Fewer shareholder proposals, more questions about risk for 2009

By January 20, 2009News

There are a total of 91 shareholder proposals in SHARE’s Shareholder Resolution Database so far for 2009. This is in sharp contrast to the 127 shareholder proposals SHARE was tracking at this time last year. The lesser number is the result of a decrease in governance filings. The number of socially responsible investment (SRI) proposals filed to date, nine, is exactly the same as last year.

Given the mood of investors and the state of financial markets, it is not possible to suggest that the decrease in governance proposals is the result of increased filer satisfaction with corporate Canada. Instead, the filings indicate a sharper focus than in 2008. Most governance filers have reduced the breadth of their asks, selecting one or two specific requests in a particular governance area to pursue rather than advancing a large number of concerns. Encouraging companies to better evaluate risks of all types is at the heart of many of the proposals.

Continuing the trend, executive compensation has garnered more filings than any other single subject. SHARE is aware of thirty-six proposals (39%) asking shareholders to weigh in on practices related to executive compensation. These proposals include a request for a review of compensation in relation to performance and risk, a proposed rule around equity pay in the context of a change of control and–for the second consecutive year–there are proposals asking for a shareholder “say on pay.”

Shareholders eager to vote on the “say on pay” issue will have ample opportunity to do so this proxy season. There are 19 proposals (21%) asking for an annual advisory shareholder vote on executive compensation. These proposals will appear on ballots for meetings beginning in late February. One of these proposals was filed at Nortel Networks Corporation. As that company has recently declared bankruptcy, the annual meeting will not take place as planned, and so the issue is not expected to come to a vote in 2009.

Another proposal filed at the big five Canadian banks asks that executive pay practices be reviewed to ensure that they “do not encourage extreme risks” and that bonuses are paid out only when performance warrants. This proposal is a sort of distant cousin to the advisory vote, or “say on pay” proposal. It asks that new executive pay policies that result from this review be submitted to shareholders for their approval one year after the proposal is adopted.

Other quick previews of 2009 shareholder proposals:

  • Of the 91 filings, there are 28 proposals (31%) concerning boards of directors. Among the issues raised are nomination procedures, limits on the total number of boards on which each director serves and compensation committee independence.
  • In 18 of the filings (20%), shareholders have raised their concerns about other governance matters. These include a request that the board of directors undertake a review of short-selling and “if warranted,” bring forward a policy on the practice for shareholder approval. This proposal is filed at Canada’s five largest banks. Another asks TD and Bank of Montreal to review their risk management procedures in light of the sub-prime mortgage crisis.
  • A total of nine SRI proposals have been filed, or 10% of total filings. Of these, seven are slated to appear on proxy ballots during the 2009 proxy season. Two proposals will likely not be voted due to dialogue between the companies and the filer.
  • Similar to previous years, the SRI proposals are company- or sector-specific requests intended to call investor attention to a particular environmental or social risk. These risks are ones that, in the filer’s view, are not being sufficiently addressed by management.
  • As an example, Canadian National Railway has received a proposal regarding risks to the company due to its current policies on the safety of its operations. Another proposal filed with Enbridge asks for an analysis of the risks to one of its projects in light of the unresolved aboriginal territory claims over the land where a pipeline is to be constructed.

To sum up, proxy-voting decision makers are likely to see fewer shareholder proposals on their ballots at Canadian companies this year than last. The issues, however, are mostly familiar ones: board composition, executive pay and company business practices. The distinguishing feature of 2009 will be a sharp focus on risk as shareholders prod companies to pay more attention to what they believe are currently unattended, or unaccounted for, hazards.