For film buffs, The Dirty Dozen—the 1967 classic
with Lee Marvin, Charles Bronson and Jim Brown,
not the various retreads—is an iconic movie. For
pop culture devotees, the phrase conjures up countless year-end lists running down the dozen “worst”
of this or that.
For corporate directors, the following “dirty
dozen” questions offer a rudimentary early warning
system for the coming proxy season. While some of
these questions touch on perennial concerns (such
annual elections and majority voting), the primary
focus is the new challenges, including a possible
sophomore slump in vote support on say on pay,
renewed calls for mandatory auditor rotation and a dog’s breakfast of proxy access resolutions. Whether
the 2012 season gets really messy, however, largely
hinges on two uncertainties: the direction of the
market’s next mood swing and potential seepage
from the looming U.S. presidential campaign.
1. Are your owners optimistic or
pessimistic heading into season?
At the outset of 2012, most of the warning signs
for board service becoming fodder for continued
scrutiny were in place. Shareholder returns last
year were largely flattened by the ongoing global
economic crisis. Market volatility, fueled by investors’
anxiety, is off the charts. Dividend pay- outs remain low. Unemployment is sky-high, growth weak.
Meanwhile, the anti-elite Occupy Wall Street (OWS) movement
and other corporate bashers paint corporate directors and
executives as non-innocent bystanders who have been content to
hoard cash, cut costs (read: jobs) and wring their hands over regulations
while the economy burned. With all signs pointing to 2012
disclosures of big paydays for many CEOs and other top corporate
managers despite 2011’s anemic returns, look for OWS and its cohorts
to do their best to brew up an anti-board backlash.
Will this wealth of bad economic news and public animosity
toward economic elites translate into a contentious meeting
season? In years past, preseason opinion polls designed to measure
shareholders’ mood swings proved highly predictive of a
proxy season’s potency. An upbeat investor class entering 2011,
for example, accurately forecasted a relatively mild annual
This year, however, poll-land is shrouded in fog. In fact, the
key survey data show a sharp divergence in attitudes between institutional
owners, who appear to be optimistic, and individual
investors, who are nearly as downbeat as they were at the depths
of 2009’s market meltdown.
Institutional investors’ confidence
enters the year with positive
momentum. The State Street
Investor Confidence Index,
which measures confidence/risk
appetite quantitatively by analyzing
buy/sell patterns, steadily
rose throughout second half of
2011. Global investor confidence
(a reading of 100 is considered
neutral) hovered at 99.3 in December,
up from the August reading of 88.1.
Somewhat paradoxically, individual investors’ confidence appears
to have been shattered by months of market gyrations. The
Well Fargo/Gallup Investor and Retirement Index plunged to –
in September from 33 in May. This freefall put the Wells Fargo/
Gallup Index near its all-time record low (–64) set in February
2009, on the eve of the equity markets hitting rock bottom. (The
index peaked at a whopping 178 in January 2000, just before the
dot-com bubble burst.) How will this investor optimism gap play
out in terms of proxy voting behavior and shareholder activism?
Mainstream money managers and other investment professionals
may voice frustration over market volatility, but they
generally view uncertainty as opportunity. Their more activist
cousins—large public employee and labor union funds, som non–U.S. investment managers and hedge funds—view boardroom
vulnerability as opportunity. Accordingly, these activists appear
to be on track to boost their efforts to push reform measures
during the coming proxy season.
For smaller investors, massive market fluctuations have bred
uncertainty. Notably, two out of three investors (65 percent) told
the Wells Fargo/Gallup Index pollsters that they feel “little or no
control” in their efforts to build their retirement savings. As a result,
look for some individual investors to take their frustrations
out on board members during annual meeting season.
Prior to the season, directors need to take the temperature of
their shareholder constituents. Did company performance lag
the market? Is the company’s stock price way off its LTM highs?
If the answers to these questions are yes, beware.
2. Is my board in the say-on-pay red zone?
The big question entering the sophomore say-on-pay campaign
surrounds potential electoral escalation.
With the Dodd-Frank Act mandating advisory votes on compensation
at most U.S. companies in 2011, shareholders were
provided with an alternative avenue
to express their views on
corporate pay programs. Taking
advantage of this pressure valve,
investors largely ignored members
of compensation committees
and other directors when they had
concerns over pay levels. Instead,
proxy voters used the advisory pay
votes to send warnings to board
members. Many investors who
voted “nay” on say on pay in 2011
may seek to expel board members at this year’s meetings if they
feel that their concerns about compensation have been ignored.
Accordingly, directors must determine whether last year’s sayon-
pay results put them in the red zone—where angry voters
could score significant negative tallies against board members.
ISS’s 2011–2012 Policy Survey indicates that investors’ views vary
on where this imaginary line should be drawn. The biggest bloc
(36 percent) of shareholder respondents said that they expect
boardroom reassurances whenever overall say-on-pay opposition
tops 20 percent. Another 24 percent of the investors raise
the negative vote bar to 30 percent, but half that number (12
percent) actually lower the hurdle to opposition in excess of 10
percent. All told, nearly three-quarters (72 percent) of investor
respondents indicated that an explicit response from the board......
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