Analysis of Proxy Voting Data Looks at Say-On-Pay, Shareholder Engagement

Catherine Dunn

Corporate Counsel

01-30-2013

With the introduction of say-on-pay rules has come a drop in shareholder proposals on executive compensation, along with an increase in engagement between companies and shareholders, according to a new analysis of proxy voting data over the past five years by The Conference Board.

“There was significant decrease in shareholder proposals in the area of executive compensation,” says Matteo Tonello, managing director of corporate leadership at The Conference Board. “Now that shareholders have a specific vehicle to do that—which is say-on-pay—they don’t have to formulate generic proposals.”

The Conference Board report, “Proxy Voting Analytics (2008-2012)” analyzed proxy voting data for registered companies listed in the Russell 3000 index that held annual meetings between January 1 and June 20, 2012, and compared those results to data from prior years. (The full report is available from The Conference Board website.)

The impact of say-on-pay, the introduction of proxy access proposals, and a wave of resolutions on board declassifications topped their list as “the principal themes of the 2012 proxy season.”

Over the past five years, the number of shareholder proposals on executive compensation has plummeted from 193 in 2008, to 65 proposals in 2011—the year the SEC’s say-on-pay rules took effect. In 2012, the number of proposals “rebounded slightly,” to 92—but they are also “better formulated and more specific” in the wake of the new rules, according to the report.

The authors also pointed in particular to the connection between engagement and say-on-pay support levels. “Encouraging year-over-year comparison of voting results confirms that say-on-pay can be a catalyst for improved corporate investor communication,” the report states, noting “systematic effort” among companies to engage shareholders on the issue.

Such engagement efforts paid off in votes for compensation plans. For example, the 144 companies in the Russell 3000 that received less than 70 percent support levels in 2011 and fell within The Conference Board’s 2012 sample period, “saw such support level improve by an average of about 20 percentage points,” the report states.

At the same time, “only a handful of Russell 3000 companies . . . failed their say-on-pay vote for a second year in a row,” according to the report.

Proxy access proposals “received solid average support” in 2012. While only two of 14 such proposals passed, notably “both successful proposals were formulated to match the terms of now-vacated SEC Rule 14a-11, requiring 3 percent ownership for three consecutive years to qualify for proxy access rights,” the report finds.

Board declassification, meanwhile, struck the authors as “by far the hot governance issue” of last year. Such proposals call on companies to put all their directors up for a vote once a year, rather than only a certain number of them, and they garnered “a staggering average support level of 80 percent of votes cast recorded in the Russell 3000.”

So even though 2011 also saw high levels of support for board declassification, the report notes, “the numbers of 2012 confirm that shareholders are determined to question the rationale for not having all corporate directors face a confidence vote on an annual basis.”

In general, 2012 was a year of increased volume of shareholder proposals, "marking the reversal of a declining trends observed since 2008,” the authors write. Shareholders filed 719 proposals in 2012, up from 684 proposals in 2011.

Proposals were more likely to come from labor unions (in unionized business sectors) and pension funds in 2012. Labor-affiliated shareholders “were particularly active” in sectors such as energy minerals (filing 31.8 percent of proposals in the industry) and health services (filing 33.3 percent of proposals), according to the report.

Activity by pension funds increased from 80 proposals (8.7 percent of total volume) in 2008 to 127 proposals (17.7 percent of total volume) in 2012.

The flow of proposals by hedge funds and by religious groups showed a steep drop. Hedge funds introduced 2.2 percent of total proposal volume in 2012, down from 3.8 percent in 2011 and 4.9 percent in 2008. Proposals filed by religious groups, “declined by more than half during the last five years,” the report states—from 75 proposals in 2008, to 28 proposals in 2012.

However, proposals put forth by hedge funds tended to get the most for votes: “The highest level of votes for was observed for proposals by hedge funds (69.3 percent), which also registered no abstentions.”

Not so for proposals on environmental and social policy. These resolutions displayed low levels of for votes—at 16.8 percent of votes cast—and the highest levels of abstention from voting, at 10.8 percent. (The average abstention for other subjects was 1.3 percent).

“This finding indicates that U.S. shareholders, in general, continue to believe that the board of directors and senior management are better suited to determine the business viability of certain sustainability activities and that one-size-fits-all policies may lead to inefficiencies or capital misallocations,” according to the report.