More Reports on the 2010 Proxy Season

Florida SBA. Several reports on the results of the proxy season piled in yesterday. One came from Florida’s State Board of Administration (SBA). During the fiscal year ended June 30, 2010, they executed votes on 3,568 public company proxies covering 28,284 individual voting items, including director elections, audit firm ratifications, executive compensation plans, mergers, acquisitions, and other management and shareowner proposals. The SBA voted for, against, or abstain on 73.3 percent, 24.8 percent, and 0.1 percent of all ballot items, respectively. Of all votes cast, 26.1 percent were against the management-recommended vote, down from 31.1 percent during the same period ending in 2009. Key voting items included:

  • Director Elections—Board elections represent one of the most critical areas in voting since shareowners rely on the board to monitor management. The SBA supported 73.2 percent of individual nominees for boards of directors, voting against the remaining portion of directors primarily due to concerns about candidate independence, attendance, or overall board performance. The SBA policy is to withhold votes from directors who fail to observe good corporate governance practices or demonstrate a disregard for the interests of shareowners. Some of the highest director opposition in 2010 occurred at the following companies: AGCO Corporation (Francisco Gros received 68 percent withhold vote), Helix Energy Solutions Group (Bernard Duroc-Danner received 71 percent withhold vote), Interline Brands (Gideon Argov received 60 percent withhold vote), Kopin Corporation (David Brook received 68 percent withhold vote), and Skywest, where three directors received a majority of opposition votes (including Ralph Atkin with 76 percent against, Ian Cumming with 63%, and Steven Udvar-Hazy with 55% opposition).  The Board reelection at Massey Energy was notable, with three individual directors narrowly receiving majority support after harsh examination by a large group of the company’s investors. The SBA voted to withhold support for each of the directors mentioned above.
  • Executive Compensation—The SBA considers on a case-by-case basis whether a company’s board has proposed or implemented equity-based compensation plans that are excessive relative to other peer companies or plans that may not have an appropriate performance orientation. As a part of this analysis, the SBA reviews the level and quality of a company’s compensation disclosure—believing strongly that shareowners are entitled to comprehensive disclosures of compensation practices in order to make efficient investment decisions. Over the last fiscal year, the SBA supported 32.7 percent of all non-salary (equity) compensation items—while supporting 93.8 percent of shareowner resolutions asking companies to adopt an advisory vote on executive compensation (a.k.a., “Say-on-Pay”), 61.6 percent of executive incentive bonus plans, and 38.9 percent of management proposals to adopt restricted stock plans in which company executives or directors would participate (33.3 percent for the amendment of such plans).  Compensation-related votes of interest in 2010 included the shareowner proposal to adopt say-on-pay at Chesapeake Energy, which received 56.0 percent support, including that of the SBA. In contrast, a management proposal to ratify executive pay at Motorola received only 45.7% support, with the SBA voting against the compensation structure. The Motorola vote was historic because it was the first advisory compensation vote at a U.S. company to fail to achieve majority investor support. At Comerica Incorporated, the SBA supported the proposal to recoup unearned management bonuses (i.e., adopt “clawback” provisions), which received 54 percent shareowner support.
  • Audit Ratification—Auditors are responsible for safeguarding investor interests and assuring financial statements are presented fairly; therefore, auditor independence and impartiality are paramount in maintaining public trust. The SBA supported over 96.0 percent of ballot items to ratify the board of directors’ selection of external auditor. Votes against auditor ratification are cast in instances where the audit firm has demonstrated a failure to provide appropriate oversight, when there have been significant restatements in the financial statements, or when significant conflicts-of-interest exist, such as the provision of outsized non-audit services.
  • Environmental & Sustainability Reporting— Companies have begun developing policies to improve their environmental sustainability in order to implement new environmental regulations, achieve cost savings, ensure safe operations, and use their resources as efficiently as possible. Increasingly, the SBA has supported general sustainability reporting requirements and improved environmental disclosures issued by companies in its portfolio. Improved corporate reporting allows investors to better gauge a firm’s potential environmental risks and business practices. The SBA supported 93.3 percent of shareowner resolutions asking companies to publish sustainability reports and 72.2 percent of shareowner resolutions asking companies to produce reports assessing the impact on local communities.

SBA continues to post proxy voting records on its website. This real-time vote disclosure occurs in advance of all annual shareowner meetings, normally within a few hours of the proxy vote being cast. Voting information is fully searchable based on date, calendar range, company name, and SBA portfolio. Voting data covers every publicly traded equity security for which the SBA retains voting authority (which excludes most foreign securities). The SBA’s current and historical proxy votes can be viewed here.

Pax World. Pax World Management LLC, investment adviser to Pax World Funds, announced that during the 2010 proxy season it withheld votes from 74 board slates because those companies did not nominate any women directors.

Pax World’s proxy voting guidelines provide that it will generally withhold votes from, or where possible vote against, all board slates that do not include women.  Pax World then sends a letter to the board chair and CEO of the company, letting them know the reasons why Pax did not support their board and encouraging them to embrace gender diversity.  In its follow-up letter to companies, Pax World urges them to address gender diversity on their board by adopting nominating committee charter language specifically establishing that gender diversity is part of every director search. Said Pax World President and CEO Joe Keefe,

We believe gender diversity on boards is vitally important.  When women are at the table, the discussion is richer, the decision-making process is better and the organization is stronger.  Companies that embrace gender diversity and women’s empowerment are, in our view, simply better long-term investments.

There is a significant body of research supporting the belief that companies that are successful in promoting women to the most senior levels of business tend to outperform their peers that do not. A 2007 Catalyst study on board diversity and financial performance, for example, found that those companies with the highest proportion of women on their boards of directors outperformed those with the lowest percentage of women by 66 percent on the basis of return on invested capital.

The value of board diversity has long been promoted by many prominent institutional investors and is increasingly being recognized by regulatory bodies worldwide. Most recently, the U.S. Securities and Exchange Commission adopted a new rule on proxy disclosure that included, among other changes, a requirement that companies disclose whether and how their nominating committees consider diversity in identifying board nominees.

Pax World claims to be the only mutual fund in America that focuses on investing in companies that are global leaders in promoting gender equality and women’s empowerment.  They also established the Pax World Women’s Advisory Council, which is comprised of nationally-known leaders and experts on women’s issues.  The Council assists Pax World in its efforts to advance women and gender equality through the Pax World Global Women’s Equality Fund.

Additionally, Pax World is currently co-leading an investor initiative, in collaboration with the United Nations Principles for Responsible Investment (UNPRI), Calvert Asset Management Company and other institutional investors, focusing on gender equality in corporate leadership and related corporate best practices.  The goal of the engagement, which targets companies in 10 countries in North and South America and Europe, is to encourage the representation of women on boards of directors and in senior management and to promote greater disclosure by companies on the topic of gender equality.

Pax World is also encouraging companies worldwide to endorse and take steps to implement the Women’s Empowerment Principles, a joint initiative of the United Nations Development Fund for Women (UNIFEM) and the United Nations Global Compact (UNGC). Pax World recently sent letters to the chief executive officers of 82 companies held in its Global Women’s Equality Fund, urging them to embrace these principles, which guide the private sector in promoting gender equality in the workplace.

Netflix Now with Woman on Board. Calvert Asset Management and the Connecticut Retirement Plans and Trust Funds (CRPTF) announced the successful resolution of their joint shareholder proposal on board diversity filed with Netflix (NFLX).  The company finally named its first female director effective July 1.  Ann Mathers, an entertainment industry veteran who has served in senior finance roles at Pixar Animation Studios, Walt Disney and Paramount Pictures.

Calvert and the CRPTF filed their resolution on December 1, 2009, asking Netflix to take every reasonable step to ensure that women and minority candidates are in the pool from which Board nominees are chosen and to publicly commit itself to a policy of board inclusiveness. In March 2010, Netflix incorporated language in its corporate governance and nominating committee charter making gender and race a factor in considering board candidates.  The firm announced it would add Mathers to the board on June 16th. Said Barbara J. Krumsiek, President & CEO of Calvert Group,

Netflix has affirmed Calvert’s belief that shareholder value and corporate bottom lines are enhanced by an independent and diverse board.

Connecticut State Treasurer Denise L. Nappier, principal fiduciary of the $23 billion CRPTF, said,

In this economic climate, boards should take every reasonable step to preserve and enhance long-term financial performance. Given the compelling business case for board diversity, the addition of a woman to Netflix’s board of directors is an important and strategically sound step in the right direction.

Both Calvert and the CRPTF have made significant commitments to shareholder advocacy on the issue of board diversity. Calvert began its board diversity initiative in 2002, after new listing requirements mandated an increased number of independent directors.  Since 2001, Treasurer Nappier has filed over a dozen shareholder resolutions on corporate board diversity at a number of companies, including Danaher Corporation and Apple.

Retail Investors Filed Most of 2010’s Majority-Backed Proposals, by Therese Doucet of ISS Publications. After reaching a record high in 2009, fewer governance proposals filed by shareholders obtained majority support this season. As of June 30, 119 (31 percent) of the 384 proposals that went to a vote (and where results are available) garnered majority approval, down from 154 (or 36.6 percent) of the 421 proposals on the ballot during the first six months of 2009, according to ISS data. However, this season’s majority-approval percentage still exceeded the 26.7 percent rate in 2008 and 23.6 percent in 2007.

Individuals filed at least 60.5 percent (72) of the majority-supported proposals, up from 47.4 percent during the first six months of 2009 and 45.2 percent during the same period in 2008. Of the 13 identified retail investors who filed successful proposals this season, the most active were: Gerald Armstrong (with 22 majority-backed proposals); John and Ray Chevedden (21 combined); William and Kenneth Steiner (14 combined); and members of the Rossi family (six). In six cases, companies did not disclose the identity of the proponent.

Unions were the second biggest category of successful proponents, with ten labor pension funds filing 19 (16.0 percent) of the majority-supported proposals. The United Brotherhood of Carpenters submitted the greatest number of these, with five of its proposals winning majority approval. The third most prolific category of proponents was public pension funds. Six funds filed 15 (12.6 percent) of the majority-supported proposals, with New York City’s pension funds responsible for one-third of those.

The continued success by individual proponents is notable, because they generally don’t have the resources to mount public relations campaigns or enlist support from other investors. Retail activists have mostly pursued well-established and widely accepted governance reforms, such as board declassification. Labor funds generally offer several new proposals each season, and it’s uncommon for a first-year resolution to attract more than 50 percent approval.

Declassification resolutions were the most numerous among this year’s majority-supported proposals, with 26. Proposals to eliminate or reduce supermajority voting requirements were the next most popular with 22. The third most successful were the 16 proposals seeking majority voting in uncontested board elections.

Proposals seeking the right of shareholders to call special meetings and to act by written consent each received 11 majority votes, on par with the performance of “say on pay” proposals, which found majority support at 12 issuers. In addition, there was majority approval for three golden parachute proposals, two poison pill resolutions, and an independent board chairman proposal at Ameron International.

A couple of the majority-supported proposals were on less common topics. Investors at Comerica gave 53.9 percent support to a proposal by the Service Employees International Union to recoup unearned management bonuses. Shareholders at Whole Foods Market gave 53.4 percent approval to a proposal from Amalgamated Bank’s LongView Funds to amend the company’s bylaws to allow for director removal. FirstEnergy and Allstate saw the most shareholder proposals win majority support, with three proposals each. At both companies, investors supported proposals to restore the right of shareholders to call a special meeting and to act by written consent. FirstEnergy’s shareholders also supported a proposal for a majority vote to elect directors from an undisclosed investor, and Allstate’s shareholders supported a “say on pay” proposal from AFSCME and Calvert.

Pay Enablers. In their report, Compensation Complicity: Mutual Fund Proxy Voting and the Overpaid American CEO, AFSCME, The Corporate Library and analyzed mutual fund voting patterns on compensation issues in 2009. They found that mutual funds voted in favor of management proposals on changes to executive pay policies at a rate of 84 percent, and ratified executive pay packages at a rate of 77 percent. According to AFSCME Pres. Gerald W. McEntee,

Given the bailout and dismal performance of many companies, investors in mutual funds should be outraged that their assets are being used to ratify CEO pay that in too many cases was undeserved and unearned. Mutual funds hold over 25 percent of the market capitalization of all U.S. companies, and the ten largest fund families manage more than half of all mutual fund assets. These 800 pound gorillas need to start throwing their weight around to demand that CEOs get paid only when they perform.

The mutual fund industry’s four greatest “Pay Enablers,” reported as most consistently enabling runaway CEO pay, were Barclays, Northern, State Street and Vanguard.  According to the authors’ analysis, Barclays was the most enabling, supporting management compensation proposals 96 percent of the time, while its support for shareholder proposals was under 2 percent. The merger of Barclays and BlackRock last year created a mutual fund family with unprecedented power to constrain runaway pay; however, the combined voting record of the merged firms ranks as near the most “Pay Enabling,” along with mutual fund giant Vanguard. ( Barclays would argue that instead of opposing management compensation proposals they discipline board members by voting against compensation committee members where it appears the committees have been ineffective.)

Schwab, BNY Mellon, Dreyfus, Fifth Third and Legg Mason were the funds most likely to vote to rein in pay.  ( Unfortunately, the report did not include SRI funds like Domini, Calvert and others which were even more likely to vote to rein in pay.) These “Pay Constrainers” voted for shareholder proposals designed to tie executive compensation to long-term performance at an average rate of 91 percent. These funds also voted against members of board compensation committees at companies with pay problems at a higher rate than other funds.

The average level of mutual fund support for management proposals on compensation issues was 84 percent, unchanged from 2008. The average level of support for the categories of compensation-related shareholder proposals was 56 percent, a significant increase from the 40 percent in 2008.  Mutual funds were less willing to vote against directors over compensation issues, increasing the average level of support for certain directors from 48 percent in 2008 to 50 percent in 2009.  Mutual funds supported management-sponsored Say on Pay proposals at a rate of 77 percent. director Tracy Stewart said, is pleased to be part of this effort to inform all owners, including the retail shareowner market about mutual fund voting patterns on pay issues. The mutual fund industry plays a critical role in protecting retirement security. Retail investors choosing mutual funds for their 401(k)s and pension assets need to understand how these assets are being affected by mutual fund policies and proxy voting decisions. is glad to educate investors about the proxy voting records of mutual funds on CEO pay, and tools such as those available at make this task much easier.

According to Beth Young, Senior Research Associate at The Corporate Library,

In spite of surveys showing a majority of institutional investors find CEO pay excessive, mutual funds on the whole remained supportive of management positions. Although the overall support for shareholder proposals to reform compensation practices did increase, the wide disparity among funds in voting on compensation proposals indicates that some fund families employ a hands-on approach, while others take a decidedly more passive role in voting on executive compensation issues.

“Compensation Complicity: Mutual Fund Proxy Voting and the Overpaid American CEO” examined the voting records of 25 of the largest mainstream mutual fund families on executive compensation-related proposals at corporate annual meetings from July 1, 2008, to June 30, 2009. The report ranked the fund families according to how they voted in director elections, on management compensation proposals, and on shareholder compensation-related proposals in several different categories including shareholder advisory votes on CEO pay, equity-holding requirements and limiting severance payments.

The Report offers two action recommendations:

  1. Retail investors in mutual funds, which calls Citizen Investors, should critically evaluate how their mutual funds vote on pay issues and hold those funds accountable for votes that enable pay abuses. New tools such as those available at make this task much easier. ( For example, see their ranking of votes on: director elections, executive compensation, corporate governance, and corporate impact.  Please send them a donation to support their work. Another excellent source of information is Jackie Cook’s Fund Votes.)
  2. Investors should consider shifting their investments from fund families whose voting practices and records are not responsible to fund families with more responsible practices and records, provided the fee and performance characteristics of the funds are comparable. If more responsible fund families are not available — for example, because the investor’s investment is made through an employer-sponsored benefit plan with limited investment choices — the investor should lobby for expanded choices.

Retail investors in mutual funds should critically evaluate how their mutual funds vote on pay issues and hold those funds accountable for votes that enable pay abuses.  New tools such as those available at make this task much easier. Investors should consider shifting their investments to fund families with more responsible practices and records, provided the fee and performance characteristics of the funds are comparable. This is the fourth report produced by The Corporate Library and AFSCME examining mutual fund proxy voting patterns and CEO pay.

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