RiskMetrics Group to Host June 2 Webcast on Pension & Post-Retirement Plans Under Pressure
Submitted by: Stephanie O'Neil, Marketing
In 2007, many companies’ pension and postretirement expenses benefited from a combination of rising interest rates and strong equity market returns in the years prior to 2007. In late 2007, this beneficial environment changed rapidly, affecting these expenses, as equity markets suffered and the Federal Reserve began aggressively cutting interest rates.
RiskMetrics Group will host a webcast with analyst Dan Mahoney on June 2, at 10:00 am that will cover why the rapid market environment changes raise our concern that the lower pension and post-retirement expenses enjoyed by companies in 2007 may not be sustainable. During the forum, he will discuss the trends in pension and post-retirement expenses, and the affect such expenses have on mid- to large-cap companies traded on the major exchanges in the U.S.
To register for this webcast, please visit here.
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May 23, 2008 |
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U.S. Midseason Review
Submitted by: L. Reed Walton, Publications
Shareholder proposals requesting an annual advisory vote on pay--“say on pay”--have received slightly higher support at U.S. companies this year.
Pay vote proposals have averaged 43.1 percent support over 35 meetings where preliminary or final results are known, compared to 42.5 percent support in 2007, according to RiskMetrics Group data. So far this year, “say on pay” has won majority support at six companies. The most recent majority vote came at the May 20 meeting of Alaska Air Group, where a resolution submitted by shareholder William Davidge won 53 percent support, according to news reports. Another recent majority result came at the May 17 meeting of utility company PG&E, where a “say on pay” measure received 52 percent support, proponents say.
Other firms where advisory vote proposals have garnered over 50 percent support include South Financial Group, Lexmark, Motorola, and Apple. The AFL-CIO, which submitted the pay resolutions at Apple and Motorola, plans to ask the companies in July and August to start holding annual non-binding votes on compensation. (For more information, please see the “In Brief” section of the May 9 issue of Risk & Governance Weekly.)
Earlier this season, support for “say on pay” slumped at several financial firms where the issue was voted on last year. Support for advisory vote proposals dropped at Citigroup on (from 46.2 percent to 41.9 percent this year), at Wachovia (from 38.7 percent to 30.6 percent), and at Merrill Lynch (45.6 percent to 37.5 percent).
Overall, there has been higher median support for “say on pay” this year. Last year, three pay vote proposals received less than 30 percent support, and 33 won over 40 percent support. So far in 2008, no proposals have received less than 30 percent support, and 26 have won over 40 percent. Investors filed more than 80 “say on pay” proposals this year; more than 70 resolutions will go to a vote during the traditional U.S. proxy season, which concludes at the end of June. Upcoming meetings that have pay vote proposals on the ballot include Altria Group and ExxonMobil on May 28, Raytheon on May 29, and General Motors on June 3.
It’s difficult to assess the support for other shareholder proposals on executive pay this year since few results have been released so far by companies or reported by the news media. A new proposal from the American Federation of State, County, and Municipal Employees that asks firms to eliminate tax “gross-up” payments on CEO perks and compensation has gone to a vote at four meetings so far. The measure won a 48.2 percent vote at CVS Caremark, according to proponents. The drugstore company noted in its most recent proxy statement that former Caremark CEO William Spalding--who left the post after the buyout by CVS--was given an approximate $2.9 million excise tax gross-up payment last year.
Requests to link executive pay to company performance are faring about as well as last year, though many of the vote tallies have yet to be released by companies. The resolutions--mostly sponsored by the United Brotherhood of Carpenters and Joiners--have averaged 30.8 percent support at five meetings thus far, compared with 29.8 over 38 meetings during the 2007 proxy season. About as many pay-for-performance proposals will be voted this year as last. Proponents withdrew 18 resolutions after negotiations with companies, leaving 37 proposals on company ballots.
This year, there are also fewer shareholder proposals asking for an investor vote on supplemental executive retirement plans (SERPs) or exit pay packages. Few results have been released, but a SERP proposal won a 45 percent vote at Black & Decker, proponents say, and a “golden parachute” proposal won 35 percent support at Boeing, according to proponents.
Resolutions asking companies to abolish the practice of granting stock options to executives--submitted at five firms by investor Evelyn Y. Davis--has averaged 6.4 percent support. This is slightly higher than last year’s average of 4.3 percent across six meetings.
Governance-Related Proposals
Other governance-related proposals have also continued to receive high levels of support this season. Most of the resolutions asking companies to eliminate supermajority provisions have won majority backing so far. Of the seven meetings where preliminary or final results are available, those proposals have averaged 62.9 percent support. This widespread support is not unprecedented; shareholder requests to rescind supermajority voting rules averaged 67.8 percent in the 2007 proxy season, according to RiskMetrics data. Most of this year’s 14 resolutions have gone to a vote, though the proposal will be voted at Maine-based utility firm Energy East in June and H.J. Heinz in August.
Proposals asking for the right of investors to call special meetings are faring well for the second consecutive year. At 12 meetings where results are known, proposals asking that holders of 10 to 25 percent of outstanding stock be able to call meetings have averaged 51.8 percent support. Last year, those resolutions averaged 56.5 percent support at 18 meetings before June 30. Overall, 27 special meeting proposals are slated for a vote this year.
This year, investors have withdrawn most of the majority vote proposals (48 withdrawn) after negotiations with companies, but 31 are slated for a vote so far this year. Of 11 meetings where results are known, proposals have won an average of 45.3 percent support--not including a 92 percent result at RadioShack where company management supported the resolution. The best showing was 72 percent support at FirstEnergy. Majority vote resolutions received an average of 50 percent support over 36 meetings in 2007.
Board declassification proposals continue to win considerable support, with an average of 57.8 percent over seven meeting where results are known. Only one proposal so far has failed to win majority support. These proposals won an average of 63.9 percent support during the 2007 season.
So far, independent chair proposals are receiving record support. Those resolutions have averaged 32.1 percent support over 15 meetings this year, up from 30.2 percent support in 2006 and 24.8 percent support during the 2007 season. Investors will vote on the issue at Chevron and ExxonMobil on May 28, and at Legg Mason on July 22.
Proposals that ask companies to appoint an independent “lead director” with “clearly delineated duties” are on the ballot at six companies this year. So far, the resolution--new for 2008--has won 39.4 percent support at AT&T, 34 percent at Boeing, and 43.5 percent at Merck, according to preliminary tallies.
Support for cumulative voting is holding steady--averaging 34.1 percent support over six meetings so far. That compares to a 34.2 percent average across 22 meetings from January to June 30 last year. However, as most of the results for the 20 meetings at which the resolution appeared are not available, that number is likely to fluctuate as the companies holding second-quarter meetings begin reporting vote results in late July and August.
The California Public Employees’ Retirement System (CalPERS) once again submitted a proposal asking that shareholders be allowed to amend the bylaws by majority vote. The resolution, which won 48.8 percent support at Eli Lilly in 2007, received slightly more support--49.3 percent--at the firm this year. The proposal received 80.6 percent support last October at Sara Lee, which announced in January it would allow shareholders to amend company bylaws by majority vote.
Social and Environmental Proposals
Though most companies have not released vote results, social issue proponents have reported strong showings by proposals pertaining to greenhouse gas (GHG) emissions, sustainability reporting, human rights policies, and nanomaterial product safety.
Proposals asking companies to set specific targets for reducing GHG emissions won 33.7 percent support at Standard Pacific and a 41 percent vote at energy firm ConocoPhillips, according to proponents. These are the two highest results for this particular GHG proposal; the previous best showing, 31.1 percent, came at ExxonMobil in 2007. The resolution averaged 20.7 percent support over four meetings last year.
Resolutions that request sustainability reports are on the ballot at seven firms this year. Twenty-three sustainability proposals were withdrawn by proponents this year; in most cases, companies agreed to issue a report for the first time or to expand previous sustainability reports. A proposal at Dover received 39.5 percent support at the industrial products company’s May 1 annual meeting, according to proponents. This proposal averaged 27 percent support over 18 meetings last year.
A resolution asking companies to review or amend a standing human rights policy won 28.2 percent support at United Technologies, proponents reported. This is the third-highest result for a human rights-related shareholder proposal, excluding one at Newmont Mining last year that was backed by management. The highest came in at Cisco Systems in 2006 and 2007, with 28.9 and 35.8 percent support, respectively.
A new proposal this year asks companies to examine the safety of products containing nanomaterials, or components smaller than one micron (1/1000th of a millimeter). Avon Products shareholders gave the proposal 25 percent support--which is high for a first-year social issue proposal. Avon uses nanomaterials in some of its cosmetic products.
Editor’s Note: RiskMetrics Group reports vote percentages based on “for” and “against” votes cast and doesn't include abstentions or broker votes. This is the same approach the Securities and Exchange Commission uses under SEC Rule 14a-8(i)(12) to evaluate the support received by proposals in previous years. Please also note that many results are preliminary and do not include all 2008 meetings, because some companies have declined to release vote totals on shareholder resolutions until their next quarterly regulatory filing. Finally, the 2007 averages include only those meetings that occurred from Jan. 1 through June 30 of that year
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May 22, 2008 |
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Explorations in Executive Compensation
Submitted by: Gary Hewitt, Marketing
This week RiskMetrics Group introduced a new research initiative that looks at the always complex issues surrounding executive compensation. The project, Explorations in Executive Compensation is offered in the hopes of sparking constructive dialogue and stirring new ways of thinking about this issue - and in the process help move investors and companies towards a common language for creating, evaluating and communicating about executive pay systems.
The project initially consists two sets of white papers. The first set, Considerations, defines and puts into context the basic elements of U.S. executives' pay packages, with special attention paid to emerging key considerations for investors in evaluating pay and equity plans in particular.
The second set, Innovations, offer a pair of new methods of looking at critical issues in executive pay: peer group benchmarking and and the degree of alignment between the risks borne by investors and by shareholders.
We're excited about this opportunity to advance dialogue and transparency on compensation issues - and are eagerly seeking your feedback on the ideas put forth in the project. Explorations in Executive Compensation is posted online at www.riskmetrics.com/compensation, with an interactive executive summary and online tools to explore the new benchmarking and risk profiling methodologies. Please visit the site and let us know what you think.
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May 19, 2008 |
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E-Proxy: Retail Voting Still Low
Submitted by: L. Reed Walton, Publications
U.S. companies using online proxies and mailed notices--also known as “notice and access”--continue to see sharp declines in voting by individual investors, but some shareholder advocates are re-examining their previously pessimistic views on e-proxy.
Since July, when firms could begin electronic distribution of their proxy materials, 92 companies have held annual meetings, according to Broadridge Financial, which processes proxy votes for most of the issuers that have adopted notice and access. At those 92 firms, retail shareholder participation dropped more than 75 percent from the previous year. Only 4.5 percent of individual investors voted at e-proxy firms in late 2007 and early 2008, down from 19.2 percent participation in late 2006 and early 2007, according to Broadridge.
According the latest statistics from Broadridge, 283 public companies adopted electronic proxy material delivery as of March 31. In July 2007, the Securities and Exchange Commission adopted a rule allowing public firms an alternative to sending full packets of proxy materials to each shareholder--the “notice and access” model--whereby issuers would mail a notice to shareholders telling them that proxy materials are available via a Web site other than the SEC’s EDGAR site. By January, large companies were required to post proxy materials online, though they could still choose to send full packets of voting materials in advance of their annual meetings. Small companies will have until 2009 to post proxy information online.
The possibility of a drop in retail shareholder participation was raised by many of the investors who commented on the SEC’s notice and access rule. During the first comment period in 2006, shareholders Nick and Emil Rossi warned in a letter to the SEC that electronic proxy delivery “is another attempt to disenfranchise small individual shareholders.” A survey conducted by Forrester Research--on behalf of Broadridge and included in the proxy processing company’s comments to the SEC--indicated that 38 percent of shareholders who vote would be less likely to look at proxy materials online and less likely to vote under a notice and access model.
At the time, investor groups expressed concern that older or less technologically savvy shareholders would be reluctant to use the computer technology required to view e-proxies. The Association of BellTel Retirees wrote in its letter that it was “premature” of the SEC to expect that retirees and other shareholders over the age of 65 are comfortable enough with the Internet to access corporate proxy disclosures.
The initial decline in retail voting appears to bear out these warnings. But the dip may be temporary, some advocates say. Richard Clayton, research director for the CtW Investment Group, told Risk & Governance Weekly that a number of factors could be contributing to the drop in retail participation--including frustration with a flagging economy and a declining real estate market. Trouble using the new online proxy voting applications could contribute to a temporary drop in participation, as well. “With a lot of online services, there tends to be a learning curve,” Clayton said.
Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County, and Municipal Employees, agreed. Ferlauto told R&GW that it would probably take at least five years for some retail shareholders to become familiar with the technology, have the broadband network access necessary to download large files, and cope with the hassle and expense of printing out long proxy forms. “These are significant barriers that will be overcome with time,” Ferlauto said.
Ferlauto also noted that notice and access may have dampened support levels for “say and pay” and other shareholder proposals this year. However, CtW’s Richard Clayton told R&GW that because it’s difficult to measure how many retail investors are voting for shareholder resolutions, it’s too early to tell whether the e-proxy rules are having a real effect on proposal support.
A number of early-adopter companies reported shareholder complaints over the mailed notice cards. A few shareholders wrote their votes on the notice cards and sent those back to the company, Gail Smith, director of corporate development for pharmaceutical firm Pharmos, said in a January interview on e-proxies with Broadridge.
Dominic Jones, editor of the IR Web Report, wrote about problems he had accessing online proxy materials for Applied Micro Circuits in July of last year. Mistyping the Web address for Broadridge’s proxy voting site, Investor E-Connect, brought up a “spam” advertising site he suspected preyed on people who accidentally visited the wrong Web page, Jones wrote. Other investors complained about the mailed notice that Broadridge used to alert shareholders to online availability. The notice form was too small and not very “user-friendly,” Helen Kaminski, assistant general counsel for food company Sara Lee told Broadridge.
Broadridge has no plans now to redesign its mailed notice, Chuck Callan, the company’s senior vice president of regulatory affairs, told Risk & Governance Weekly. This is partly because the SEC requires that certain text be printed on the notice of online proxy material availability. “You get the notice, but it’s not in and of itself a ballot,” Callan said.
He contends that the new, unfamiliar proxy delivery method is causing retail shareholder participation to drop. According to Broadridge statistics, in cases in which e-proxy companies sent certain shareholders a “full set” of proxy materials, and among the 0.5 percent of shareholders who “opted in” for full paper copies, voting was much higher. For retail shareholders receiving the full set of proxy materials this year, the voting rate was approximately 66.5 percent. “The basic conclusion is that opt-in rates are low, opt-out rates are low, and if there is a change in the default, people tend to take no action,” Callan told R&GW.
Two new initiatives may also help individual investors become more informed about governance matters and vote their shares. A new Web site, ProxyDemocracy.org allows shareholders to see how institutional investors plan to vote at upcoming meetings. The California Public Employees’ Retirement System, Calvert Funds, Christian Brothers Investment Services, and Domini Social Investments are among the investors that have signed up to make their vote recommendations available on the site. Investors can also assign their voting rights to a third party, such as an environmental or social group, through the Investor Suffrage Movement. The proxy exchange, currently in trial phase, will help members transfer ballot rights to other members online.
Quorum Issues and Broker Votes
One of the major concerns of companies at the outset of e-proxy voting coincides with a pending decision by the SEC. The New York Stock Exchange (NYSE) has proposed to bar companies from counting “broker votes”--those shares where clients haven’t given voting instructions--in all board elections. Uncontested director elections are now considered “routine” ballot items by the exchange, but the NYSE is seeking SEC approval to classify board elections as “non-routine,” like shareholder proposals.
Some companies balked at the idea of eliminating the votes, arguing that they may not be able to reach quorum--the requisite number of shareholders present in order to hold an annual meeting. Uninstructed shares account for a significant percentage of shares in U.S. companies. A 2005 presentation by the National Investor Relations Institute (NIRI) showed that as much as 85 percent of NYSE-listed firms would have been working to reach quorum in the nine days before their annual meeting and 23 percent of listed firms would not have attained quorum without broker votes in 2004. The latest statistics from Broadridge on e-proxy voting show that average quorum has slipped about 4 percentage points among those companies adopting notice and access.
Clayton of CtW asserts, though, that the quorum argument is beginning to lose credibility. “It’s a small and probably shrinking share of the market where [quorum is] a concern, so there’s probably a way around that,” Clayton told R&GW. “It wouldn’t be hard to put in an exemption for smaller companies.”
Some investor groups also consider broker votes a “thumb on the scale” for management-sponsored director nominees. Most brokers vote uninstructed shares with a company’s management recommendation, which can undermine a “vote no” campaign by investors. A few directors this year, including James Stever and Charles Lillis at Washington Mutual, would have failed to win re-election if broker votes had not been counted, labor investors say. (For more on this issue, see the “In Brief” section of the May 2 edition of Risk & Governance Weekly.)
The AFL-CIO wrote in its comment letter on notice and access in 2006 that issuers should be reaching out to shareholders rather than relying on broker votes to help them achieve quorum. Daniel Pedrotty, director of the labor federation’s office of investment, told R&GW that the need for change on the broker vote issue “is so compelling” that he believes that quorum requirements do not override the issue. The Council of Institutional Investors, a member organization of public and labor pension funds, advocates using broker votes to reach quorum, but not counting them for or against any ballot items at all, CII Deputy Director Amy Borrus told R&GW.
The SEC has so far declined to move on the issue and appears unlikely to do so until three commissioner nominees take office. Still, investor groups like the CII continue to pressure the commission to address the broker vote issue. In an April 17 letter to SEC Chairman Christopher Cox, CII Executive Director Ann Yerger wrote that the organization was “disappointed that this important investor-friendly reform has languished” at the commission.
Benefits to Companies
Despite caution on the investor side, there is little doubt that companies adopting the notice and access model have seen significant financial benefits. Broadridge’s Callan estimates a savings of approximately $75 million in printing costs among the 283 companies using notice and access. During a January interview with Broadridge, representatives from Pharmos and Sara Lee testified to a collective savings of about $398,000 after going predominantly online last year (shareholders may still elect to receive full paper copies of a firm’s proxy materials.)
If U.S. companies use electronic distribution on a wide scale, it can save up to 800,000 trees per year, and prevent hundreds of thousands of tons of paper from being dumped into landfills, BNet.com’s Peter Galuszka reported on the site’s “Corner Office” feature on April 23. Environmental responsibility is one of the reasons that Molson Coors Brewing chose to adopt notice and access this year, company spokesman Paul de la Plante told R&GW. “It shows good leadership. We wanted to be in the first handful of companies that did this,” de la Plante said.
He also said that only five people called the company with questions about the mailed notice or the online proxy voting process, and that they have had no complaints so far. Data on retail investor voting at Molson Coors will be available shortly after the company holds its annual meeting on May 15.
SEC Votes to Mandate XBRL
In other news this week, the SEC voted May 14 to propose a new rule to require large companies to start incorporating the XBRL computer language in their quarterly and annual reports. The data-tagging technology would allow investors to more easily access financial data and compare results across companies.
“It will replace the current time-consuming methods involved with retrieving corporate-shareholder information and put that information at the fingertips of every investor,'' SEC Chairman Christopher Cox said in a speech on the proposed rule.
Under the draft rule, large companies (with more than $5 billion in publicly traded shares worldwide) would have to start including XBRL tags in their early 2009 filings. Public comments are due within 60 days after the proposal is published in the Federal Register.
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May 12, 2008 |
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Judge Rejects Two Stock Option Settlements
Submitted by: Ted Allen, Publications
In pair of rulings that may have significant implications for scores of stock-option backdating lawsuits, a federal judge has rejected settlements reached at Zoran and CNET Networks.
In separate rulings on April 7, U.S. Judge William Alsup of the Northern District of California refused to approve two proposed settlements of derivative lawsuits over misdated option grants. In a derivative lawsuit, investors sue on behalf of a company to recover damages from executives and directors over alleged violations of their duties to investors.
The Zoran settlement, which is similar to those reached in other cases, called for the repricing or cancellation of options, governance reforms, and a payment to the lawyers for the investors. Zoran is a Sunnyvale, Calif.-based maker of chips for DVD players. As lawyer Kevin M. LaCroix noted in his “D&O Diary” weblog, “the two opinions have important implications for the way that settlements are presented to the court, and could have important effects on the settlement dynamic in other cases going forward.”
Under the Zoran settlement, the company agreed to reprice or cancel options received by two executives (an economic benefit of $1.65 million, the parties asserted), and pay $1.2 million to the investors' lawyers. Zoran also agreed to adopt various governance changes, including a more structured grant process, the appointment of a new independent director, and increased officer and director education.
Alsup, who stressed the role of federal judges to protect absent shareholders against “collusive settlements,” concluded that the terms were “far too modest,” given the $16 million in damages claimed by an expert for the investor plaintiffs. “The corporation would recover no cash, all the cash going to counsel. The cancellation of underwater options is the only concession of any value and even that is small,” the judge wrote.
The judge discounted the value of the repriced options, noting that those options had been repriced in December 2006--more than a year before the settlement was presented to the court. Alsup also dismissed many of the governance changes as “purely cosmetic,” and pointed out that the company adopted five of those changes before entering settlement negotiations. “These ‘reforms’ do not compensate the company for the damages suffered by the company as a result of defendants’ backdating,” he wrote.
In the CNET case, Alsup said it was premature to consider the merits of the settlement until the investor plaintiffs completed their pre-trial evidence gathering and presented more information about the viability of their claims and potential damages. The judge also noted that investors had not yet satisfied the “demand” requirement to establish their right to sue on behalf of the San Francisco-based technology news company.
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May 9, 2008 |
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Proxy Update: E. Europe/Russia
Submitted by: Aneta McCoy, International Analyst
The 2008 proxy season in Russia and Eastern Europe has been notable so far for hostile takeover activity and shareholder power struggles. A number of Eastern European countries--such as Poland and Bulgaria--have adopted new codes of corporate governance, which will take effect this year.
The Hungarian proxy season peaks in late April and early May, while annual meetings in the Czech Republic, Poland, and other Eastern European markets occur with more frequency in late April and May. The majority of Russian meetings take place in late May and early June.
Some of the most closely watched shareholder meetings--such as the annual meeting at MOL Hungarian Oil and Gas, and the special meeting at Russian mining firm MMC Norilsk Nickel--took place early in the season.
At the MOL meeting on April 23, 80 percent of investors approved a proposal submitted by OMV, an Austrian energy firm that has been trying to take over MOL since making an initial $15.7 billion bid in 2007. The resolution asked MOL to commission a special audit of management activities since 2005, including a number of share-lending agreements aimed at insulating MOL from a takeover.
When OMV increased its stake in MOL from 10 percent to 18.6 percent in June, MOL had already been building defenses against a possible hostile takeover for two years. Since December 2005, MOL has repurchased $4.8 billion in shares, as well as initiating a number of share lending agreements with companies such as Dutch banking firm ING and the Czech nuclear power company CEZ Group that were considered “friendly” to MOL’s interests. The company also adopted a 10 percent cap on voting rights. In September 2007, OMV raised its offer to around $20 billion, but MOL dismissed the offer again as not in the company’s best interests, according to the International Herald Tribune. MOL officials said a merger would destroy shareholder value, lower competition, and create a regional monopoly.
At the MOL meeting, a management-sponsored resolution for another share buyback program was opposed by approximately 20 percent of shares voted. Share repurchase programs at the company have typically not run into much opposition. A repurchase plan won 99.9 percent shareholder support in April 2007, and similar proposals in 2006 and 2005 were majority-supported, though the company did not disclose results.
The Hungarian government is under investigation by the European High Court of Justice regarding its response to OMV’s takeover bid. In October, the administration of Prime Minister Ferenc Gyurcasny adopted a law called the “Lex MOL,” which applies only to companies like energy firms that are “assets of strategic importance.” The law specifically eliminates the 10-percent voting cap on treasury shares--repurchased shares held by the company--and allows shareholders to approve a limit on the voting rights of an individual or group of shareholders if company bylaws permit it. The law also requires potential bidders to submit a business plan to Hungary’s financial market regulatory agency for approval. As soon as the law was passed, the European Commission announced it would open an investigation and would bring the case before the high court.
OMV’s bid also faces scrutiny. In March, European Union regulators voiced antitrust concerns, saying a merged company may decrease competition in Central Europe. The European Commission plans to rule on the transaction by July 22.
Contentious Russian Meetings
Before the traditional start of the Russian proxy season, private investment firm Onexim Group called an April 8 special meeting to put its own slate of nominees up for election to the board at MMC Norilsk Nickel (Norilsk). The meeting was the culmination of a dispute between its two major shareholders, former Norilsk CEO Mikhail Prokhorov and major shareholder Vladimir Potanin, who have jointly controlled the large-cap mining company since 1995.
Onexim--controlled by Prokhorov--asked Norilsk shareholders to end the terms of current directors early and to elect a new board, including Onexim’s own six nominees. The dissidents also called on shareholders to amend the company's charter to shift some of the CEO's powers to the board and increase the supermajority requirement for transactions that require board approval. Russian board elections are unique in that all are conducted by cumulative voting and often have many more candidates than there are board seats. If they had been elected, the Onexim nominees may only have served until June, though, when Norilsk holds its annual meeting. However, the dissident nominees were never voted on because the resolution to end the current board members' terms failed. The proposed charter amendments were also not approved at the April 8 meeting.
The proxy fight was precipitated by the collapse of a deal made in early 2007 for Prokhorov to step down as Norilsk’s CEO and sell his 22 percent stake to Potanin. Prokhorov did step down as CEO, but apparently had a change of heart in May 2007 about selling to Potanin. He increased his stake to more than 25 percent and formed Onexim with the intent of selling his stake to another Russian mining company, Rusal. In January, Rusal said it intended to create a “global” diversified metals and mining group, leading the Russian press to speculate that it was planning a takeover of Norilsk although Rusal has made no formal bids. Rusal already has three directors on the Norilsk board, and it supported the Onexim candidates. Through Onexim, Prokhorov sold his Norilsk equity to Rusal on April 24.
Meanwhile, Norilsk has also been approached by Russian metals industry holding company Metalloinvest and asked to consider a possible merger with its mining division, Gazmetall. Advisors from Swiss investment bank UBS are consulting with Norilsk management on the merits of the Metalloinvest offer, Russian press reports say. A Rusal takeover is not out of the question, either, as it now holds Onexim's former stake in Norilsk.
Since Russian companies are required to announce the names of board nominees within 30 days of the end of the fiscal year--Jan. 30 in this case--board nominees supporting Prokhorov, and those supporting Potanin, will both be up for election in June. The outcome of this election, as well as Onexim’s sale to Rusal, will affect any future buyout agreements.
The Prokhorov-Potanin dispute extended to another Russian metals company, Polyus Gold, early this season. CJSC Interros Holding, a private investment firm founded by Vladimir Potanin and run by Polyus board member Sergey Batekhin--called a special meeting at Polyus, which was held April 7. Much as was the case at Norilsk, Interros--which holds about 22 percent of Polyus--wanted to remove the current board and put forward ten candidates, including Batekhin, for election. Nine other candidates were proposed by Prokhorov’s Onexim. Interros also proposed a charter amendment similar to the one voted at Norilsk, which would have raised the number of directors required to approve certain transactions.
Interros said it was “deeply disappointed” with Polyus’ underperformance and its failure to capitalize on the rising price of gold. Batekhin also said he was concerned with the board’s lack of independent oversight, especially with regard to attempts by Polyus management to spin off some of the company’s assets into an offshore, non-Russian incorporated company called Polyus Exploration without board or shareholder approval. Batekhin claims that the Polyus assets in the new company would be significantly diluted by a planned share offering when the proposed spin-off is complete.
The resolution to remove the board did not pass, according to company filings. Interros’ proposed charter amendments received the support of 58 percent of shares voted, but failed to meet the vote requirement of 75 percent of shares in attendance to change the charter. The dispute at Polyus likely will continue through its annual meeting in June.
A shareholder conflict will also feature prominently when Russia’s second-largest telecommunications firm, Vimpel Communications (VimpelCom), holds its annual meeting on June 9. The company’s two largest shareholders, the Russian private industrial conglomerate Alfa Group and Norwegian communication firm Telenor, have disagreed for several years over VimpelCom’s strategy for expanding into the Ukrainian market.
Representatives from both shareholders serve on the board, and since Russian board elections feature cumulative voting, Telenor-affiliated directors will be vying for seats with Alfa Group-affiliated directors on June 9. Elections at VimpelCom have been contested since 2005, and company bylaws require that both shareholders nominate four candidates each, including one independent director. Telenor has the option of nominating an additional independent director, but the nomination must be approved by Alfa.
The results may help determine the outcome of a legal battle over potential acquisitions since 2005. Alfa and Telenor have filed lawsuits against one another over VimpelCom’s acquisition of Ukrainian Radio Systems and the 2006 failed bid for another Ukrainian company, mobile phone operator Kyvistar. Most recently, Alfa brought suit against Telenor in March for loss of profit, while at about the same time a district judge in New York upheld some of Telenor’s complaints against Alfa.
New Governance Codes in Hungary, Poland, and Bulgaria
A major development in the Hungarian market this year is the implementation of a new corporate governance code. The Hungarian Corporate Governance Recommendations went into effect in August 2007, replacing a code adopted in 2002. The new code was developed by the Budapest Stock Exchange (BSE), and is voluntary, meaning Hungarian public firms must comply with the recommendations or explain why they choose not to. However, companies listed on the BSE are required by law to report this year on how they applied the code in fiscal 2007, and the report must be ratified by shareholders. No compliance report received significant opposition this year.
The new code recommends that public company boards be “sufficiently” independent--with the majority of key committees such as audit and remuneration committees composed of directors that “have no significant relationship with the company, its executive management, or key shareholders.” However, it is unclear what percentage of Hungarian directors meet the code’s definition of independence.
Poland also adopted a new corporate governance code, which went into force on Jan. 1. The code, entitled “Best Practices of WSE (Warsaw Stock Exchange)-Listed Companies,” replaced a 2005 governance code. Like the Hungarian code, it is based on the “comply or explain” principle, and companies listed on the WSE must provide an annual compliance report to the exchange. Polish firms are also required to post those reports on their company Web sites and attach them to annual reports. However, putting compliance reports up for shareholder ratification is voluntary.
Many of the new code provisions deal with information transmission. One section stipulates that annual meetings be broadcast over the Internet, and stored as audio files on the corporate Web site. Corporate Web sites should also be maintained in both Polish and English.
The code recommends auditor rotation every seven years. Poland has a two-tier board system, and the code stipulates that at least two members of the supervisory board be without significant ties to management or major shareholders. In addition, at least one audit committee member should be independent and possess expertise in finance. As in Hungary, it is difficult to tell how many directors are independent by the code’s standards.
In October 2007, Bulgaria released its National Corporate Governance Code, the country’s first comprehensive set of corporate governance principles. The code is designed to attract foreign investment, and to move Bulgaria closer to international standards since its acceptance into the European Union in January 2007. The principles in the code are based on those put forward by the Organization for Economic Cooperation and Development. Like the Hungarian and Polish codes, all provisions are “comply or explain,” but companies are not required to submit compliance reports for shareholder approval.
Bulgaria goes further than Poland on board independence, urging an entirely independent audit committee. Companies are also asked to allow online proxy voting and to guarantee comprehensive and timely disclosure--especially of measures voted on at annual meetings. To ensure that the code remains current, the Sofia Stock Exchange plans to review it every 18 months.
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May 5, 2008 |
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Aflac’s Pay Practices Get 93% Support
Submitted by: Ted Allen, Head of Publications
In the first “say on pay” vote by a U.S. public company, Aflac investors gave 93 percent support to the firm’s executive compensation practices, according to news reports.
There was only 2.5 percent opposition at Aflac’s May 5 annual meeting. The Columbus, Georgia-based insurer decided to hold an annual advisory vote after receiving a shareholder proposal on the issue in late 2006.
Aflac CEO Daniel Amos earned a total of $14.8 million, and had approximately $70 million in stock options vest in 2007, according to the company’s compensation report. Amos’ incentive-based pay is entirely performance-based, the company says, noting that since he took the post of CEO in 1990 the firm’s total shareholder returns have exceeded 3,867 percent. Aflac’s stock price has risen about 126 percent since early 2003.
Six other U.S. companies, including Verizon Communications and bond insurer MBIA, have agreed to hold non-binding pay votes. Meanwhile, investors have filed more than 80 proposals this season asking other firms to take this step. “Say on pay” proposals have averaged 42 percent support at 21 companies so far, earning 50.7 percent support at computer maker Apple, and majority support at printer manufacturer Lexmark International, according to RiskMetrics Group data.
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RiskMetrics Group Finds One in Five Large Firms Set Labor Supplier Standards
Submitted by: Peter DeSimone, Head of Labor and Human Rights Research
RiskMetrics Group just completed a year-long pilot project assessing more than 1,800 global companies-the S&P 500, the Toronto Stock Exchange 300 and the Morgan Stanley EAFE index excluding Japan—on more than 200 policy and performance indicators, including more than 60 on supplier labor standards. Findings from the report reveal a fifth of all large cap companies have codes addressing their suppliers’ compliance with labor standards. Still fewer, though, monitor their suppliers on their adherence to these standards.
The labor issues most frequently addressed by companies in their supplier codes were child and forced labor and workplace discrimination; 15 percent of all the companies surveyed set standards for their suppliers on these points. The next most common provisions in supplier codes were freedom of association (12 percent) and harassment, health and safety and wages (all tied for 10 percent). However, far fewer companies set standards for their suppliers on these labor issues that were as stringent as the corresponding core conventions of the International Labor Organization (ILO) with regard to barring child labor, forced labor, and discriminatory practices, and upholding freedom of association, the right to organize and collective bargaining.
For example, while 15 percent of the companies RiskMetrics analyzed had anti-discrimination policies, only 3 percent met the standards outlined in ILO conventions 100 and 111. Most fell short of ILO 100 by not specifically stating in their supplier EEO policy that it applies to pay. On ILO 111, those disqualified for meeting this standard did not include all of the classifications listed in the convention (i.e., race, color, sex, religion, political opinion, national extraction or social origin).
While 20 percent of the surveyed companies set labor standards of some kind for their suppliers, only 14 percent mentioned that they actually monitored their suppliers for compliance. Even fewer—12 percent—outlined consequences for suppliers found in violation, or whether they would engage the facilities in implementing corrective actions (11 percent). Meanwhile, fewer than half of the companies with supplier codes acknowledged training workers on these policies and programs (7 percent) or reporting on the findings from these efforts (4 percent). Likewise, 10 percent of the firms had supplier codes with a health and safety statement, but only 2 percent addressed workers’ contact with hazardous chemicals.
Risk Exposure
Based on the report findings, investors should be most concerned about firms in high risk sectors that lack supplier labor standards and monitoring procedures. The report identifies five sectors as particularly high risk: Retailing, Food and Staples Retailing, Consumer Durables and Apparel, Household & Personal Products, Food, Beverage & Tobacco. This assessment is based on the following factors:
* The pervasiveness and severity of sweatshop labor abuses in the supply chain within the industry as documented by governments and multilateral institutions.
* The number of intermediaries typically found between the publicly traded companies in the industry and the offending suppliers.
* The extent to which governments have cut off supplies of products to the sector from particular countries due to endemic child or forced labor problems.
* The frequency to which activists have targeted companies in the industry for contracting with supplier sweatshop labor.
*The degree to which groups have sued companies in the industry for damages related to labor abuses perpetrated by suppliers.
Out of these five high risk sectors, retailers were the most likely to have adopted a supplier code and won the distinction of exhibiting the highest rate of code adoption among all industries. Roughly half of all retailers RiskMetrics analyzed had codes, and the group also was the most likely to address all of the core labor rights areas identified by the ILO and monitor suppliers for compliance. In contrast, companies in the food, beverage and tobacco sector have been far slower to address this risk through codes and monitoring programs.
S&P 500 Makes Gains
While this was the first year RiskMetrics looked at non-U.S. firms’ policies and practices in this area, it represented the third time RiskMetrics has looked at the supplier labor codes of the S&P 500. This cohort appears to be adopting codes at an accelerating rate. The percentage of companies in the S&P 500 with standards addressing their suppliers’ treatment of employees leapt three percentage points between 2005 and 2006 and six between 2006 and 2007.
For a copy of the full report and further commentary, please visit here.
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May 2, 2008 |
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Analysis: Early Season Trends
Submitted by: Subodh Mishra, Governance Institute
Resolutions calling for advisory votes on pay have received less support at a number of firms this year versus last, according to a RiskMetrics Group analysis of preliminary vote results through April 30.
Governance watchers suggest that a number of factors may underlie the declining support at those firms, though the average support level for all such “say on pay” proposals correlates to that in 2007, based on tallies collected so far.
This year, pay vote proposals have averaged 42.1 percent support at 21 companies so far. That is in line with results for calendar 2007, when 52 such proposals received 42.5 percent average support. Surprisingly, however, the measure received less support at a number of financial companies this season, including Citigroup, Morgan Stanley, Wachovia and Merrill Lynch, where many observers expected the measure would fare better than last year given investor anger over subprime-related losses.
Of the 11 companies where investors voted on the resolution both this year and last, seven have seen declines in support that range from one-tenth of a point at AT&T to 9.6 percentage points at Merrill Lynch. Pay vote proposals received increased support at just five firms, meanwhile, including at Apple (Editor’s Note: this is based on an estimated vote tally of 51 percent, given that the company announced the proposal received majority support, without disclosing the specific votes or percentages; RiskMetrics has recorded a preliminary tally of 51 percent at Lexmark International for the same reason). Defense contractor Lockheed Martin and aerospace giant Boeing each saw 3.9 percentage-point gains.
To view some of the early season trends, please Download file
“It’s a theory at this point, but e-proxy may play a role in the decline,” notes Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees, or AFSCME, referring to the decline at some companies. “There’s some preliminary data showing a drop-off in retail voter participation, and our understanding of retail voter trends is that they’ve supported ‘say on pay’ when they’ve cast their ballots.”
According to vote processor Broadridge, retail voting participation has dropped markedly under the Securities and Exchange Commission’s e-proxy rules, which now require large capital firms to allow investors to receive proxy materials and vote their shares via the Internet. Statistics released by Broadridge in late February show that the proportion of retail shares voting drops from 30.1 percent to 23.3 percent with the e-proxy option. Those numbers are based on an evaluation of 103 corporate issuers that have utilized e-proxy, of which 80 have held their shareholder meeting. Company names were not given, however.
A drop-off in retail voter participation also would serve to amplify the voting of mutual funds and other institutions that generally do not back pay vote proposals, proponents say.
Another potential explanation for the decline is that investors are more focused on business strategy in light of the bear market, and on righting the ship at those firms that have suffered heavy losses as a result of the credit crisis.
“Investors may well be more concerned with corporate performance and company prospects, rather than what officers are being paid, in light of market conditions,” said John F. Olson, a Washington-based partner at the law firm of Gibson, Dunn & Crutcher.
“A lot of the drama that came last year from expanded [SEC rules on compensation] disclosure has passed, and investors are saying we want directors to focus on how to navigate the storm,” said Olson, whose firm is retained by companies on issues pertaining to federal proxy rules and other corporate matters. While there was an outcry when Merrill Lynch’s E. Stanley O’Neal and Citigroup’s Charles Prince received large exit payments last year, their departures may have dampened investor support for pay vote proposals at their former firms this season, Olson noted.
The decline in support levels at some firms may also be indicative of views on the overall value of pay vote proposals, governance observers say. “There’s a mixed view on ‘say on pay’,” argues Prof. Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. “I think there are some concerns about its efficacy and impact. It’s a half-step.” Elson asserts that other mechanisms, such as corporate reimbursement for proxy solicitation expenses, are ultimately more effective tools for shareholders to curb pay and other governance abuses.
So far, “say on pay” proposals at two companies—computer maker Apple and Lexmark International, a Kentucky-based manufacturer of printers—have garnered majority support. Last year, proposals passed at seven companies, according to RiskMetrics records, with three of those firms—Blockbuster, Par Pharmaceuticals, and Verizon Communications, agreeing in recent months to hold annual pay votes. Results for the pay vote proposal at the May 1 meeting of Valero Energy, whose shareholders gave the issue 53 percent support in 2007, were not available as of this writing.
Fewer Settlements Overall in 2008
Meanwhile, early season data suggest that fewer investors and issuers are settling this year on governance proposal filings. According to RiskMetrics records, roughly one in four such proposals was withdrawn in 2007, whereas the ratio this year stands at just under one in five.
That is closer to historical averages: in 2005 about 19 percent of proposals were withdrawn, and in 2006 more than 15 percent were withdrawn. That contrasts markedly with data for social issues proposals, which have seen withdrawal rates hold steady at or near 30 percent since at least 2005.
The drop in settlements is not due to a lack of dialogue, according to proponents. “There’s been more dialogue, but less consensus,” says AFSCME’s Ferlauto, who notes the protocol now established is for communication between shareholders and issuers, but there’s less ability to come to terms, particularly on “big ticket” items. As an example, Ferlauto points to negotiations over AFSCME’s tax gross-up proposals, which ask companies to stop providing tax gross-up payments to executives that are not available to other managers.
“Companies are willing to concede on smaller amounts, such as perks,” Ferlauto said, “but not on such things as payments covering change-in-control or other big-number items.”
One proponent is bucking the trend, however, having settled roughly four out of five proposals calling on companies to adopt stricter pay-for-performance metrics, and two-thirds of those calling for a majority vote standard in director elections. The United Brotherhood of Carpenters and Joiners of America has settled 28 of 34 “pay-for-superior-performance” proposals so far this year, according to union officials, and has engaged in “good” discussions with dozens more companies that received letters—rather than proposals—calling for a re-evaluation of some pay practices.
“We thought it’s been the best year in terms of substantive and successful engagement,” said Ed Durkin, corporate affairs director at the Carpenters’ fund, regarding dialogue over this year’s pay for performance proposal, which looked closely at how companies stacked up against their peers on metrics for pay elements ranging from “golden parachutes” to supplemental executive retirement plans.
“Companies appreciated that we took an in-depth look and challenged their plans in specific terms,” Durkin said. “Because of that, what we found was a greater willingness [on the part of issuers] to engage this year, to argue their case, and in many cases concede when it was a good, solid, and substantive discussion.”
With whom the Carpenters engaged also played a role in achieving consensus, Durkin said. Meetings were largely with human resources staff and corporate secretaries, though some also were with the named executive officers whose compensation was the subject of discussion, as well as with compensation consultants. “We were looking for a group of people who knew the ‘nuts and bolts’ of the plans and could best appreciate our arguments” for change, Durkin said. That, he said, made for a more effective and efficient process than had the fund negotiated with the entire compensation committee or multiple directors.
According to Durkin, companies with whom the fund settled largely agreed to make incremental changes toward the use of restricted shares, tightening and greater disclosure of performance targets, disclosure of rationales for performance metrics, increased transparency beyond that called for by the SEC, and other similar steps.
The Carpenters’ experience is echoed to some degree by Olson. “I don’t see that issuers are taking a harder view toward discussing a basis on which to withdraw,” said Olson. Moreover, he noted, ongoing dialogue born of issuer-investor working groups on issues such as majority voting and “say on pay” are helping resolve issues before resolutions are filed.
That may hold true for some compensation and other proposals with a notable exception being pay vote resolutions. Of 82 such proposals now being tracked by RiskMetrics, just two have been withdrawn; one because it was duplicative, and the other because the targeted company, Verizon, agreed to adopt the measure in response to majority support in 2007.
Companies, for their part, have had a tough time dealing with “chronic proponents,” who, according to Olson, are retail shareholders that “simply don’t negotiate” on any practical basis.
Olson’s assertion is backed by withdrawal rates for proposals to repeal classified boards, eliminate a supermajority vote requirement, adopt cumulative voting, and allow shareholders to call special meetings, the vast majority of which are filed by retail investors. RiskMetrics is now tracking 216 such proposals in sum, of which just 15, or 7 percent, have been withdrawn.
Retail investor and governance activist John Chevedden disputes the assertion, however, noting that companies often move to omit proposals at the SEC under the "substantially implemented" argument, then propose the measure as a management-sponsored ballot item. Moreover, Chevedden argues, retail investors are indeed withdrawing at companies that are willing to negotiate "seriously" and points to American Express as an example. A Kenneth Steiner proposal to the credit card company was pulled late last year after the company agreed to put the resolution to a vote as a management item. The measure passed at the company's April 28 annual meeting.
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