Corporate Governance Reform: Electing Directors through Shareholder Proposals
Schooley, Diane K., Renner, Celia, Allen, Mary, The CPA Journal
Shareholders submitted a record number of corporate governance and executive compensation proposals during the 2003 proxy season. This increase in shareholder activism is likely due to mistrust and skepticism in the wake of recent corporate scandals. Stockholders have long understood that their boards of directors represent them as the owners of the company, but frauds such as those at Tyco and Enron indicate that boards are not living up to those responsibilities. In an attempt to make the boards aware of and more responsive to their interests, shareholders are increasingly submitting proposals for the proxy solicitation and annual meeting.
In an unusual move, the SEC is considering director election reform to increase shareholder confidence in the corporate governance process. The SEC has proposed allowing larger shareholders, under particular circumstances, to nominate members of the board of directors. Reaction to the SEC's proxy-access initiative has ranged from strong support by shareholder-rights activists to equally strong opposition by corporate America.
Shareholder Proposals and Sponsors
Shareholder proposal activity is increasing; the number of proposals submitted in 2003 was 668, up 87% from 358 in 2000, according to the Wall Street Journal. Topics range from corporate governance to environmental and social issues. For example, Wal-Mart management included several shareholder proposals on its 2003 annual shareholders' meeting agenda Four dealt with corporate governance (including one on officers' deferred compensation), one with genetically engineered food, and another with labor organization standards ("Beware of Shareholder Wielding Issues," Tim Craig, EXSN Retailing Today, June 23, 2003).
Out of the 668 shareholder proposals submitted during 2003, 423 were corporate governance proposals, a significantly greater number than the 273 voted upon the previous year. The 423 corporate governance proposals submitted during the 2003 proxy season are categorized in Exhibit 1, which uses data collected from DEF 14-a proxy statements filed with EDGAR by companies listed in Georgeson's Annual Corporate Governance Review (2003).
Nearly 40% of the 423 corporate governance proposals were related to executive compensation. Issues included whether to award stock options and, if so, when to expense them. Stock options are often issued with the aim of aligning executives' interests with those of the shareholders. The recent use of stock options, however, has taken executive compensation to such absurdly high levels in the minds of some that they think that the executives are overpaid, a situation that is not in the shareholders' best interests.
Fifty-two of the proposals were board-related, some of them calling for separation of the CEO and board chairman positions. Others required that a majority of the board be independent. Board members that are not independent of the company may profit, for example, by promoting business relationships with any affiliated company. Such business relationships may not serve the other shareholders well.
A number of the proposals dealt with governance issues such as poison pills and board declassification. Poison pills are provisions by which corporations reduce the chance of hostile takeover by making their stock less attractive. They do not necessarily work to shareholders' advantage, because there may be situations where a takeover is in the shareholders' best interest. Theoretically, rescinding the poison pills promotes better corporate governance. Classified boards are those in which members have staggered terms. While staggered boards create continuity, they may hamper the corporate governance process by impeding the removal of ineffective board members.
While individual shareholders have historically been the primary sponsors of corporate governance proposals, in 2003 labor unions sponsored almost half of all these types of resolutions. …