Study Finds More Firms Declassify
Submitted by: David Morrison, Research Analyst
A majority of S&P 500 firms now allow for the annual election of directors, according to a forthcoming ISS study examining boards at S&P "Super 1,500" companies.
That key finding, along with others concerning the structure and composition of corporate boards, suggests that companies are moving steadily to shore up their governance practices in response to growing pressure from shareholders and regulators.
The developments are "part of a broader trend to ensure boards are more accountable to shareholders," noted University of Delaware professor Charles Elson in comments to Governance Weekly. "Companies are heeding the will of investors by moving in this direction."
The study, which examined proxy data for 1,433 companies holding annual meetings between Aug. 1, 2005, and Nov. 3, 2006, finds that only 45 percent of S&P 500 companies now maintain staggered boards, compared with 53 percent last year, and 56 percent in 2004. This year's figure represents the first time in the study's 10-year history that a majority of large capital firms allow for the annual election of directors.
The use of classified board structures among S&P MidCap and SmallCap firms also is on the decline, albeit at a more modest pace than that evidenced with larger companies. Firms in those indices maintained the same percentage of classified boards in 2003 and 2004 (66 and 62 percent, respectively), but each has dropped an aggregate 3 percentage points over the last two years.
Overall, the number of S&P 1,500 companies with staggered boards continued to decline in 2006, to 55 percent overall, down from 59 percent last year and 61 percent in 2004.
The steady decline in the prevalence of classified boards among all S&P 1,500 companies can be attributed to the significant decline among S&P 500 firms, which is the result of shareholder scrutiny of larger, high-profile companies deploying the anti-takeover device. From 1999 to 2006, S&P 500 companies faced 258 shareholder proposals to declassify, according to ISS records. Over the same period, MidCap companies faced just 48 such proposals, and SmallCap companies just 22.
This trend may change, however, as activist investors turn their attention to smaller firms where proposals in recent years have fared well. In past years, support for shareholder proposals to declassify tended to be stronger among S&P 500 companies. But that was not the case in 2006 and 2005, the study finds. Average support for shareholder proposals to declassify among S&P 500 companies in 2006 was 65 percent, compared with an average of 71 percent among MidCaps and 82 percent among SmallCaps.
The broader trend to declassify will pick up pace in light of a recently released report by the Committee on Capital Markets Regulation, analysts say. The report recommends that companies with classified boards seek shareholder approval when adopting poison pill defenses and, barring such approval, that companies redeem the pill. That, notes Elson, will sharpen the focus on companies maintaining classified boards and accelerate the trend toward declassification.
Overboarding
Another notable development emerging from the study is a decline in the prevalence of "overboarded" directors. A growing number of directors sit on only one major company board, according to study findings. In 2006, 82 percent of the 10,953 individual directors tracked in the study sat on just one company board, up markedly from 67 percent in 2005.
The prevalance of overboarding declined by about half in several categories, the study finds. Less than 1 percent of directors in the study now sit on four or more boards, down from 2 percent in 2005. Four percent sit on three boards (down from 9 percent in 2005), while 13 percent sit on two boards (down from 22 percent in 2005). Only one director sat on seven or more company boards in 2006. That compares favorably with last year when the study found that a total of 11 directors sat on seven or more boards.
The trend is in part the result of companies deepening the pool of directors from which the nomination committee can draw, while, concurrently, relying less on so-called trophy directors who often featured prominently on multiple boards. In addition, a growing concern on the part of directors of increased liability stemming from multiple directorships is forcing directors to limit their service to fewer companies.
Board Leadership
When it comes to board leadership, the study finds U.S. companies continue to establish positions separate from the CEO, but they are far more likely to appoint a lead/presiding director than to separate the chairman and CEO roles.
More than half of all companies studied--57 percent--have a lead/presiding director, up from 52 percent the prior year and from just 3 percent as recently as 2002. The percentage of companies with a separate CEO and chairman again climbed in 2006, rising from 37 percent to 41 percent. Less than a third of the separate chairmen are considered to be independent directors, however, as opposed to more than 90 percent of lead/presiding directors who are considered independent based on the definition used in the study.
While companies may prefer to appoint a lead/presiding director, some investors still prefer a separation of the roles. For example, calls to split the chairman and CEO posts--through shareholder proposals to adopt an independent board chairman--gained modest support in 2006, while the number of such proposals skyrocketed. The 47 independent chairman proposals that came to a vote between Jan. 1, 2006, and June 30, 2006, garnered average support of 30.2 percent, slightly higher than the 29.2 percent average support during the same period in 2005 when ISS tracked 27 proposals that came to a vote.
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