The Carpenter Funds continued their advocacy for a majority vote standard in director elections during the 2013 proxy season, filing 34 majority vote proposals. The Funds also advanced a first-time Triennial Advisory Say-on-Pay Proposal to raise the say-on-pay (“SOP”) vote frequency issue.
The Triennial SOP proposal called for a SOP vote every three years as opposed to the present practice of annual SOP votes. The SOP vote frequency initiative was stymied by corporate no-action challenges and reluctance on the part of corporate boards to revisit the vote frequency issue so soon after the initial 2011 votes.
The Funds additionally continued to advocate for improved auditor independence by using non-shareholder proposal communications to encourage companies and their audit committees to enhance proxy statement disclosure regarding important aspects of their audit firm retention process.
The 2013 proxy season marked the tenth proxy season in which UBC Funds submitted majority vote proposals. Since 2004, Carpenter Funds have submitted 506 majority vote shareholder proposals, with the focus on large cap companies comprising the S&P 500 Index. As of Fall 2012, when the 2013 proxy season proposals were being submitted, 84% of the S&P 500 companies had adopted a majority vote standard for uncontested director elections, as had over 300 additional public corporations.
The 2013 Majority Vote Proposal Target List included 34 companies, a number of which had previously received Carpenter Fund proposals. The Fund settled 15 of the proposals with companies that agreed to adopt a majority vote standard or to advance a management proposal on the issue, while 11 proposals were voted on at company annual meetings. The proposals that were voted received an average level of support of 50%, with 3 of the proposals receiving majority support. Duke Energy’ Board adopted a majority vote standard following the 2013 proxy season vote on the proposal, which received majority shareholder support.
Dodd-Frank established a management-sponsored non-binding say-on-pay (SOP) vote that affords shareholders an opportunity to vote on the executive compensation of a corporation’s top five highest paid executive officers, its named executive officers (“NEOs”). The attractiveness of the SOP vote as a reform was its simplicity: let shareholders have a say on executive compensation by casting a vote “for” or “against” the pay plans of senior executives.
Dodd-Frank also provided for an initial frequency vote to determine how often shareholders wished to cast a SOP vote. This initial SOP frequency vote afforded shareholder three frequency options, annual, biennial or triennial, and shareholders voted in favor of annual SOP votes at the vast majority of companies.
Despite strong shareholder and public criticism of executive compensation levels, the overwhelming majority of the plans have received shareholder support. In the first two proxy seasons of SOP voting, 98% of the executive pay plans voted on have been approved by shareholders.
Two aspects of annual SOP voting diminish its value to both shareholders and corporations. First, the volume of annual SOP voting within the condensed timeframe of proxy season leads to superficial compensation plan analysis. The typical executive compensation plan disclosure spans dozens of pages of often dense narrative in the Compensation Discussion and Analysis (“CD&A”) portion of corporate annual proxy statements, along with numerous additional pages of charts. Additionally, the annual SOP vote challenges shareholders to reduce their positions on complex multi-faceted executive compensation plans to a simple “for” or “against” vote, with the vote providing no insight into investor sentiment on important aspects of the plans.
The Carpenter Fund Triennial Say-on-Pay Vote Proposal requested that companies institute a Triennial SOP Vote that provides shareholders an opportunity to vote on a company’s executive pay plan at every third annual shareholder meeting. Further, the Proposal promotes a Triennial SOP Ballot that allows votes “for” or “against” a company’s overall executive compensation plan, as well as votes on the following three key components of a NEO compensation plan: the annual incentive compensation; the long-term incentive compensation, and post-employment compensation, such as retirement, severance, and change-of-control benefits.
The Triennial SOP Proposal was advanced to facilitate more thoughtful and probing shareholder analysis of executive compensation plans. A well-designed Triennial SOP Vote can advance the goals of establishing more demanding pay-for-performance plan features, tying incentive pay awards to long-term strategic plan implementation, and encouraging continuous shareholder monitoring of executive pay. The current formulation of the annual SOP vote has resulted in limited and simplistic qualitative analysis of plans, and little or no serious progress in reforming executive compensation.
A number of companies on the Triennial Say-on-Pay Target List responded to the Triennial SOP Proposal by immediately requesting no-action letter relief from the US Securities and Exchange Commission (“SEC”). The SEC’s rules implementing the SOP vote provided companies with a strong no-action argument against the proposals. Other companies engaged in constructive discussion and consideration of the issue and included their board compensation committees in consideration of the proposal. However, given high investor support for annual SOP votes and strong substantive SOP votes enjoyed by most companies in the first two proxy seasons of SOP voting, companies expressed little interest in having an early SOP frequency vote. The Funds’ withdrew the Triennial SOP Proposal from all the recipient companies. The next required SOP frequency votes will occur in the 2017 proxy season.
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Building on their 2012 proxy season efforts to enhance audit firm independence, the Funds sent Auditor Independence Disclosure Letters to those companies that had received the Audit Firm Rotation Policy Proposal or the Audit Firm Independence Report Proposal during the 2012 proxy season. The Disclosure Letters requested that companies include the Auditor Independence Statement disclosure that several companies had agreed to in the 2012 proxy season.
As indicated on the Auditor Independence Company Target List, the corporate response to the new disclosure requests was generally positive, with some leading companies, such as Pfizer, PepsiCo, General Dynamics, Wells Fargo & Company, and Verizon Communications, agreeing to include the requested new disclosure.
In conjunction with the Funds’ advocacy of a majority vote standard in uncontested elections, letters were sent to dozens of companies that had received board declassification shareholder proposals from the Harvard Responsible Shareholder Project and affiliated public employee pension funds. The declassification proposal letter urged the companies to resist the call to declassify their boards.
The Funds presented their view that the combination of a majority vote standard and a classified board structure provides a governance framework that provides shareholders an opportunity to exercise a meaningful and constructive accountability vote without the potentially debilitating and destructive effects that could occasion the rejection of an entire board.
“We strongly believe that the combination of a majority vote standard in uncontested elections and a classified board enhances board and management accountability in a manner that better serves the interests of long-term investors, corporations, and the market generally.”
The declassification proposals that came to a vote received strong shareholder support indicating continued support of an active corporate control market as the preferred means of board accountability.
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