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July 23, 2010
Will 2011 Be a Watershed Year for Corporate Governance?
    by Robert Kropp talks with James McRitchie of about corporate governance and the 2010 proxy season. Third of a three-part series.

Corporate governance, one of the three pillars of the environmental, social, and governance (ESG) issues that can, according to the United Nations' Principles for Responsible Investment (PRI), "affect the performance of investment portfolios," has received a great deal of attention this year, and not just from activist shareowners.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law this week by President Obama, contains a number of provisions that address corporate governance and the right of shareowners to play a meaningful role in the governance of corporations. Perhaps of most importance to activist shareowners is the provision in the bill that addresses proxy access, or the ability of shareowners to include nominees for corporate boards of directors in proxy solicitation materials.

The bill requires companies to allow for shareowner votes on executive compensation, although in the final version of the bill the provision is watered down somewhat to require such a vote to be held as seldom as every three years.

The bill also directs the Securities and Exchange Commission (SEC) to eliminate broker discretionary voting for elections of corporate directors, and establishes an Office of the Investor Advocate (OIA) within the SEC to promote investor interests and assist retail, or individual, investors.

Significant issues that were not included in the final version of the bill include a majority voting standard, which would require that nominees for corporate boards of directors receive a majority vote to win a seat.

Of course, activist shareowners have had their share of triumphs this year as well. At several companies, a majority of shareowner votes were withheld from directors who fail to take shareowner interests into account. On the issue of executive compensation, a majority of shareowners voted to adopt a say-on-pay proposal at Chesapeake Energy, while at Motorola, a management proposal to ratify executive compensation received only 45.7% support.

Why is the issue of corporate governance of such critical importance? spoke with James McRitchie, the founder and publisher of, which since 1995 has been an online source of information about corporate governance and shareowner activism.

"Corporate governance is fundamental because it's important to elect directors, but it has been difficult to do so even though they are supposed to represent us," McRitchie said. "Taking BP as an example, governance is supposed to make sure that corporations are more democratically run and controlled."

Calling a majority voting standard "one of the critical things that did not make it into the final version of the financial reform bill," McRitchie said, "From a shareowner perspective, we have largely attained majority voting at the huge companies, more than two-thirds of the S&P500, but because it did not make it into the bill we have to fight for it at every company."

Asked about the 2010 proxy season, McRitchie said, "It wasn't as earth-shattering as I'd hoped it would be, because I thought the elimination of broker voting would lead to more activity than there was. Given the high expectations, it wasn't substantially different from last year. But it wasn't too long ago that we first won a majority vote on a shareowner proposal, so looking at the big picture I think we're making substantial progress."

McRitchie commended as "a very significant issue" the efforts of
Pax World, which withheld votes from 74 board slates because the companies did not nominate any women directors. Citing 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," Joe Keefe, President and CEO of Pax World, stated, "Companies that embrace gender diversity and women's empowerment are, in our view, simply better long-term investments."

Yet, according to McRitchie, the most important development of the proxy season did not occur at the annual general meetings of companies, but in the courts. The Apache v. Chevedden case came about after John Chevedden, a retail investor and shareowner activist, filed a proposal at Apache addressing a majority voting standard.

Apache brought the case against Chevedden instead of requesting a no-action letter from the SEC, because, as McRitchie observed, "They wouldn't have gotten it."

In the court case, the judge ruled that Apache could exclude Chevedden's proposal, because he missed a deadline for presenting evidence that he owned the company's stock. Nevertheless, as Ted Allen wrote in a
RiskMetrics blog post in March, "Shareholder advocates are praising the judge's decision as a dramatic win that will help investors in future disputes with companies over investor resolutions."

McRitchie said, "The judge, not knowing much about securities law, ruled that they could throw this proposal out this year because there were questions as to who actually owns the stock."

"The SEC issues a lot of no-action letters based on technicalities, and not on the issues addressed in the proposals," he continued. "But there have been many no-action requests made since the court case that cite it, and the SEC has thrown them all out. It didn't create the kind of precedent that Apache had hoped it would."

McRitchie delved further back into corporate governance history to illustrate the improvements in the SEC's protection of investors' interests since Mary Schapiro became Chairman under President Obama, referring to a 2005 court case addressing inconsistencies in the Commission's issuance of no-action letters.

The case, AFSCE v. AIG, resulted in a finding that the SEC had been inconsistent in interpreting Rule 14a-8(i), which allows companies to exclude proposals from corporate proxy statements.

"I was writing before that lawsuit that the SEC had switched positions on proxy access without rulemaking, which was what that lawsuit found," McRitchie said. "I hypothesized then that the reason the SEC switched positions was because shareowners were about to win on some proposals."

"So when we look back at the history, 2010 was a great year," he continued.

Summing up the proxy season, McRitchie said, "We fought the battle in a rear guard measure with Apache, and this year we made substantial progress on the issue of proxy access. Defending what we already have, and what we're going to attain next year, was more important than the individual proposals that were out there this year."


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