Over the past three decades, shareholder proposals have transformed the corporate landscape in the U.S. by spurring the adoption of governance best practices.
Excerpts from article published on February 5, 2019
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Annual director elections, majority vote rules for director elections, shareholder approval for poison pills, and proxy access bylaws are some of the critical governance practices that have become common practice thanks to investor support for shareholder proposal campaigns led by a wide variety of investors—some large; others small. Despite the advisory (non-binding) nature of most shareholder proposals in the U.S., successive waves of campaigns eroded boardroom entrenchment by convincing directors to respond to shareholders’ calls for accountability, transparency and stewardship.
In this second installment of our examination of long-term trends in proxy voting, we examine the impact of shareholder proposals on corporate governance practices since the turn of the century, and we forecast the potential paths forward for corporate governance changes in the future. As many of the key corporate governance practices listed above have been adopted by close to 90 percent (or more) of large market capitalization firms, proponents are turning their attention to governance topics, such as independent board chairs and written consent rights, that boards have been slower to address. Notably, voting results demonstrate that members of the investment community often have varying views on these topics, as evidenced by the declining number and percentage of governance shareholder proposals receiving majority support in recent proxy seasons.
Antitakeover Measures and Corporate Scandals Prompt Calls for Governance Reform
The high rates of support for governance proposals predate the financial crisis and the recent focus on stewardship, sustainability, and ESG investing. The roots of modern day governance activism trace back to the 1960s and 1970s, when so-called “gadfly” investors, such as the Gilbert brothers and Evelyn Y. Davis, filed numerous shareholder proposals on issues like the repeal of classified boards and the adoption of cumulative voting.
Some institutional investors joined the shareholder proposal fray in the late 1980s in response to the widespread adoption of poison pills, payments of “greenmail” and other effort by boards to entrench themselves in the wake of a wave of “hostile” takeovers.
In the 1990s, concerns about governance practices among some investors and shareholder advocates continued to spread, as we saw a substantial number of proposals seeking governance changes, including requests to curb executive pay, remove poison pills, and declassify boards.
Activism at annual general meetings picked up speed in the new millennium, as investors suffered serial knockout blows from the dot-com bubble’s burst, the Enron/Worldcom era accounting scandals, and the financial crisis. The dot-com bubble and the major accounting scandals of the early 2000s prompted calls for board accountability and governance reform by the public at large. The bipartisan Sarbanes-Oxley Act of 2002 was an effort to address public and investor concerns and reinforce the responsibilities of directors and management as fiduciaries. Soon thereafter, the exchanges changed their listing rules to require majority independence on boards and independent key committees.
While applauding these reforms, shareholders turned to private ordering to build the tools that would allow them to hold boards more accountable. As a result, the number of shareholder proposal filings dealing with governance issues rose by 50 percent in 2003. The remainder of the decade saw a succession of highly-successful shareholder proposal campaigns, including efforts to require majority vote standards for uncontested director elections, and to hold advisory votes on compensation (“say on pay”).
Following Dodd-Frank’s say on pay mandate, the number of governance proposals dropped in 2011. From 2011 to 2014, however, Professor Lucian Bebchuk’s Shareholder Rights Project initiative led to the declassification of at least 100 board of large-capitalization companies, as the project helped institutional investors coordinate and structure their efforts towards advancing annual board elections at S&P 500 and Fortune 500 companies. Further, from 2014 to 2016, a new wave of governance proposals swept through proxy ballots, with the campaigns led by the New York City Comptroller and several individual proponents requesting companies to adopt proxy access gaining significant support.
In the past two years, the filings of proposals dealing with environmental and social issues surpassed governance proposals, as E&S issues continue to gain momentum, spurred by increased support by shareholders, willingness by companies to engage and reach a common solution, and a focus on monitoring and oversight of material risks by proponents.