Early on, it seemed that 2008 would be marked by frequent displays of shareholder discontent. Activist institutional investors, angered by the Securities and Exchange Commission’s decision in November to bar proxy access proposals, appeared ready to rally behind shareholder proposals seeking independent board chairs and advisory votes on executive pay. The SEC also frustrated activists by allowing many firms affected by the credit crisis to exclude most of their new proposals that sought compliance committees, mortgage risk reports, and better CEO succession planning.

After the labor-affiliated Change to Win Investment Group (CW) threatened “vote no” campaigns against directors at six large financial companies in January and February, it appeared that many investors would vote against board members at other financial firms and homebuilders. Democratic lawmakers joined the fray, holding a hearing in early March to denounce the generous compensation received by outgoing executives at Countrywide Financial, Citigroup, and Merrill Lynch.

However, shareholder views appeared to shift after Bear Stearns, an 85-year-old Wall Street stalwart, suddenly collapsed in mid-March. The firm, which had traded at $170 per share a year earlier, initially agreed to be sold for $2 a share to JPMorgan Chase in a government-supported bailout (JPMorgan ultimately agreed to pay $10 per share).

“Simply put, the bear market mauled the 2008 proxy season,” said Pat McGurn, special counsel for RiskMetrics Group's ISS Governance Services unit. “The collapse of Bear Stearns on the eve of the season let most of the air out of the shareholder activism balloon.”

The fall of Bear--along with soaring oil prices and falling real estate values--helped drive consumer and retail investor confidence and optimism to new depths. The TIPP economic optimism index--conducted by TechnoMetrica Market Intelligence for Investor’s Business Daily and the Christian Science Monitor--hit an all-time low in April and has continued to fall. The Yale School of Management’s Stock Market Confidence Index (the one-year outlook) for individual investors also hit its low point for the decade in April.

The season’s vote results suggest that many shareholders were more inclined to back management and refrain from supporting shareholder proposals or initiatives to unseat directors. With a few notable exceptions where compensation concerns were raised or a heavily staked hedge fund led the charge, most directors at U.S. companies were elected with wide support. While investors expressed slightly more support for “say on pay” advisory vote proposals and independent board chair resolutions, the increases were less than what some governance observers had expected at the start of the year. At six financial firms, support for “say on pay” actually declined from 2007 levels.

“People are focusing on whether there is going to be a tomorrow in the market, and not on these traditional governance issues,” James Cox, a securities law professor at Duke University, told Risk & Governance Weekly. “Some institutions may believe--given the trauma of the marketplace--that management shouldn’t be distracted by these concerns.”

Activist investors also appeared to shift their tactics after Bear’s collapse. The American Federation of State, County, and Municipal Employees (AFSCME) and two state pension funds dropped plans to sue Bear and JPMorgan over the exclusion of proxy access proposals. CtW decided to wage “vote no” campaigns at just two of its targeted six financial firms, while the AFL-CIO dropped a campaign against C. Michael Armstrong, Citigroup’s audit and risk management committee chair, after the company announced that he would leave the panel. The California Public Employees’ Retirement System, the largest U.S. public pension fund, focused its attention this year on firms outside the troubled financial and homebuilding sectors (with the exception of a “vote no” campaign at Standard Pacific).

This muted investor response was apparent at the April 8 meeting of Morgan Stanley, the first of the major Wall Street firms to hold its annual meeting. Despite a “vote no” campaign by CtW against two directors and Chairman/CEO John Mack, all the directors won at least 90 percent support, which is consistent with historic voting patterns at the firm. Several other factors may have contributed to the results. Mack is well liked on Wall Street, so many investment managers were reluctant to vote against him, CtW officials said. Most of Morgan Stanley’s writedowns stemmed from a single failed trading strategy, rather than broad exposure to mortgage-backed securities; Mack responded by firing the head of trading and replacing the chief risk officer, which helped assuage investor concerns. Duke University’s Cox also noted that Mack’s decision not to accept a bonus in 2007 also dampened potential opposition.

At most financial firms, directors received overwhelming support this year. Wachovia’s board members all received more than 92 percent support at the annual meeting, which occurred before the company reported more problems in its loan portfolio and fired its CEO in June. At Lehman Brothers, the directors all won at least 95 percent support. Bank of America also avoided an opposition campaign this year, but it may face greater scrutiny from investors in 2009 over its purchase of Countrywide. Countrywide, which was the largest U.S. mortgage lender, was targeted by labor funds late last year, but it didn’t hold a regular 2008 meeting.

At some companies, there may have been a limited response because investors didn’t learn of the full extent of their firm’s problems until after the annual meeting. Lender IndyMac and mortgage financiers Freddie Mac and Fannie Mae--whose troubles made headlines in July--faced no organized investor opposition at their meetings in May and early June and received just one shareholder proposal.

The bylaw proposal was filed by the American Federation of State, County, and Municipal Employees as an alternative to proxy access resolutions, which the Securities and Exchange Commission has allowed companies to omit. The AFSCME proposal would have required the board to reimburse successful dissidents for their “reasonable expenses” in future short-slate contests.

The case is the first time that the Supreme Court has granted a request by the SEC to rule on the legality of a shareholder proposal. Islandia, N.Y-based CA, which--like a majority of U.S. public companies--is incorporated in Delaware, asked the SEC for permission to exclude the AFSCME proposal from the proxy statement for its Sept. 9 annual meeting.

The CA v. AFSCME decision can be seen as a partial victory for investors because the Supreme Court ruled that an election-related bylaw is a proper matter for shareholder action. As Justice Jack Jacobs noted in the court’s opinion, “the shareholders of a Delaware corporation have the right ‘to participate in selecting the contestants’ for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election.”

However, the Supreme Court went on to conclude that AFSCME’s bylaw would violate Delaware law because it would prevent CA’s board from fully exercising its fiduciary duties. While the labor union’s proposal specified that the board should award only “reasonable” expenses, Jacobs said that provision “does not go far enough because the bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all.” The court noted that a board has a fiduciary duty to deny reimbursement in cases where a proxy contest is “motivated by personal or petty concerns” or would promote interests “adverse” to the corporation.

Following the CA decision, AFSCME said it would renew its efforts to pursue proxy access at the SEC. A short-staffed commission voted last November to allow companies to resume omitting access bylaw proposals, but SEC Chairman Christopher Cox has pledged that the agency would revisit the issue. With the U.S. presidential elections less than four months away, it’s unclear whether the SEC will tackle this controversial issue as it confronts other regulatory concerns that stem from the credit crisis.

“This decision makes Delaware less relevant to future discussions about shareholder rights, and makes a federal solution the only alternative for shareholders seeking fair and open elections,” said Richard Ferlauto, AFSCME’s director of corporate governance and pension investment. “The ball is pushed back to the SEC for when the next chairman will finally have to resolve shareowner rights to proxy access.”

J. Travis Laster, a partner with the Abrams & Laster law firm in Wilmington, Del., offered a more sanguine view of the CA decision in a posting on TheCorporateCounsel.net weblog. “Although many will likely view this as a loss for stockholders, I believe they should view the case as a significant win. Yes, the director-reimbursement bylaw was held invalid, but the court held that the election process was a proper subject for stockholder action. A bylaw mandating the inclusion of stockholder nominees on the company’s proxy statement should fare much better under a CA analysis,” he wrote.

However, Laster cautioned that the ruling would be “generally negative” for stockholder bylaws that don’t relate to elections. The court’s analysis “should doom any substantive component to a [poison] pill redemption bylaw, such as a requirement that directors not adopt or renew any pill that could be in place longer than a year,” he wrote in his posting.

The New York law firm of Wachtell, Lipton, Rosen & Katz, which represents companies and boards, hailed the CA ruling and concluded that the Supreme Court’s reasoning would preclude shareholder bylaws that would prevent boards from adopting poison pills. “The Delaware Supreme Court’s unequivocal and welcome holding should discourage further efforts by stockholder activists to erode the fundamental prerogatives of the board of directors. The opinion will hopefully signal that the courts will not permit directors to be undermined or constrained in the exercise of their fiduciary duty in the broad range of subjects traditionally within their ambit as stewards of the corporation,” the firm wrote in a memo on the case.

For an excerpt of our Biggest Concerns list performance update, please access the report here.

The Law for the Promotion of Employment, Labor, and Buying Power (TEPA), which went into effect this year, reflects the growing shareholder discontent with executive severance pay. The law was adopted partly in response to the 2006-2007 insider trading scandal at European Aeronautic Defence and Space. TEPA requires that all executive pay at listed companies--except that related to supplemental retirement benefits or non-competition agreements--must be performance-based. Performance targets must also be verified by the board of directors, according to the law, which specifically targets retirement and severance benefits.

The law expands on a 2005 measure that stipulated that the terms of any new employment agreements with company presidents, CEOs, managing directors, and deputy managing directors be subject to approval by the board and by shareholders, according to a release by Soulier, a Paris-based law firm.

According to RiskMetrics Group data, 11 of 17 companies in the CAC 40--a major French stock index--that have submitted employment agreements to a shareholder vote this year have limited total severance benefits to two times an executive’s last total pay package. Though no pay measures failed to win majority shareholder support this year, a significant number of investors opposed severance packages with a salary multiple greater than two. For instance, 20 percent of shareholders voted against an employment agreement at Alcatel-Lucent’s May 30 meeting that would provide CEO Pat Russo with a €6 million ($9.5 million) severance package. Shareholders may have disapproved of the performance targets, which allow the severance payout if the company achieves 90 percent of its target revenue and/or 75 percent of target operating profit if Russo retires in 2009. Despite this high-profile instance, such agreements are rare in France.

Despite the passage of TEPA, companies can still choose a broad range of performance criteria--ranging from easily measurable shareholder returns to such benchmarks as internal business unit performance or client satisfaction. As the law still exempts payments in the case of a change in control or provided by a non-compete agreement, French executives and directors may still walk away with large severance packages.

The court will hear arguments on the matter on July 9 in Dover. This is the first time that the Supreme Court has agreed to resolve a legal question presented by the Securities and Exchange Commission (SEC). Delaware lawmakers approved legislation in 2007 to allow the SEC to directly ask the Supreme Court to rule on disputes over shareholder proposals.

The bylaw proposal--filed by the American Federation of State, County, and Municipal Employees (AFSCME)--would require the Islandia, N.Y.-based software company to reimburse successful dissidents for their “reasonable expenses” in future short-slate contests. To qualify for reimbursement, the dissidents would have to seek less than 50 percent of the board seats, win at least one seat, and there not be cumulative voting in place. In addition, the reimbursed expenses could not exceed the sum spent by the company on that election.

Attorneys for CA asked the SEC’s Corporation Finance Division in April for permission to exclude the proposal, arguing that it is barred by SEC Rule 14a-8(i)(8), is not a proper subject for shareholder action, and could violate Delaware law. Lawyers for AFSCME’s pension plan responded by asserting that investors have broad authority under Delaware law to enact bylaws and may constrain actions by directors.

On June 27, the SEC asked the Supreme Court to rule on: 1) whether the resolution is a proper subject for shareholder action; and 2) whether the proposed bylaw would cause CA to violate any Delaware law. On July 1, the court agreed to hear the case, and directed the parties to submit briefs on the dispute by July 7.

Richard Ferlauto, director of pension and benefit policy at AFSCME, said he is encouraged that Delaware now allows disputes over shareholder proposals to go directly to the Supreme Court. In past disputes over Delaware law, investors have had to file a lawsuit in Chancery Court and then wait “months or years” for the case to reach the Supreme Court, he noted.

AFSCME has filed several short-slate reimbursement proposals as an alternative to proxy access resolutions, which the SEC allowed companies to omit this year. Reimbursement generally is not an issue in full-slate contests, as dissidents who win board control typically are able to recover proxy expenses. An AFSCME reimbursement proposal is on the ballot at computer maker Dell on July 18. A similar proposal went to a vote May 8 at Apache, which has not yet released official vote results. A reimbursement resolution received 13.9 percent support at the Houston-based oil firm in 2007.

Feraluto said he is “optimistic” about the labor fund’s chances in the CA bylaw dispute. “While a corporation has wide latitude for the actions it takes, that’s based on the premise that directors are agents of shareholders,” he said. “The corollary is that shareholders should be able to structure the procedures for nominating and electing directors.”

In a memo on the case, the law firm of Wachtell, Lipton, Rosen & Katz, which represents directors and companies, noted that Delaware law “has generally limited the ability of shareholders pursuing special interests to recover their solicitation expenses.” The firm concluded that the Supreme Court would “have a strong basis to reaffirm the traditional prerogatives of the board under Delaware law to manage the business of the corporation and decide how to spend its funds.”

The Supreme Court likely will rule on the dispute quickly. CA plans to file its definitive proxy statement by July 17 for its Sept. 9 annual meeting. This case may have broad significance for U.S. companies and shareholders, as 61 percent of New York Stock Exchange and Nasdaq-listed firms are incorporated in Delaware, according to Bloomberg News. “Whatever happens, it will be precedential,” Ferlauto said.

“The North Dakota law is far ahead of any other state corporation law in providing rights for stockholders,” wrote proposal proponent Kenneth Steiner in the resolution’s supporting statement. “It addresses each of the major issues in corporate governance.”

The North Dakota statute, which took effect on July 1, 2007, is among the friendliest to shareholders, according to those familiar with the resolution. The law mandates the separation of the chairman and CEO positions, annual election of directors, and the right of 5 percent shareholders owning stock for two years or more to nominate corporate directors, as well as another half-dozen or so measures widely seen as empowering shareholders.

“It’s an intriguing idea and someone was bound to do it sooner or later,” said Cornish Hitchcock, an attorney for the Amalgamated Bank’s LongView fund. “It will be interesting to see how it plays out in terms of shareholder approval.”

Advocates of the North Dakota statute believe the measure will generate measurable support among investors should it come to a vote. “I would think any shareholder who understands the benefits of the North Dakota law would support this proposal,” said William H. Clark, Jr., a Philadelphia-based attorney with Drinker Biddle & Reath.

Clark, who served as president of the North Dakota Corporate Governance Council, which drafted the statute, also noted that the law required shareholders nominating director candidates not nominated by management to be reimbursed for their proxy expenses “to the extent they are successful.” That automatic right of reimbursement for solicitation expenses has gained added import in light of the Securities and Exchange Commission’s decision late last year to bar proxy access proposals and a pending decision by Delaware’s judiciary as to whether or not a reimbursement proposal filed at Long Island-based CA would violate Delaware law.

The proposal also may fare well based on support given to other recent proposals to reincorporate to another jurisdiction. The United Brotherhood of Carpenters and Joiners of America filed proposals at a handful of Ohio-based companies’ 2007 annual meetings calling for their reincorporation to Delaware. At the time, Ohio law required companies to use a plurality voting standard, and the proposals served to eventually pressure local lawmakers to amend Ohio corporate law statutes to allow for a majority voting standard in director election. The proposal was voted on at FirstEnergy, DPL, and Convergys, according to RiskMetrics records, where it received 34.9, 32.6, and 59.5 percent support of the “for” and “against” votes, respectively.

But the view that the North Dakota reincorporation resolution will be well received by shareholders is not shared by all, with some observers arguing incorporation in Delaware is more beneficial to investors. “Ultimately, it comes down to the judiciary, and the view is that the Delaware judiciary is investor protective,” said Delaware University professor Charles Elson. “There is no corporate judiciary in North Dakota dedicated to the resolution of corporate disputes.”

That underlying premise is flawed, argues Clark, because the need to rely on the Delaware judiciary effectively concedes that the Delaware corporation law is fundamentally “not protective” of investor rights. “My preference as an investor would be to make sure the law is clear, rather than having to run to the courts to establish my rights,” said Clark. “The Delaware judiciary is limited by the statute in the rights it can provide investors. There’s no way, for example, that the Delaware judiciary could create a right of proxy access, which North Dakota has.”

Hain officials did not immediately respond to requests for comment on receipt of the resolution and whether they would seek to challenge it at the SEC. Of 17 proposals relating to reincorporation over the past decade, just three were omitted at the SEC, according to RiskMetrics records. Hain held its 2007 annual meeting on April 1 of this year and will hold its 2008 annual meeting sometime this fall.

Shareholder activist John Chevedden, who worked with Steiner on drafting and filing the proposal, said he had so far not engaged in any dialogue with the company on governance concerns. Chevedden also said he will be looking into filing the proposal at other companies as deadlines approach for submissions for 2009 annual meetings.

To view the proposal, please Download file.

As such, RiskMetrics Group's new report, Sovereign Wealth Funds & Emerging Governance Issues, is intended to: (1) provide an overview of sovereign wealth funds; (2) identify key and emerging issues of interest to institutional investors; and (3) explore potential solutions to concerns related to the transparency practices of sovereign investors.

Key takeaways from the paper include the following:

* Sovereign wealth funds are firmly established. There are now roughly 40 such funds—half of which came into being since 2000—collectively managing assets in the range of $1.9 to $2.9 trillion. Macroeconomic trends, including a weak U.S. dollar, tightening of credit, growth in commodity prices, and market volatility suggest that sovereign investment, and its influence, will only grow.

* Traditional institutional shareholders are seeking to understand the investment objectives and strategies of these potential power brokers. The International Monetary Fund is now involved in consultations with more than two dozen sovereign wealth funds in an effort to develop a code of conduct for their transparency, and market regulators across the globe are considering guidelines for disclosure and related issues. Mainstream investors will wish to monitor and potentially influence these efforts.

* There are concerns that sovereign funds will primarily be “disengaged” investors in equities. Some traditional investors have suggested that they will ride the coattails of other shareholders who press underperforming management for change through governance activism; or that their proclivity for non-voting stakes could help to entrench or otherwise insulate underperforming management.

* Substantial investment from sovereign funds could lessen pressure on governments and corporations in developing economies to raise corporate governance standards in such markets.

* Sovereign wealth investors with long-term investment horizons may serve as a stabilizing force in the market, however. Most are not bound by the constraints of many traditional investors who may have to withdraw capital on short notice for income or liquidity needs. Moreover, sovereign investors have demonstrated their willingness and ability to expeditiously shore up the capital base of distressed companies.

* There is no standard disclosure model for sovereign wealth investors. But some sovereigns may be more comfortable with disclosure models other than that of Norway’s fund—widely viewed as the gold standard for transparency—and traditional institutional investors may wish to promote alternatives such as Temasek’s approach to transparency. Temasek, a Singapore-based fund, is an active investor disclosing key investment objectives and strategies though does not disclose its full portfolio or voting record.

* Pressure from lawmakers and regulators for sovereign investors to meet elevated standards of disclosure could have unintended consequences. Such pressure might lead to the funds avoiding direct investment in corporate issuers and allocating more of their capital to private equity and hedge funds, potentially leading to greater acquisition activity and proxy fights.

To access RiskMetrics new paper, Sovereign Wealth Funds and Emerging Governance Issues, please visit here.

The Children’s Investment Fund (TCI), a London-based equity group, and Cayman Islands-based 3G Capital Partners say they’re seeking board seats because CSX has refused to engage in dialogue about the firm’s business model. Together, TCI and 3G own 8.7 percent of the Jacksonville, Fla.-based company, and have an additional 12.3 percent stake through stock swaps.

The June 25 proxy contest will be the 30th challenge to go to a vote at a U.S. company this year. The fight for CSX has received the most media attention after Carl Icahn’s proxy bid at Internet firm Yahoo!, which is slated for an Aug. 1 vote. TCI’s decision in December to seek five seats on CSX’s 12-member board has led to a war of words in the press, legal actions on both sides, and even Congressional hearings.

The dissident slate includes TCI Managing Partner and founder Chris Hohn; Gilbert Lamphere, a former director at Canadian National; Timothy O’Toole, managing director of the London Underground subway system; Gary Wilson, former board chair at Northwest Airlines; and Alexandre Behring, managing director at 3G and former CEO of Latin American rail company America Latina Logistica. TCI aims to replace the four longest-tenured directors: Elizabeth Bailey (18 years); Robert Kunisch (17 years); William Richardson (15 years); and Frank Royal (14 years). The fifth targeted director, Jacksonville-based contractor Steven Halverson, has only one year of board service; TCI contends that he lacks experience with both CSX and with railroad management.

Hohn said his fund, which is CSX’s second-largest shareholder with a 4.4 percent stake, has tried unsuccessfully for over a year to engage the firm in a productive dialogue about the company’s future. The proxy contest was a last resort, but “it is impossible for us to effect the change we see as possible if we don’t change the board,” Hohn told Risk & Governance Weekly.

Though Hohn has said repeatedly that his dissident slate does not want to take over the company or oust management, CSX Chairman and CEO Michael Ward told Financial Week on May 21 that the proxy contest is specifically aimed at removing him. CSX maintains that it repeatedly agreed to meet with TCI representatives and offered board seats, lead director Ned Kelly said at a June 9 forum hosted by RiskMetrics Group.

Since its founding in 2003, TCI has sought to find “great companies with underperforming shares,” and attempt to engage with directors to turn performance around, Hohn said at the June 9 forum. TCI has a history of prompting action at its portfolio companies, recently catalyzing board and management change at German stock exchange holding company Deutsche Börse and bringing about the sale of Dutch financial firm ABN Amro to a consortium of European banks.

CSX, the third-largest U.S. railroad, argues that it does not need a turnaround. The company’s share price has risen more than 270 percent since January 2004. TCI counters that most of the stock gains stem from rising prices and productivity in the rail industry as a whole, rather than just at CSX. North America’s largest railroad companies have all posted stock price growth during the same period--Union Pacific (131 percent), Norfolk Southern (185 percent), Burlington Northern Santa Fe (257 percent), and Canadian National (154 percent)--though none as pronounced as CSX’s share gain.

Christopher Young, head of M&A Research for RiskMetrics Group, will moderate the forum, which will run two hours in order to provide both sides with ample time to speak and field questions from the audience. To register for this governance forum, please visit here.

The most controversial issue this year will again be the introduction and renewal of various types of anti-takeover measures. In the wake of takeover attempts at Hokuetsu Paper, Bull-Dog Sauce, and Sapporo Holdings, and the belated legalization in May 2007 of stock-swap acquisitions by foreign firms (called “triangular mergers”), many Japanese firms are in a state of near-panic over the possibility of being acquired.

Their fears may be overblown, however. Triangular mergers are used overwhelmingly for friendly acquisitions, not hostile takeovers; and the difficulties of successfully managing a company after a hostile acquisition will help to ensure that the number of such cases will be limited. Also, some of the firms implementing pills are not especially vulnerable, because founding families, business partners, or other insiders own more than a third of outstanding shares. This is enough to veto any special resolution, such as an article amendment or a merger, severely limiting what a hostile bidder could hope to accomplish.

Nevertheless, several hundred companies will introduce or renew pills this year. One in seven Japanese companies likely will have a pill in place by the end of June. Since 2006, the vast majority of poison pills have been so-called “advance warning-type” plans. With these pills, the board announces a set of disclosure requirements it expects any bidder to comply with, plus a waiting period between receipt of information and the bid, before any offers are made. Advance warning defenses do not require shareholder approval, but in most cases, companies are choosing to put them to a shareholder vote, believing that doing so will put the company in a stronger position in the event of a lawsuit. As long as the bidder complies with the rules, the company “in principle” will take no action to block the bid, but will allow shareholders to decide.

Exceptions are usually allowed when the bid is judged to be clearly detrimental to shareholder interests. These include cases involving “greenmail” (when the bidder buys enough shares to threaten a takeover and forces the company to buy the shares back at a premium to avoid a buyout), a possible stripping of company assets by the bidder, or coercive two-tier offers. Usually, judgments on shareholder harm are made by a “special committee” or “independent committee,” which may or may not include members of the board, but the committee’s decision is usually subject to being overruled by the board. At some companies, the decisions are made by the board with no committee input at all.

Many of the poison pills introduced in the past few years will be up for renewal in 2008. Shareholders at Shin-Etsu Chemical and Sharp, for example, will vote on takeover defense renewals this year. Some companies, while not putting a poison pill on the ballot, will seek to pave the way for the eventual introduction of a pill through measures such as increasing authorized capital. Investors also will be asked to approve other article amendments designed to ward off hostile takeovers, such as the elimination of vacant board seats that could be filled by shareholder nominees, and the tightening of procedures for removing a director from office.

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.

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.

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.

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 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.