The following is the first of two articles on the 2007 U.S. proxy season. Shareholder proposals on takeover defenses and social issues will be covered in the July 20, 2007, edition of Governance Weekly.

Looking back at the 2007 U.S. proxy season, two themes come to mind: accountability and engagement.

Shareholders gave strong support for proposals that seek greater board accountability, such as those seeking annual investor votes on executive pay and majority voting in director elections.

At the same time, investors withdrew more than half of their proposals on majority voting and stock option reforms after negotiations with companies. These withdrawals suggest that companies are becoming willing to engage with shareholders on certain issues.

Pay-related proposals received the most attention this season; more than 40 proposals that request an annual advisory vote on compensation--or "say on pay"--were voted on. Investors withdrew six resolutions; most of those withdrawals were at firms that agreed to join a new investor-issuer working group on pay votes.

As of June 30, support for pay vote proposals averaged 42.4 percent at 29 meetings where preliminary or final results are available. The topic averaged 40 percent at seven meetings in 2006, the first year it appeared on U.S. ballots.

Four "say on pay" proposals received majority backing--the most recent winning 57 percent of votes cast at Ingersoll Rand on June 6, according to the proponent, the American Federation of State, County, and Municipal Employees (AFSCME). At least 10 proposals received greater than 45 percent support, according to ISS data.

Proponents also received a boost in February when Aflac announced it would start holding shareholder votes on pay in 2009. The U.S. House of Representatives approved pay vote legislation in April, and similar legislation is pending in the Senate.

Investors also voted on over 60 proposals requesting that firms more closely link executive pay with the corporate performance. General pay-for-performance proposals averaged 35.1 percent support over 22 meetings where results are known, a slight decrease from last year's average of 36.1 percent.

In addition, 14 proposals were withdrawn, which suggests that companies have become more willing to engage with stockholders in drawing up performance metrics for calculating executive pay. At least one company, Progressive, has committed to adopting pay-for-performance metrics this season.

Proposals asking for a specific link between equity incentives and shareholder returns--or a performance threshold for option grant vesting--fared about the same as general pay-for-performance measures, averaging 35 percent across 17 meetings. A majority of shareholders at KB Home and Hewlett-Packard backed a performance-based stock proposal this year, with 54.6 percent support at KB Home, and 53.8 percent at HP, according to regulatory filings.

Meanwhile, "clawback" proposals averaged 35.5 percent support at six firms where voting results have been released, significantly higher than the 2006 season average of 23.6 percent. These proposals call for recouping bonus payments to executives if a later investigation or restatement determines that their incentive goals weren’t met. Two proposals obtained majority support; the best showing was a 59.2 percent vote at Motorola.

Many of this year's pay-related proposals reflect a continued shareholder backlash against what the AFL-CIO has called "pay for failure." Executive retirement and severance payments have come under scrutiny in recent years as corporate exit packages, sometimes totaling in the hundreds of millions of dollars, make headlines nationwide.

A set of proposals asked companies to disclose, limit the amount of, or let shareholders vote on Supplemental Executive Retirement Plans--or SERPs--which are benefits given to top management in addition to the company-sponsored pension plan. SERP proposals won an average of 33.8 percent support over 12 meetings where results are known; the best showing was a 51.7 percent vote at Goodyear.

Investors also were more receptive to resolutions that ask for a shareholder vote on future "golden parachute" packages for outgoing executives. The proposal averaged 55.9 percent support at seven meetings, up from 50 percent support at 11 firms last year. A total of 13 such proposals were voted on this season. One golden parachute resolution won 68.7 percent at PPG Industries, according to regulatory filings, while a Bricklayers & Trowel Trades proposal got 85.6 percent support at KB Home, the company reported.

In response to the stock options backdating scandal, many firms have adopted new option grant policies. The Amalgamated Bank's LongView Fund submitted nine proposals asking companies to fix grant dates before the fiscal year begins and to price options at an average of the stock’s opening and closing price on the grant date. According to Cornish Hitchcock, an attorney for LongView, most of the proposals were withdrawn following constructive talks with the companies.

The proposal won 47 percent at Apple, Hitchcock said. At CVS/Caremark's first annual meeting as a single corporation, a similar proposal received a 48.4 percent vote, a strong showing for a first-year resolution. Another proposal was filed at McAfee, but the software company could not hold an annual meeting because it has been unable to file timely financial reports due to options-related adjustments.

Another new proposal seeks information that relates to the independence of the executive pay consultants hired by boards, such as on other work that the consultant may be doing for the company. Only three of these proposals were voted on, averaging 40 percent support.