November election could be key to hot proxy issues like say-on-pay, health care

The ultimate outcome of this proxy season, highlighted by hot shareholder proposals on executive compensation and health care, could come in polling places in November rather than at annual corporate meetings, corporate governance experts say.

The November election for president and for congressional seats could determine progress on further shareholder rights from the Securities and Exchange Commission, particularly on shareholder access to use the corporate proxy materials to nominate candidates to boards, they said.

“Some of the issues prominent this proxy season will echo in the campaign and in legislation in 2009,” said Patrick McGurn, special counsel at RiskMetrics Group Inc., New York.

“I think the election will have a significant impact,” said Hye-Won Choi, senior vice president and head of corporate governance, TIAA-CREF, New York.

“Depending on who is elected president, the election will impact who will lead the SEC,” Ms. Choi said. Two of the five commissioner positions are vacant, she pointed out. The election outcome “will be important to filling the vacancies and the (position of) chairman and affecting the issue of access,” she added. By law, the two vacancies cannot be filled by Republicans to keep a partisan balance on the SEC. The three other positions are now held by Republicans, including Chairman Christopher Cox, who is expected to leave after the November election. Democrats, if they win big in November, could fill three of the five commissioner seats, giving them a majority of the votes on the SEC; otherwise they would have only two seats.

The election also could lead to the enactment of say-on-pay legislation, especially if Sen. Barack Obama, D-Ill., wins the presidency, the experts said.

Mr. Obama sponsored a say-on-pay bill pending in the Senate since last year. A bill sponsored by Rep. Barney Frank, D-Mass., already passed the House.

Sen. John McCain, R-Ariz., if he is elected president, “might even sign say-on-pay” legislation, because of his statements that support corporate reform, Mr. McGurn said.

Scott Fenn, managing director of policy for Proxy Governance Inc., a Vienna, Va., based corporate governance advisory firm, believes this proxy season could be “red hot” on a few issues like executive pay.

Falling stock prices, in particular from subprime-credit troubles, have angered shareholders and could lead to more tension between shareholders and board members, and more support by shareholders to rein in excessive pay, Mr. Fenn said.

A possible prelude to scrutiny in Washington on executive pay took place March 7 at a hearing of the U.S. House Committee on Oversight and Government Reform. It examined the compensation and retirement packages of CEOs of corporations “deeply involved in the current mortgage crisis,” in the words of a committee statement.

“The attention of the public, regulators and Congress may have had a positive effect in limiting some of the more egregious pay packages, but there is more work to be done,” Kurt Schacht, managing director of the CFA Institute Centre for Financial Market Integrity, Charlottesville, Va., said in a statement.

“Considering the extent ... of subprime exposures, it is curious to see CEOs depart with compensation arrangements that tended to preserve and, in some cases, accelerated unvested benefits.

“However, given the magnitude and severity of the subprime impacts, one would expect those in charge to have likewise suffered some personal financial loss,” he added in the statement.

RiskMetrics, a financial risk and corporate governance advisory company, expects about 900 shareholder proposals to be filed this season, down from around 1,200 last year.

Say on pay, the proposal calling for an annual advisory vote by shareholders on executive compensation, has been filed at 95 companies this year, according to Dawn Wolfe, social research analyst with Boston Common Asset Management LLC, a socially responsible investment firm. That number is the most of any shareholder proposal this year.

Shareholders at Apple Inc., Cupertino, Calif., voted in the majority in favor of say on pay March 4, the only company so far where the proposal has come to a vote, Ms. Wolfe noted. The AFL-CIO Reserve Fund, Washington, sponsored the proposal, along with members of the Interfaith Center on Corporate Responsibility, New York.

The support Apple's “cultish” shareholders, for their presumed dedication to the company, gave to it could provide an indication of a high level of support for the proposal at other companies, Mr. McGurn said.

“Say on pay is one for one so far,” he said.

Representatives in Apple's media relations department didn't respond to requests for comment.

Also on executive pay, “we could see congressional pressure for enhanced disclosure on compensation consultants,” Mr. McGurn said. New disclosure rules could provide information on fees paid to these consultants, he said.

A health-care proposal, calling for boards to adopt principles in favor of health-care coverage that is universal, affordable and high quality has been filed at 22 companies, said Mr. Fenn. Sponsors include the AFL-CIO fund and ICCR members.

Many companies see the proposal as a matter of public policy rather than a policy on which a board should take a position, Mr. Fenn said.

“I think it is certainly possible the real action on this issue will take place in the political public-policy realm,” Mr. Fenn said. “Perhaps that is why we are seeing these proposals now because there is a lot of attention to this issue in the (election) campaigns.”

Shareholder proposals on climate change, carbon emissions and other environmental issues could also “turn into legislative initiatives, post-2008 election,” especially if Democrats sweep Congress, Mr. McGurn said.

Among other shareholder proposals, according to RiskMetrics, one requiring a majority vote to elect directors has been filed at 81 companies so far, the second most of any shareholder proposal this year.

“I think proponents found an issue that resonates with investors,” said Claudia H. Allen, partner with the Neal Gerber Eisenberg LLC, a Chicago-based law firm, referring to the sweeping success of majority voting.

In all, 68% of companies in the Standard & Poor's 500 index have adopted majority voting, Ms. Allen said.

“It's been a tremendously successful movement,” she added.

“Since many companies have majority voting, one thing we'll be seeing is the targeting of directors (in opposition to their re-election) where there has been concern about oversight” of credit risk management, often coupled with excessive executive compensation, Ms. Allen said.

CtW Investment Group, Washington, initiated a vote-against campaign at Morgan Stanley, New York, to oppose the re-election of Howard J. Davies, C. Robert Kidder and John J. Mack, chairman and CEO, at the April 8 annual meeting. CtW Investment Group works on shareholder issues with pension funds sponsored by labor unions affiliated with Change to Win, a coalition of unions.

As members of the board's audit committee, Messrs. Davies and Kidder “bear central responsibility” for the company's $9.4 billion in subprime-related accounting write-downs in 2007,” the CtW group said in a statement. It opposes Mr. Mack, to stop him from holding the chairman position.

“Shareholders are mad about portfolio losses,” Mr. McGurn said. “They are much less likely to support incumbent management (and boards) this year, especially at companies involved in the credit crunch.”

Among other board-related issues, Apache Corp., Houston, faces a shareholder proposal calli