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July 01, 2011
Shareowner Action Contributes to Sea Change in Corporate Governance
    by Robert Kropp

GovernanceMetrics International reviews the results of the 2011 proxy season thus far, and finds that important corporate governance policies are now enshrined at most S&P 500 companies.

According to the Proxy Season Wrap-Up recently published by GovernanceMetrics International (GMI), the number of shareowner proposals addressing such corporate governance issues as board declassification and the right of shareowners to call special meetings decreased considerably in 2011.

While such a development may appear to represent a step backward for advocates of improved governance, GMI's survey of the 2011 proxy season indicates that in fact the opposite is the case. Because "activists have had a great deal of success in pushing companies to stop using certain defenses," the report states, "there are fewer target companies for these issues in activists' portfolios."

For example, the report reveals that proposals requesting that companies permit shareowners to call special meetings declined to 28 in 2011, from 54 in 2009. The reason, according to GMI, is that "the proportion of S&P 500 companies at which shareholders have no right to call a special meeting is at an all-time low of 49.6 percent."

The presence of poison pills, a strategy once widely used by corporations to discourage hostile takeovers, has declined markedly during the past decade. More than half of S&P 500 companies had such a strategy in 2002, GMI found, while only 16.2% of them now do. As a result, the number of proposals requesting shareowner votes on poison pills declined from five in 2009 to only one in 2011.

An important corporate governance mechanism that remains an issue for shareowner activists is classified, or staggered, boards, in which directors serve overlapping terms. According to the American Corporate Governance Institute (ACGI), "There is significant empirical evidence suggesting that classified boards could be associated with lower valuation and worse performance."

GMI found that by 2011, only one-third of S&P 500 companies still had a classified board, the lowest number since the organization began tracking the trend. As a result, proposals seeking board declassification decreased from 63 in 2009 to 36 in 2011.

In addition, GMI stated, ACGI reported that board declassification proposals at 14 companies were withdrawn in 2011. It appears that boards have good reason for seeking agreement on the issue; shareowner votes in favor of board declassification proposals have averaged 72% in 2011.

"Finally," GMI reported, "Activists have found new outlets for their shareholder rights energy in the issue of action by written consent in lieu of a meeting." Since more than 62% of Russell 1000 companies do not allow shareholders to act by written consent, the fact that proposals calling for such an avenue for action increased from zero in 2009 to 32 in 2011 is certainly significant.

GMI stated, "Written consent rights allow shareholders to take action such as replacing directors or amending the bylaws outside of the normal annual meeting cycle, which is largely under the control of a company's incumbent board."


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