The Election of Corporate Directors:

Transcription

1 The Election of Corporate Directors: What Happens When Shareowners Withhold a Majority of Votes from Director Nominees? Webinar: Review of Research Findings and Q&A Wednesday, August 22, 2012 at 1:00pm ET Investor Responsibility Research Center Institute & GMI Ratings

2 Agenda Introductions Why This Research Research Review Q&A 2

3 Speakers Jon Lukomnik, Executive Director, Investor Responsibility Research Center Institute Kimberly Gladman, CFA, Ph.D., Director of Research and Risk Analytics, GMI Ratings Michelle Lamb, Senior Research Associate, GMI Ratings 3

4 About IRRC Institute Not-for-profit organization established in 2005 Funds and disseminates research at intersection of corporate responsibility and informational needs of investors Examines the capital market context that impacts how investors and companies make decisions All research available free of charge at 4

5 Recent IRRCi Research Environmental, Social and Governance Investing by College and University Endowments in the United States, July 2012 Voting Decisions at US Mutual Funds: How Investors Really Use Proxy Advisors, June 2012 Discovering Shale Gas: An Investor Guide to Hydraulic Fracturing, March 2012 Finding Common Ground on Metrics that Matter, February 2012 Mergers and Acquisitions and the Universal Investor, January 2012 Key Performance Indicators for Investors to Assess Labor & Human Rights Risks Faced by Global Corporations in Supply Chains, January 2012 Corporate Governance of Political Expenditures: 2011 Benchmark Report on S&P 500 Companies, November 2011 The State of Engagement between U.S. Corporations and Shareholders, February

6 Why IRRCi Funded This Research Emperor s New Clothes Open secret that directors who fail to receive majorities still serve Director elections the fundamental accountability mechanism Movement to majority voting standard Disproportionately large capitalization company phenomenon 79% of S&P % of S&P Mid cap 15% of S&P Small cap Practical implications Seating of nominees Serious consideration by Board Communication by Board 6

7 About GMI Ratings Independent provider of research and ratings on environmental, social, governance and accountingrelated risks affecting performance of public companies. ESG ratings for nearly 5,500 companies worldwide incorporate 120 ESG KeyMetrics to help investors assess sustainable investment value of corporations. Accounting and Governance Risk (AGR ) ratings for approximately 18,000 public companies worldwide. Named The Best Independent Corporate Governance Research Provider in the 2012 IRRI survey. 7

8 Definitions Director Election Standards Plurality - elected by a plurality of votes Plurality Plus Resignation Policy - also elected by a plurality but if not a majority of support, required to submit a resignation for consideration Majority: only elected if majority of support Usage of Withhold votes includes Against (an option only valid at Majority standard companies) 8

9 Key Findings 1. Majority withholds more common at small caps (80%) and plurality-standard firms (91%) 2. Only 5% of majority withhold votes lead to director removal 3. Removal more likely with majority or plurality plus resignation standards (50% and 8%, respectively, stepped down) 4. Only half of votes are about best practices, rest companyspecific 5. Almost 20% tip of iceberg in situations of shareholder discontent 6. Majority or plurality plus resignation standards improve disclosure (all of these companies disclose some reaction to votes, vs. 13% of whole sample) 9

10 Sample Description Russell 3000 companies in Snapshot shortly before Russell reconstitution each year 175 majority withhold votes 98 companies 10

11 Incidence of Majority Withhold Votes Occur at less than 2% of companies 80% of votes were at Russell 2000 companies (yet R2000 was only 66% of sample) 91% were at companies with plurality director election standards 11

12 Reasons for Majority Withhold Votes 12

13 Shareholder Discontent : Where withholds tip of iceberg (18%) Example Companies: Advanced Analogic 2009, 2010 over 30% WH for full board, 2011 proxy contest, 2012 acquisition Chesapeake two directors with majority WH after scandal; major governance restructuring, split CEO/ COB Barnes Group over 45% WH in 2011 and 2012, high support of indep Chair proposal in 2012 Ferro Corp over 15% WH in 2011 for full slate, again in

14 Director Departures 9 directors (5%) resigned shortly after meeting 7 others did not stand for re-election at next AGM (not necessarily because of vote) 50% of companies with Majority standards, 8% with Plurality Plus 14

15 Disclosure Regarding Majority Withhold Votes 15

16 Disclosure Examples Annaly (Majority): unelected director holds over Hospitality Properties Trust (Majority): director appointed to the vacancy created by resignation IRIS (Plurality Plus Resignation): rejected resignations but responded to vote 16

17 Disclosure Examples (cont.) Vital Images (Plurality) full explanation of reasons for the overcommitted director s vote results and board decision Note: one third of majority and plurality plus group still gave no reason for the majority withhold votes 17

18 Governance Changes Limited poison pill removal only at IRIS, others made no change Compensation in most cases where compensation was issue, company did make changes; positive examples include The Pantry, Stewart Info Services, CIRCOR Five changed director election standards Many companies made no changes 18

19 Performance Study Inconclusive due to small sample size, but possibly leading indicator of peer underperformance More companies underperformed than outperformed their peer group in year following majority withhold votes (58% underperformed) Median relative (under)performance was -5.5% 19

20 Conclusions 1. Companies should not dismiss withhold votes only half are about best practices 2. Investors should press for majority voting standards such firms tend to act in higher numbers on vote results 3. Performance analysis results warrant further study 20

21 Questions? 21

22 Contacts IRRC Institute Jon Lukomnik Executive Director GMI Ratings Kimberly Gladman, CFA, Ph.D. Director, Research & Risk Analytics