ISS postseason proxy report

By Cydney Posner

Following is a link to the postseason proxy report prepared by ISS, a proxy advisor (and, according to some of us with more jaundiced views, a self-appointed arbiter of corporate governance matters notwithstanding serious conflicts of interest).  

The report concludes that executive pay was arguably the single most important issue this proxy season, although it certainly appears that there were many more proposals related to corporate governance, such as majority vote and independent chair proposals. ISS counts more than 180 U.S. companies that adopted new election policies and bylaws related to majority voting for director, with most companies following the Pfizer model (retain plurality voting, adopt resignation policy for director that receive majority withheld or against votes), while approximately 40 issuers followed the Intel model (majority voting bylaws and resignation policies). The report cites more than 150 U.S. shareholder proposals seeking majority voting, of which at least 36 have received majority support to date. ISS notes that, in most cases where proponents of majority vote proposals received low levels of support, the companies at issue had already instituted Pfizer-type director resignation policies.

The report finds that many U.S. companies appear to be responding to investor concerns over governance practices, evidenced by the continued decline in ISS recommendations (under its benchmark voting policy) against corporate directors. Reasons cited in the report for high levels of withhold votes for directors include compensation practices, affiliated outsiders on committees and other independence issues, poor attendance and "over-boarding." The percentage of directors receiving unfavorable ISS recommendations decreased from 25% in 2003 to 17% percent last year, with the rate at 15% so far this year.  With respect to ratification of auditors, ISS has issued unfavorable recommendations at 100 companies so far this season (representing 3% of companies that solicited shareholder ratification of auditors, down from 7% in 2003).

The report also notes increased activism by hedge funds (with an estimated aggregate of $1 trillion in assets under management) and pension funds. According to outside sources cited by ISS,  there were 80 proxy contests during the first six months of this year, compared to 54 proxy contests in all of 2005, 40 contests in 2004 and 74 contests in 2003. In addition to proxy fights, there have been 122 other activist campaigns this year, including campaigns related to stock buybacks, increased dividends, sale of the company or other changes.  ISS attributes the increase in proxy fights (and M&A opposition) in part to the propensity of hedge funds to "maintain a laser focus on shareholder value." (A little sweet talk aimed at some of ISS' clients perhaps?) Another catalyst cited is the erosion of poison pill plans, classified boards and other takeover defenses. According to ISS, approximately 54% of S&P 500 companies no longer (or never did) have poison pills, while a majority of S&P 500 directors likely will be subject to annual elections by the end of 2006. ISS reports that this year, hedge funds have won board representation in 35% of their dissident campaigns. In addition, according to ISS data, 31 proxy contests have ended in settlements (which ISS contends are reached when targets believe they will lose) and 21 went to a vote, as compared with 18 in all of 2005.

With respect to executive pay proposals, ISS reports that, of the 11 resolutions offered up this season that won majority support, six concerned shareholder approval of golden parachutes.  Several proposals calling for the use of performance-based equity won majority approval. ISS contends that investor skepticism regarding employee equity plans has increased recently, with investors rejecting 4.4% of 383 stock plans proposals last year, more than twice the percentage rejected in 2004. So far this year, shareholders have rejected equity plans at eight companies, according to ISS.