Kevin LaCroix does a masterly job of summing up the current governance arena in his latest blog for The D&O Diary, Governance Perspective: Current Bearings, Future Directions. Each of his points lead to the conclusion that governance factors are leading indicators of litigation risk and could potentially lead to higher D&O insurance fees for companies demonstrating heightened governance risk.
He summarizes the main points of current interest which are:
- Say on Pay
- Proxy access
- Board declassification
- Majority voting
- Compensation ratios
- Clawbacks
As with Say on Pay, we are up to 19 majority votes against management resolutions, according to Broc Romanek's blog. And according to our calculations, we will see at least 35 by the end of the current annual meeting season. This is a level of unrest previously unseen in any country that has Say on Pay. Shareholders’ ability to analyze compensation policies at companies is becoming ever more essential and the range of opinion sources needs to be as wide as possible from our Executive Pay Scorecards, to Board Analyst profiles, to GMI Company Reports.
Proxy access is stalled at the moment due to the Business Roundtable/U.S. Chamber of Commerce’s lawsuit, but, as Kevin notes, this will only be a temporary stay. Shareholders will have access, and they will need to access independent directors from a pool such as the one being developed by us for GMI's 3D director database.
While Dodd-Frank has inspired moves forward on the first two issues, the second two – although in and out of the legislative moves that eventually became Dodd-Frank – have been left to shareholders to pressure companies to introduce. The weight of the majority will soon force most widely-held companies to introduce majority voting and to declassify their boards, but it is going to be more of an problem at controlled companies where public shareholders do not have access to a majority of the votes. Campaigns like those Nell Minow referred to in a recent BNET posting being run by the American Corporate Governance Institute, headed by Lucian Bebchuk, are showing great success. Those companies still resisting declassification and majority voting can be found by GMI clients searching here and here.
The last two issues are back to Dodd-Frank, compensation ratios and clawbacks. Already compensation ratios (the ratio between the CEO’s pay and median worker pay) are being attacked as impossibly burdensome to produce, of little use, and potentially divisive. It seems unlikely that the push to repeal will be successful, but not impossible. On the other hand, a single year of such disclosures would tell shareholders an enormous amount about the widening gap between pay levels. As for clawbacks, as research from The Corporate Library (a GMI company) shows, companies have been assiduous about introducing their own, though it is far from universal, and, although in the majority, the toughest clawback provisions have not been adopted by all companies that have instituted one.
Kevin concludes, quite correctly in our opinion, that this is all going to lead to heightened scrutiny, increased risk of litigation, and even changing judicial attitudes.
Paul Hodgson – Senior Research Associate
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