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.

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.

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.

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.

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.

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.

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.

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.

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