The Advisors' Blog

– Roel Delgado, Nikeita Lea, and Nafeez Amin, ISS’s Taft-Hartley Research Team

Despite concerns that the end of broker voting in uncontested board elections would unleash a surge of withhold votes during the 2010 U.S. proxy season, the number of directors who failed to receive majority support declined this year. As of Sept. 1, 88 directors had failed to earn majority support, a slight decrease from the 93 board members during the same period last year, according to ISS data. In addition, the average opposition vote against directors at Russell 3000 companies was 6.1 percent, down from 7.4 percent during the same period in 2009. The average dissent levels in 2008 and 2007 were 5.1 percent and 4.9 percent, respectively.

Among S&P 500 firms, directors at 158 companies had at least 10 percent dissent this year, down from 171 in 2009, but more than 121 in 2008, 118 in 2007, and 95 in 2006. Only one of the 3,627 directors at S&P 500 firms up for election so far this season has failed to win majority support: Virgis W. Colbert at Stanley Black & Decker. Almost 54 percent of shareholders opposed his reelection after the company failed to adopt a majority-supported shareholder proposal to declassify the board. By contrast, 12 directors at six S&P 500 companies received majority opposition in 2009; and five directors at two S&P 500 issuers received such opposition in 2008.

Notwithstanding the overall lower levels of shareholder dissent, common threads were observed at those firms that received significant levels of dissent: ignored shareholder proposals and, just as last year, pay practice concerns.

Ignored Shareholder Proposals

A key contributing factor to high protest votes at S&P 500 firms this year were corporate failures to implement majority-supported shareholder resolutions. At six S&P 500 companies, board members received more than 40 percent opposition for this reason. Twelve FirstEnergy directors received more than 30 percent opposition at the company’s annual meeting in May after failing to implement several majority-backed shareholder proposals for the fourth consecutive year. This display of investor dismay follows the company’s failure to adopt four proposals seeking to adopt simple majority voting provisions, reduce the threshold for calling special meetings, establish a proponent engagement process for shareholders, and adopt a majority vote standard for director elections.

At Ball Corp., four directors received more than 41 percent dissent after the company failed to implement declassification proposals that earned majority support in 2009, 2008, 2006, and 2005. The company also declined to opt-out of a 2009 Indiana law that established classified boards as the state’s default standard.

There was more than 40 percent opposition this season at Vornado Realty Trust after the board failed to act on a majority-backed proposal to require majority voting for the election of directors. There also was more than 40 percent dissent at Chesapeake Energy after the board declined to implement proposals to declassify the board and to adopt a majority voting standard. At Motorola, there was more than 30 percent opposition after the board did not fully adopt a majority-supported shareholder proposal to give 10 percent shareholder groups the right to call special meetings; the board opted for a 20 percent threshold.

Pay Concerns

During the 2010 season, tax gross-up payments and other compensation practices continued to spur significant levels of dissent across the S&P 500 universe, according to ISS data. Two compensation committee members at Abercrombie & Fitch received more than 40 percent opposition amid a “vote no” campaign by the American Federation of State, County and Municipal Employees (AFSCME) Pension Plan. The labor pension fund raised concerns about succession planning and entrenchment, and argued that the committee has “approved guaranteed pay that fails to link pay to performance.” AFSCME also cited a $4 million lump-sum payment for ending CEO Michael S. Jeffries’ company aircraft usage as a significant concern.

Investor concerns around pay and performance linkage and equity compensation practices also contributed to more than 40 percent opposition to compensation committee members at Eastman Kodak and Fortune Brands.

Shareholders continue to oppose pay panel members who approve tax gross-up provisions as evidenced by the more than 30 percent dissent levels at Hess Corp., Noble Energy, and PerkinElmer. Executive perks, problematic change-in-control provisions, and pay-for-performance disconnects also contributed to more than 30 percent withhold votes against pay panel members at Aetna, Occidental Petroleum, GameStop, Urban Outfitters, Vulcan Materials, Boston Scientific, and the NASDAQ OMX Group.

At Occidental, compensation committee members received more than 30 percent opposition, even though there was a management “say on pay” (MSOP) proposal on the ballot where investors could express their views on pay. The votes at Occidental suggest that some investors will vote against directors and oppose MSOP proposals in cases in long-standing pay concerns.
Tax gross-ups and retention payments also contributed more than 20 percent dissent at Abbott Laboratories. A pay panel member at Dr Pepper Snapple Group also received more than a 20 percent protest vote, apparently due to the provision of excise tax gross-ups and tax reimbursement on personal aircraft usage.

Shareholders of Fidelity National Information Services again expressed disapproval of the company’s executive pay practices by withholding more than 20 percent support from the only compensation committee member up for election this year. Among investors’ likely concerns were retention bonuses and the lack of a maximum cap on bonuses for synergy cost saving incentives. Last year, the sole Fidelity compensation committee member who stood for reelection received more than 30 percent shareholder opposition.

Other Drivers of High Protest Votes

Insufficient attendance at board and committee meetings remains a determinant of shareholder votes as seen at PepsiCo where a director who failed to attend at least 75 percent of board meetings received more than 40 percent opposition. For the same reason, director nominees at Molson Coors Brewing and Applied Materials received greater than 30 percent dissent while a director at Supervalu faced more than 20 percent opposition. Concerns about “overboarding”–a director serving on more than six boards or an outside CEO serving on more than two other boards–contributed to more than 20 percent negative votes at Laboratory Corporation of America, Advanced Micro Devices, Qwest Communications International, and Coca-Cola Co.

At Massey Energy, all three nominees, who were members of the board’s Safety, Environmental and Public Policy Committee, received more than 40 percent withhold votes. The company was a target of a “vote no” campaign by the CtW Investment Group, which represents union-backed investment funds, and a group of state pension funds. The consortium of investors expressed concern with the lack of board oversight of company management, particularly around the issue of safety. The dissident group pointed to extensive statistics from the U.S. Mine Safety and Health Administration, highlighting high levels of compliance failures at the Upper Big Branch mine, where 29 miners were killed in April, and other Massey operations over the last few years.

Non-management directors who are affiliated with management (due to professional service fees, business transactions, or other ties) and who serve on key board committees (compensation, audit, or governance/nominating) also received high levels of opposition at a number of S&P 500 companies, such as: Jabil Circuit, Juniper Networks, and Rowan Cos. (all greater than 40 percent opposition); and Aon, Morgan Stanley, Dentsply International, and Medco Health Solutions (all had greater than 30 percent opposition).

Independence, Attendance, and Pill Concerns at Small Issuers

So far this year, there have been 48 companies in the Russell 3000 index where a director received more than 50 percent dissent, up from 44 companies in 2009. As is typical among smaller issuers, the vast majority of these companies do not have majority voting provisions or resignation policies. Investor calls for fully independent committees also contributed to high adverse votes at smaller issuers. Affiliated outsiders who serve on key board committees (audit, compensation, nominating or governance) received more than 50 percent disapproval at 12 companies. The highest level of dissent within the Russell 3000 index was at CSG Systems International, where shareholders withheld 80 percent of their votes from an affiliated outsider sitting on the nominating committee. At 10 other companies, directors failed to garner majority support apparently due to their poor attendance at board meetings. Overboarding concerns also contributed to majority withhold votes against four directors at different companies.

At least one director at Nabi Biopharmaceuticals, Kendle International, Michael Baker Corp., AMAG Pharmaceuticals, CIRCOR International, and EMS Technologies received majority opposition due to the board’s failure to seek shareholder ratification of a poison pill. Notably, all of Kendle International’s eight directors failed to obtain majority approval with their support averaging just 39 percent. The company has a plurality vote standard without a director resignation policy in place.

Pay concerns also generated high withhold votes at smaller issuers. The provision of tax gross-ups contributed to more than 30 percent dissent at Quidel Corp. Compensation committee members at CIBER and The Pantry received more than 50 percent opposition that apparently was due to disconnects between executive pay and corporate performance. Pay panel members also had more than 40 percent dissent at Universal Health Services (apparently because of severance packages), at On Assignment (after repricing of options without shareholder approval), and at Ikanos Communications (cash buyout options were adopted without shareholder approval.)

At the annual meeting of Fred’s Inc., a Tennessee-based retailer, the entire board received majority opposition for the second consecutive year. This vote apparently stemmed from two reasons. The company failed to implement a 2009 majority-supported shareholder proposal to adopt a majority vote standard in board elections. Additionally, the company’s poison pill, which the board renewed without shareholder approval in October 2008, remains in place. Notably, the company has a plurality vote standard for board elections with no director resignation policy in place. At Sterling Bancshares, one director received majority dissent after the board ignored a majority-supported declassification proposal.