Editor: Please start our discussion with an overview of the Society’s activities and advocacy efforts this past year.
Wagner: The Society was very active on a variety of fronts this past year, notably, our advocacy on Capitol Hill and with the SEC on matters such as Dodd-Frank and the JOBS Act, and in proactively interfacing with the New York Stock Exchange and NASDAQ. Darla Stuckey, who serves as senior vice president - Policy and Advocacy at the Society, has been very engaged on those issues as well as with PCAOB (Public Company Accounting Oversight Board) issues.
We recently met with all of the current SEC commissioners and had very good discussions about upcoming rulemaking. Obviously, we should expect changes when Mary Jo White becomes chair, but clearly there’s a lot of interest in completing the Dodd-Frank rulemaking process – a view that Mary Jo White echoed during her confirmation hearing.
We’ve also been working hard to create value for our members by enhancing the Society’s educational programs and website features and by providing more support for our chapters. During a strategic planning session last year, our board focused on ensuring that our mission statement remains accurate and relevant in today’s world. Given the many developments over the past five years, we’re also making it a priority to stay up-to-date with technological developments in the distribution of content including educational programming.
Editor: What are the top issues and developments of this year’s proxy season?
Bertsch: I believe the most important proxy issue for another year will be say-on-pay. While the subject has become tired for some people, it remains the major proxy change, and we’re in the midst of a multi-year process of working out how to engage each other and make this a productive enterprise.
We’ve already seen strong shareholder support on certain process issues – notably with respect to board declassification. The early votes here are averaging around 80 percent, and in my view, we’ve passed the tipping point on this issue. A very large majority of shareholders support annual election of all directors, and while some firms continue to have staggered elections, the days of this practice are probably numbered for widely held companies.
There has been interesting reluctance on other proposals that could be seen as more meddlesome, and less tethered to the shareholder franchise. For example, a shareholder proposal for board independence at Disney didn’t get a very high vote, even though there had been some controversy over the company’s decision to recombine the roles of CEO and chairman. Disney might be one of the preseason bellweathers.
Also at Disney, proxy access got a much lower vote this year than it did last year at two companies. Support seems to correlate significantly with company performance, and Disney has been performing well, so it’s an interesting development that, in the absence of performance issues, many shareholders are reluctant to impose that structure.
Many corporate secretaries have found certain shareholder proposals to be ill-founded or even knee-jerk in nature. The best example may be proposals for written consent rights, an issue that was raised in the ‘90s and has resurfaced in the last three or four years. Most are familiar with action by boards by unanimous written consent, without meeting. Certain shareholder activists have submitted shareholder proposals supporting empowerment of holders of a majority of shares to force action through written consent. It is clear why a majority shareholder might like this. It is less clear why widely dispersed shareholders would add written consent rights to the investor rights toolkit, given the potential for misuse and the preferability of meeting processes. I was struck by a preseason 2013 vote at Johnson Controls that was substantially lower than support levels we have seen for many written consent proposals.
Editor: Please talk through the issues pertaining to the balance of power within the shareholder voting process and possible concerns about the voice of small holders.
Bertsch: A key factor is voter turnout. Institutional voter turnout is much greater than that for individuals, which can skew voting results. U.S. institutional investors are more or less required to vote in order to carry out fiduciary duties, which causes very high turnout. Individuals, on the other hand, tend not to vote and are even less engaged with the rise of electronic communications. But technology can help address the problem as well. We would love to see all brokers provide easy proxy-voting mechanisms for brokerage clients, as Merrill Lynch does. We also are hopeful about the potential for simplified voting through mobile devices to increase turnout.
Editor: What are some examples of improvements to the disclosure process this year?
Bertsch: A large majority of companies are now providing a summary of their compensation disclosures and analysis (CD&A). The CD&A requirements were enacted a few years ago and can be quite daunting for the writer and reader alike. Issuers must comply with elaborate rules, but they also should be molding the proxy statement as an effective communications document.
We are seeing more companies this year do a different summary – a high-level executive summary of the entire proxy statement, pulling major points and highlighting key issues. While companies certainly must be careful to ensure that the summary is honest and consistent with the rest of the proxy statement, the SEC does not discourage folks from highlighting the key points. In fact, because big investors have hundreds of proxy disclosures to manage and often complain about the length of disclosures, it’s desirable for companies to create more reader-friendly documents. This might include the increased use of color and visuals – graphs, charts and two-column format for text, which are easier for the eye to scan.
Editor: Have proxy advisory firms contributed to the dialogue about say-on-pay and other proxy issues?
Bertsch: They have a clear role to play. I was on the other side, having done proxy voting at an asset management firm. I understand that it’s hard to do and requires a systematic approach, which is a beneficial tool that proxy advisory firms certainly can provide. On the other hand, in their role as an intermediary, these firms can stand in the way of important communication. Proxy advisory firms do encourage issuers to communicate directly with their investors, but they play a big role; thus, for pragmatic reasons, many issuers feel it really is ISS and Glass Lewis that must receive attention. In my view, boards would do well to pay some, but not too much, attention to these firms.
What worries me about say-on-pay particularly is that proxy advisors tend to be overly mechanical; they don’t have a real nuanced understanding of the company and of the industry, which is especially important for the executive pay issue. Voting on board declassification, for instance, is more of a procedural issue and not particularly dependent on industry spin or complicated analysis. In contrast, executive pay is very particular to the company; therefore, by imposing restrictions that don’t make sense, voters might push companies in the wrong direction and can actually damage a company’s ability to thrive. Put simply, details matter on executive pay, so the broad and theoretical approach taken by proxy firms is not optimal on this issue.
Editor: Given that institutional investors may lack the resources to properly vet all proxy issues, many rely on ISS to provide guidance. What are your thoughts about the overall influence of proxy advisory firms?
Bertsch: We see the whole spectrum of options: investing institutions that follow ISS or Glass Lewis to the letter and make no secret about it; to firms that claim to be making independent decisions but then vote with proxy advisors across the board; to firms that legitimately claim to use the proxy advisors as one of many resources, in which case, we will see significant diversion in the actual voting behavior; to firms that say they don’t use proxy advisors at all.
It’s especially tough for the index houses because they don’t have portfolio managers or analysts who are really focused on the company; the whole point for them is to follow market indices. Groups like BlackRock (including on the indexing side), State Street and Vanguard have been stepping up and trying to increase their research capacity, but it’s a huge challenge to develop their own independent view without portfolio managers and analysts (although BlackRock makes some use of the fundamental investing side of the house). For houses that do have fundamental investment staff, there’s been some increase in integration between the proxy voting staff and the portfolio managers, and that’s a good thing because portfolio managers will know the companies better, although they may be less familiar with corporate governance best practices and norms.
Editor: Let’s talk about shareholder litigation. Are companies developing proxy-related strategies that are specifically engineered around this issue?
Bertsch: Certainly companies are trying to generate disclosures that enable them to avoid lawsuits; however, we know that M&A transactions are nearly guaranteed to generate litigation. It approaches 100 percent. In my view, some of these are strike suits with little merit, designed to generate fees for law firms. M&A transactions are complex. They present many opportunities for complaints and time is of the essence; therefore, companies are motivated to deal with these issues and pay what’s necessary to get through the process. So we’ve been disturbed over the last year with the growth of “copy-cat” suits around annual meeting proxies, which, like merger proxies, are now a target for shareholder litigation. To me, it’s just a terrible use of the system.
Editor: So do you see these actions as being largely opportunistic?
Bertsch: Very much so. I haven’t seen much justification for them. An earlier round of lawsuits that attempted to use negative say-on-pay votes as the basis for litigation did poorly, and now seem to be on the wane. Remember, when enacting say-on-pay, Dodd-Frank’s stated intention was not to increase liability, so it’s understandable that these lawsuits were very aggravating to companies.
Editor: Please talk about the corporate secretary's current and expanding role.
Wagner: I believe the corporate secretary’s role is unique in that he or she interfaces closely with both executive management and the board of directors, while not necessarily being a part of either group in the sense of having a seat at the table. Corporate secretaries participate from a governance perspective, and the increasing focus on governance has elevated the role even further.
Many Society members who are corporate secretaries also serve as securities lawyers for their companies, and that continues to be a challenging role as Congress dictates new disclosure requirements and the SEC promulgates the associated rules. For instance, a number of public companies are struggling with new disclosure requirements relating to conflict minerals and payments made to U.S. or foreign governments by resource extracting companies. In addition, some complex Dodd-Frank rulemaking, such as pay ratio disclosure, is not yet complete. Corporate secretaries have a key role in communicating these developments to executive management and the board.
Many companies have started to merge the compliance areas into the corporate secretary’s duties – I’ve noticed that a number of Society members have also started to wear the chief compliance officer hat. The corporate secretary is generally viewed as someone with broad knowledge of both business and governance issues and so is often a good fit for the compliance role.
Editor: Please close our discussion by telling us what’s ahead for the Society.
Wagner. We are excited about the direction the Society is taking. We expanded our talent base at the national office with the addition of Ken Bertsch a few years ago and more recently with Teresa Webb as director of membership and marketing and David Martin as VP for business development and research. We now have a fully staffed national office, which helps us better deliver value to our members.
We’re utilizing our new website to help meet member needs, for example with webcasts that allow the convenient option to attend remotely. We also have a feature on our website called the “Society Huddle” where individuals can ask questions of fellow members on a broad range of issues, from board portals to specific proxy or disclosure issues.
When I joined the Society 13 years ago, exchanging views was a matter of picking up the telephone and calling a fellow member whom you may have met at a national or regional conference. The new website capability has dramatically increased member interaction outside of our conferences. It’s very easy to use, and it allows you to reach many different people at one time, so we’re really excited about this benefit for our members.
The Society’s national conference in Seattle is coming up on July 10-13, and the theme for this year is “Governance Wired,” which references the interaction of technology trends with governance. We’ve got 30 breakout sessions on a variety of issues. One of the highlights of the conference will be a keynote interview with Alaska Air Chairman Bill Ayer on the topic of “transformation through turbulence.” We are in the process of lining up additional speakers and are expecting participation from various members of the SEC, including from the Division of Corporation Finance.
Beyond the Society's national conference, I will mention our continuing work with the SEC and other regulators to promote approaches that are pragmatic and that benefit investors in cost-effective ways. We typically meet twice per year with the SEC staff, and they really appreciate the practical input we can provide from our perspective as corporate secretaries. We often poll our members to collect information for the SEC that is helpful to them in the rulemaking process. This is a very collaborative and longstanding relationship that we hope will continue.
Bertsch: Finally, I would like to invite your readers to visit the Society’s website. There’s good information available for all, and members can access a wealth of documents as well as special features like the Society Huddle. Please visit us at http://www.governanceprofessionals.org.