in the official proxy materials. We feel there are significant problems with this tactic, some of which can come back to bite the unwary company and their uninformed shareholders as well: Most of the cases we saw were in connection with “gentlemen’s agreements” that were made with Walden Asset Management regarding the role of Company directors who are also on the board of directors of the U.S. Chamber of Commerce – where Walden asserts, correctly, as it seems to us, that the Chamber often acts, or endorses acts on the social, political and environmental fronts that are in direct contradiction to a member Company’s own policies:
As to the “floor votes” the Pfizer proxy statement said “The board is not aware of any matters that are expected to come before the 2011 Annual Meeting other than those referred to in this Proxy Statement and the possible submission of the Walden Proposal, which is not included in this Proxy Statement but may be presented by Walden… If …presented at the Annual Meeting….the Proxy Committee appointed by the Board of Directors will have discretionary authority pursuant to Rule 14a-4(c) under the Securities Exchange Act of 1934…and intends to… vote AGAINST the proposal.”
JP Morgan Chase and several other companies in similar positions vis-a-vis the Chamber also allowed Walden to initiate “floor votes” like this if they chose to do so at the Meeting…while several other large companies relied on the notice provisions in their bylaws – the most carefully drafted of which specifically disallow any proposals that are not officially described in the proxy statement from being considered as “other business that can come before the meeting.” Yes, they said, you can bring up the proposal during the discussion period, but not during the business portion of the meeting, because no “floor votes” are allowable under our bylaws.
When the “floor vote” stuff first crossed our desk we called our good and usually very savvy friend at Walden, Tim Smith: “What the heck are you doing here?” we asked him: “How can you folks – ‘good governance advocates’ you say – advocate something that is so clearly bad governance…by trying to bring proposals to a vote at the Annual Meeting that the overwhelming majority of shareholders will have had no chance to consider, much less to vote on?”
“We think it’s a good way to get a hearing on this issue, and get a dialogue going… without having to file an official shareholder proposal” he told us. And it struck us - though we didn’t tell him at the time - that many companies would think of this as a ‘cheap and easy way’ to dispense with the issue…without having a really serious debate, much less an up-or-down vote….OR…thinking that they had more than enough discretionary votes “in the bag” to vote it down overwhelmingly…so the proponents would slink away defeated and maybe not come back.
And guess what? This season we encountered three companies with entirely different kinds of shareholder matters being put forth - where the company seemed to think that allowing a “floor vote” would be better than filing for a No Action Letter…or engaging in a debate in the proxy statement… and thinking too that they would have the discretionary votes ‘in the bag’ to vote it down big-time.
But think again, dear readers: As we’ve been repeating over and over – the only “discretionary votes” the company has ‘in the bag’ – and can VOTE at the meeting are represented by proxies – from registered holders…. Unless, that is, you have given street- name shareholders a box to check on the VIF they get, that specifically authorizes the Proxy Committee to “vote in its discretion on any other business that may come before the meeting.” Yes, the SEC rules do give companies broad discretion regarding “other business” – but the ‘rules of proxy’ – and what makes a valid proxy - are State-Law matters. Without such a box, the Proxy Committee has no discernable number of votes that they can automatically assume run to them and that they can simply “plug in” to the vote totals.
So if your company is like the vast majority of companies we’ve seen this year – where the registered vote is a mere 10-15% of the total votes cast…and where there are lots of abstainers and broker non votes in your quorum that don’t count as “votes cast” – and where Tim Smith, or some other proponent of something comes to your Meeting with Legal Proxies – it’s not as hard for them to carry the day as you might think.
Let’s do the math: Say you have 100 shares outstanding, to keep it simple, and your quorum at the opening of your meeting is 80%…with 15% coming from the registered holders, or 12 votes, all running to you….And all of them, because the signers did not scratch out the authorizing language that appears on the back of the proxy card, granted your Proxy Committee discretionary authority to vote on “all other business”. But for the remaining 68 votes that came from the street-name holders, you have no actual instructions or information as to your discretionary authority, since you did not have an “all other business” box to check. Thus, the only “discretionary votes” your Proxy Committee has in hand are 12 votes.
Now comes Tim Smith, or someone else, to introduce a proposal from the floor…And lo and behold, they have 2 votes from registered holders who’ve given them proxies and 11 votes from institutional holders who’ve given them Legal Proxies to vote as they wish. So it’s 12 votes where your Proxy Committee can vote NO - and 13 YES votes from the floor…Ouch! If the standard for “approval” is “a majority of the votes cast” on the matter, you lose…And with only 25% of the 100 shares outstanding actually voting on the issue from “the floor” of the Meeting, please note.
Share
Share the Optimizer with your colleagues!