Recently in Corporate Governance Category

Today's Wall Street Journal featured a piece which discussed the failure of tactics employed by organized labor and activist groups in an effort to "kill business speech" through the proxy proposal process. These particular proposals at issue seek to limit, burden or in some cases disrupt legitimate corporate political activity.

The Journal, citing Manhattan Institute's Proxy Monitor project, reported:

Support for political proxy proposals has fallen significantly at other big companies as well. Overall, according to the Manhattan Institute's Proxy Monitor, in 2012 political spending or lobbying proposals have received an average shareholder vote of 18.3%, compared with 22.6% last year. Could shareholders be getting wise to the political charade?

The disclosure gambit is key to the left's strategy of intimidating businesses from spending on politics to compete with unions and liberal billionaires like Peter Lewis of Progressive insurance. The political bludgeoning will continue, but at least this year the effort to vilify corporations that have exercised their First Amendment rights isn't getting the kind of traction the activists had in mind.

Our own Jim Copland, director of the Proxy Monitor project and Manhattan Institute's Center for Legal Policy, predicted an increase in political spending and lobbying related proposals and is closely tracking the trend in his regular findings.

In his recent finding, Jim discovered that:

Looking at the composition of shareholder proposals with more specificity, a plurality of all proposals introduced to date in 2012 involve corporate disclosure of political spending or lobbying activities, followed by those related to executive compensation and those seeking to separate the positions of board chairman and chief executive officer...

The increase in the share of proposals related to political spending or lobbying is notable and in keeping with a trend witnessed since the Supreme Court's controversial 2010 Citizens United decision, which held that corporate political speech was protected by the First Amendment. In 2012, fully 26 percent of Fortune 200 companies to have filed proxy materials have faced a proposal related to political spending or lobbying, an all-time high.

As the Journal recognized, despite the increase in volume, it doesn't seem that these political spending and lobbying proposals are having the desired effect. At least not yet.

On last Thursday and Friday, I was in Charlotte for the spring meeting of the Civil Justice Task Force of the American Legislative Exchange Council, to which I presented my thoughts on how today’s securities litigation affected states. Uptown Charlotte was visited by various protesters affiliated with labor unions, the Occupy movement, and other left-leaning causes who were objecting to ALEC’s meeting and at the earlier-in-the-week annual shareholder meeting for Bank of America.

The protests against ALEC have been led by Van Jones’s Color of Change organization, which has attacked the free-market organization for drafting “stand your ground” model legislation arguably (though not really) at issue in the Trayvon Martin shooting. (Note: Florida’s stand-your-ground law pre-dates ALEC’s model bill, and the group has now disbanded the task force responsible for advancing that model legislation.) Like Ted, I’ve found the left’s attacks on ALEC to be profoundly disingenuous. First, it’s clearly the case that those opposed to ALEC’s reform work—in the case of the Civil Justice Task Force, for instance, the American Association for Justice, formerly known as the Association of Trial Lawyers of America—offer up legislation and legislative amendments to further their own interests. Second, if ALEC didn’t exist, corporations would still offer draft legislation and legislative amendments to further their own interests; it just wouldn’t be vetted by a broad group including legislators across several states and thinkers like myself, my former colleague and Point of Law founding editor Walter Olson (now at the Cato Institute), our editor Ted Frank and others at his Center for Class Action Fairness, and ALEC Civil Justice Task Force co-chair Victor Schwartz, who edits the most-used law school casebook on torts. Exactly how is ALEC supposed to be an unusually nefarious force, apart from the fact that its critics disagree with its agenda?

TK Kerstetter, president of Corporate Board Member, hosts our very own James Copland on This Week in the Boardroom to discuss shareholder proposals in the current proxy season. Jim offers insight on what to expect and provides an overview of this very important corporate governance issue.

James Copland, director of Manhattan Institute's Center for Legal Policy, participated in a webinar moderated by Paul Atkins, former SEC Commissioner, (2002-2008,) on shareholder activism concerning corporate spending disclosures.

Other participants included:

Brian Cartwright - Role of the SEC; 14a-8 process; Home Depot Letter; Academic rulemaking petition, counter letter.

Andrew Pincus - New ISS standard; Activist agenda.

William Walton - Management & Board perspective; Fiduciary responsibility of management.

In the first finding of the 2012 proxy season, James Copland, director of Manhattan Institute's Center for Legal Policy, discovered quantitative evidence via the Proxy Monitor database that institutional shareholders appear to be relying heavily upon Institutional Shareholder Services (ISS), the institutional shareholder advisory firm, for decisions on executive compensation packages. Copland notes that most shareholder proposals thus far in 2012 are related to corporate governance, rather than executive compensation or social or political issues. Among the Fortune 200 companies to have held their annual meetings to date, the only shareholder proposals to gain majority support are those to declassify the board and to require majority voting for directors.

As evidenced by the recent Wall Street Journal article, The Corporate Disclosure Assault: Unions and liberal activists are using proxy rules to attack business political speech, the shareholder activism issue has generated widespread concern. Proxy Monitor plans to respond to that concern with up-to-date tracking and analysis of the 2012 proxy season.

In a recent op-ed, Copland expressed his concern for the increasing influence of ISS in the current season:

Since ISS's position almost certainly helped to influence the markedly different shareholder votes on pay packages, it would seem that an unintended side effect of Dodd-Frank-mandated say-on-pay votes is to give the proxy advisory firm a major "gatekeeper" role over executive pay. ISS's strengthened position might be enhanced further if institutional investors heed its newly promulgated advice to challenge management to respond whenever fewer than 70 percent of shareholders approve of board-proposed compensation packages--a position that would seem to be rather self-fulfilling given ISS's influence over the votes in the first place. Given that many of ISS's clients are labor-union pension funds and social-investing funds that may be motivated by issues other than maximizing shareholder value--and have respectively sponsored one-third and one-fifth of all shareholder proposals to date in 2012--I'll be watching the proxy advisory firm's role closely.

What else will I be watching in the upcoming annual meeting season? I'll be paying particular attention to certain classes of shareholder proposals in which union and social funds have taken a special interest:

Point of Law will be tracking the monthly Findings on ProxyMonitor.org to report on trends during this very important 2012 proxy season.

In a new report, James Copland, director of the Manhattan Institute's Center for Legal Policy, highlights what to watch for in 2012 in the world of shareholder activism. Drawing upon new data from the Proxy Monitor database, Copland identifies alarming trends in shareholder proposals, predominantly sought by labor-union pension funds. As the proxy season kicks off this month, Copland suggests that those interested in corporate governance should particularly follow shareholder proposals related to shareholder advisory votes on executive compensation, shareholder proposals involving corporate political spending, shareholder proposals calling for independent board chairmen, and shareholder proposals seeking proxy ballot access for director nominees. (Boardmember.com article)

ProxyMonitor.org is a project of the Manhattan Institute's Center for Legal Policy and is designed to shed light on shareholder activity. Central to ProxyMonitor.org is the Proxy Monitor public web database which has been updated to include shareholder proposal information for the Fortune 200 companies from January 2006 to August 2011. Proposals are searchable by company, year, proposal type, sub-proposal type, proponents, proponent type and industry. Searches are exportable to Excel and can be graphed to reveal trends in shareholder activity.

For the 2012 proxy season, Proxy Monitor will again feature its scorecard which will include, company names and meeting dates, proposal title and type (general and specific), proponent title and type (general and specific), and votes for each proposal in real time. Point of Law will feature commentary and links to newly discovered trends and findings as the proxy season gets into full swing.

In recent commentary, senior attorney and counsel for special projects with the Competitive Enterprise Institute, Hans Bader, articulated a compelling argument against the European Union's push for gender quotas for corporate boards. Several European nations including Spain and France already impose 40-percent quotas for corporate boards and EU officials are moving toward implementing a mandate on all member nations even those that have resisted interfering with corporate governance.

In his entry, Hans recognizes the potential disaster in widespread implementation of a discriminatory gender quota:

Gender quotas could provide a big boost for nepotism on corporate boards in some fields. In sectors like metallurgical engineering, there are just not very many women with the required knowledge and expertise to sit on a corporate board. So a company in such a sector, confronted with a gender quota, will probably pick female relatives of existing corporate insiders to sit on the board. If you have to put someone who is largely ignorant of your business on your board, it might as well be someone who will do what others on the board with more knowledge advise them to do -- and they are more likely to take your advice if they are your relative than if they are not related to you.

Years ago, Harvard Law professor Hal Scott suggested that New York financial markets could regain competitiveness by permitting securities issuers to opt out of the enormously wasteful securities litigation scam, whereby, on average, diversified shareholders had money transferred from the left-hand pocket to the right-hand pocket with enormous commissions taken by plaintiffs' and defense attorneys.

This year, privately-held Carlyle suggested it might make good on the idea with its IPO, which had a mandatory arbitration clause for such disputes. The SEC had previously, without much legal authority, blocked a less-restrictive arbitration clause in an IPO in the 1980s by Franklin First Financial, but Carlyle is deep-pocketed enough to have defended itself against the now Democratic-dominated regulators, which, indeed apparently opposed.

Shareholders who think class actions are good things can invest in one of the thousands of other securities out there; those who think class actions divert shareholder resources to attorneys now have a new, improved, investment option. Let the market decide which type of stock should trade at a premium and which at a discount. Even if trial-lawyer-controlled unions and pension funds boycotted the IPO, it shouldn't be enough by itself to depress the stock price, and would have had the side benefit of fewer frivolous proxy fights. (Moreover, Carlyle was to be a limited partnership, rather than a corporation, even further reducing the issue of fiduciary duties.)

Given that the DOJ's and SEC's criminal and civil penalties still applied, and such penalties are sufficiently draconian as to already create principal-agent problems between officers, directors, and shareholders, and given that well over 90% of meritorious civil securities litigation is simply piling on existing public disclosures, it's hard to say what permitting parasitical—or worse, meritless—civil litigation adds to investor benefit. One would thus expect Carlyle stock to trade at a premium: the boom in the Rule 144A private market suggests how beneficial it is for business entities to avoid the additional marginal litigation and regulation expense. See also Susan Beck.

But the litigation lobby was not satisfied with the simple possibility of letting investors have choice: only through monopoly power would investors willingly continue to let billions of dollars a year be unfairly siphoned into trial lawyers' pockets. Their water-carriers in Congress and the press spoke out loudly against the offering, and Carlyle has since backed down. AAJ declared victory, and Professor Stephen Bainbridge is understandably upset at being misquoted: but given that the trial-lawyer lobby was dishonest in getting the arbitration clause struck down, one can hardly be surprised that they continue to be dishonest afterwards.

Separately, strike another nail in the coffin for Professor Fitzpatrick's theory that the Supreme Court's recent jurisprudence will lead to the death of class actions.

It would be interesting to see which pension fund decision-makers with both ties to trial lawyers and fiduciary duties to fund participants lobbied against the clause; it would be entertaining if a fundholder brought a derivative suit on the issue. After all, such litigation is always a good, right?

Alison Frankel finds it problematic that a derivative shareholder suit against the Johnson & Johnson board was thrown out before it could incur millions of dollars of discovery costs and an extortionate settlement. I'm more sanguine.

Let's leave aside the fact that the underlying allegations are mere piling on: the lawsuit stemmed from the settlement of criminal allegations over Risperdal marketing and similar problems. Let's also leave aside the fact that every major pharmaceutical company is entirely at the mercy of prosecutors, and thus a criminal settlement is evidence of nothing other than ambitious prosecutors: given the fact that any criminal sanctions would cost the company tens of billions of dollars, no global pharmaceutical company is ever going to risk defending itself when prosecutors come after it, and the only question is the terms of surrender, given that even a risk-neutral set of executives would refuse to go to trial on criminal charges that they had a 95% chance of winning.

The issue is this: first, any corporate law is going to have to balance false negatives (valid suits against directors being thrown out prematurely) and false positives (invalid suits against directors costing tens of millions of dollars in time and money to resolve). Any opening up of the courtroom doors to challenge directors will reduce false negatives at the expense of more false positives; any increase in the burden to bring suit will reduce false positives at the expense of more false negatives.

Which brings us to my second point: the fact of the matter is that being a shareholder is a voluntary transaction. Different corporations can incorporate under different state laws that balance the interest of preventing false positives against the interest of false negatives. Shareholders can vote with their feet. If Frankel or other shareholders feel that New Jersey law is too protective of corrupt or incompetent directors, they can readily vote with their checkbooks to instead invest in companies incorporated in states that allow Bernstein Litowitz and Robbins Geller fishing expeditions. Such capital flows create premiums for incorporating in states that strike a good balance and penalties for incorporating in states that make it too easy or too hard to sue. Even if the legal standard here produced a false negative (and it's hard to say that it did if one believes that federal prosecutions of pharmaceutical companies are frequently just a lawless arbitrary expropriative tax that can strike good companies as easily as bad ones), it's good for New Jersey corporations in the systemic sense that the legal gatekeeping standard for such derivative suits is upheld.

See also Larry Ribstein and Erin O'Hara, The Law Market.

Jim Copland speaks with Harvey Pitt, former chairman of the Securities and Exchange Commission, about shareholder proposal trends over the last four years and how the SEC has changed since Dodd-Frank.

Relatedly, the Manhattan Institute releases its Fall 2011 Proxy Monitor report. Among its findings: shareholder proposals are sponsored by a small subset of shareholders; labor unions' shareholder activism appears potentially linked to union organizing campaigns and motivated by concerns other than shareholder return. "On balance, the empirical evidence analyzed in this report tends to throw into question the push for 'shareholder democracy' and suggests that shareholder activism in the form of shareholder proposals submitted on the proxy ballots of publicly traded companies may be more a vehicle for interest-group capture of corporations rather than for mitigating agency costs and improving shareholder returns."

Meanwhile, "say on pay" is already having an adverse effect on one corporation: Cincinnati Bell was one of the very tiny minority of companies whose "say on pay" shareholder vote rejected the executive compensation package. Since such votes are only supposed to be advisory without creating a fiduciary duty, and the independent board members believed the compensation package sound, the package was approved anyway. And now they're the subject of a federal complaint in the Southern District of Ohio that will almost certainly cost shareholders more than the executive compensation package itself. [NECA-IBEW Pension Fund v. Cox via Frankel]

This is one of a surge of lawsuits prompted by say-on-pay votes, as Reuters reported in May and Professor Bainbridge had predicted, despite the fact that Congress rejected a proposed cause of action. See also: Bainbridge, earlier on POL.