A preview of the headline issues of the coming proxy season, including shareholder rights, corporate accountability, voting procedures and compensation disclosure
As new markets emerge and institutional investors expand their international portfolios, harmonizing shareholder structures and governance practices between different countries and regions is becoming a high priority for governments, companies and investors. Companies in emerging markets are gradually making progress, and disclosure levels and notification of AGMs are steadily improving. However, governance standards in many relatively developed Asian countries still have some way to go to meet the demands of the largest institutional investors.
Europe
Providing cross-border solutions to the problem of inadequate shareholder rights continued to be an issue for international organizations throughout 2006. The culmination of much of the consultative work undertaken by the European Commission is expected to come to fruition during the coming year, with the final deadline for implementation of the European Directive on Shareholder Rights arriving in December 2007. With that in mind, it is likely that 2007 will see greater strides toward achieving improved shareholder democracy.
In the UK and other parts of Europe, institutional investors are increasingly disclosing proxy votes on their web sites. Additionally, the Directive on Shareholder Rights should enhance voting turnout by introducing a one-month notice period for meetings across Europe and forcing companies to offer a choice of methods that should better facilitate cross-border proxy voting. The European Union has already legislated with some success on proxy issues; according to a recent study by Pensions Investment Research Consultants (Pirc), the much-maligned practice of share blocking is now virtually non-existent in Europe.
Issues to watch for
Improving shareholder rights with regard to director nominations and dismissal as well as director disqualification still needs to be addressed, according to a July report from the EU. The EU consultation document on company law and corporate governance suggested that these issues have not been addressed by the draft Directive on Shareholder Rights.
The EU has also commissioned a study on the lynchpin of proxy governance, the ‘one share, one vote’ issue. However, this may prove problematic in countries such as France, the Netherlands and Scandinavia, where varying classes of shares with different voting rights are commonplace.
In the UK, the Company Law Reform Bill has been welcomed by the business community as a means of providing better shareholder treatment by forcing companies to be more accountable on many aspects of corporate governance. It has failed to address some issues, however, and dissent from investor groups will no doubt rumble on with respect to minority shareholder rights, which remain threatened by some UK practices. In particular, there is still concern about whether the traditional show of hands is still appropriate in the 21st century. In other parts of the region, European governments are taking steps toward improving the proxy voting process. The Swiss parliament is in the process of bringing forward legislation to improve disclosure on remuneration, and in Germany the relatively low turnout at AGMs remains a concern for the government.
North America
‘Proxy voting in the 2006 season has placed more of an emphasis on elections; there’s been more majority voting,’ says Jackie Cook of the Corporate Library.
Traditionally, the US has been known for its so-called ‘Soviet-style’ election of directors. A director can be automatically reelected on the basis of a single vote cast in his or her favor at the AGM. This practice is increasingly frowned upon, and proposals to change to majority voting are getting a lot of support. These resolutions are still fairly limited in scope, only allowing shareholders the opportunity to cast an advisory non-binding vote. So far, more than 50 companies, starting with Pfizer in June 2005, have adopted director resignation policies while retaining plurality voting. Under those policies, directors are asked to tender their resignation if they receive more ‘withheld’ votes than ‘for’ votes.
Cook thinks the appeal court ruling in favor of the American Federation of State, Country and Municipal Employees (Afscme) in Afscme vs AIG will probably result in similar cases being brought by other investors until the SEC provides further guidance on the issue. Companies often try to omit shareholder proposals from their proxy statements and are at liberty to do so if the proposal concerns one of the issues outlined in 14a-8. AIG sought permission from the SEC to omit a shareholder proposal and the SEC granted it leave to do so, but Afscme took the case to court and won. This decision allows shareholder groups to force a vote on whether to amend corporate bylaws in a way that effectively provides ballot access.
Asia
A study on proxy voting in Asia published by the Asian Corporate Governance Association (ACGA) in September 2006 found Hong Kong to be the clear leader in the region in terms of proxy governance. It also found that proxy voting systems in Asia are ‘seriously antiquated and in need of improvement.’ The concerns highlighted in the report included: lack of independent audit of vote results; lack of publication of vote results; insufficient information on how to vote; and the prevalence of voting by way of a show of hands.
‘One of the big issues in Hong Kong has been the general mandate to issue new shares on a non-preemptive basis. In other words, existing shareholders cannot buy these shares,’ says Jamie Allen of ACGA. ‘The main factor here is that existing shareholders are suffering dilution from new shares being issued on a private basis. Shareholders have been voting against it in quite large numbers; the problem in Hong Kong is that we have listing rules that allow companies to issue up to 20 percent of total share capital each year in new shares issued privately, and they can offer up to a 30 percent discount. The better companies here, like Hang Seng Bank and CLP, have been voluntarily cutting their mandates to 10 or 5 percent. That’s an issue that is going to run on into next year.
‘One of the big stories in Japan this year has been poison pills, and I suspect this will continue to be an issue into next year,’ Allen continues.
Paul Marsland, proxy voting manager at Pirc, adds that there is still ‘very limited disclosure in the Japanese market.’ He believes that there are signs that the Japanese are attempting to improve proxy governance in the country, however, in particular with the introduction of a new electronic voting platform launched in February 2006 by ADP, the Tokyo Stock Exchange and the Japan Securities Dealers Association.
Australia
According to Sarah Wilson, founder and managing director of corporate governance and proxy voting agency Manifest, ‘The Australian market is definitely becoming more active, with Australian companies increasingly coming to the UK market looking for additional capital. Certainly, it’s as modern and progressive a market as anything in the UK, but it’s probably more advanced than other parts of Europe in many respects. Its company law is built on the same foundations as that of the UK, and that makes it very easy for UK shareholders to understand how things work in the Australian market.‘