In a statement, the PCAOB said it was “gratified” by the decision and noted the court’s opinion is consistent with positions taken by several investors and investor groups, including the Council of Institutional Investors, AFL-CIO, and TIAA-CREF, as well as regulatory bodies such as the Securities and Exchange Commission.

“The decision today … is welcome news for the [SEC], investors and U.S. capital markets,” SEC Chairman Christopher Cox noted in a press release. “The [SEC] believes that the PCAOB is a highly effective organization whose continued existence is vital to protecting investors and furthering the public interest in the preparation of accurate and informative audit reports.”
Critically, observers say the decision will be welcome news at a time when capital markets are pulling back. “Had the decision gone the other way, it would have introduced a lot of uncertainty to capital markets, particularly at a time when we don’t need more uncertainty,” Duke University securities law professor James Cox told RiskMetrics Group. “From a public policy perspective, this was a very welcome decision.”

Professor Cox noted that it was the poor performance of the audit profession that gave rise to the last period of significant market uncertainty, when Enron, WorldCom, and other corporate titans collapsed under the weight of accounting irregularities. “We’ve avoided [a repeat] with this decision,” he said.

Today’s ruling also is a boost to the PCAOB’s financing mechanism, which relies on fees paid public companies.

According to the Associated Press, Judge Brett Kavanaugh of U.S. Court of Appeals for the District of Columbia circuit wrote in his dissent that the case represented “the most important separation-of-powers case regarding the president's appointment and removal powers to reach the courts in the last 20 years.” The PCAOB’s structure “unconstitutionally restricts the president's appointment and removal powers,” Kavanaugh wrote.

Christian Vergonis, an attorney for the Free Enterprise Fund, said the group was disappointed with the decision and intends to appeal either to the full appeals court or directly to the Supreme Court, the AP reported.

The losses were incurred in off-balance sheet transactions undertaken by the bank’s structured credit conduit Rheinland Holding, and the scope of the damage initially came to light in July 2007 after the release of the bank’s preliminary annual results. The timing of the discovery forced the bank to restate its earnings and delay its 2007 annual meeting until March 2008. An independent assessment of the damages by PricewaterhouseCoopers blamed IKB management for failing to implement effective risk analysis and risk management controls, and for giving its IKB Credit Asset Management subsidiary, which ran Rheinland Holding, a disproportionately high degree of responsibility over the company’s risk position.

Notably, for the second consecutive annual meeting, management is recommending that shareholders postpone liability discharges for members of the bank’s management and supervisory boards who were in office during the lead up to the subprime crisis. The vote of discharge, which is a routine agenda item at German annual meetings, is generally considered to be a symbolic vote of confidence in the actions of the management and supervisory boards during the previous fiscal year. Also, because supervisory board directors in Germany generally are elected once every five years, the vote to discharge represents one of the few opportunities that shareholders have to express their dissatisfaction with a company’s leadership. Although a vote to discharge does not necessarily preclude a company and investors from taking legal action against its directors, a management recommendation to postpone or refuse discharge is a good indicator that a company is considering such action.

In this case, IKB management has recommended postponing discharge because former IKB management and supervisory board members are currently being investigated for breach of duty under the authority of a special audit proposed by the Dusseldorf-based shareholder organization DSW and approved at the March 2008 annual meeting. DSW was able to successfully reverse IKB management’s original recommendation for discharging the supervisory board and pass its special audit proposal with 82 percent approval. DSW managing director Carsten Heise told RiskMetrics Group that the strong showing was attributable to the German government’s willingness to going along with the proposal. According to Heise, IKB is cooperating fully with the investigation, and that the results are expected to be published this fall.

Although IKB suffered more significant subprime-related losses than most other European banks, the bank’s concentrated ownership structure, combined with political support from Berlin, were clearly the decisive factors that enabled DSW to pass its special audit proposal. For the sake of comparison, the German government’s ownership percentage at IKB (45 percent) was actually greater than the total share capital participation at two shareholder meetings for large European banks with subprime-related shareholder proposals: UBS (37 percent) -- where a similar special audit proposal narrowly failed – and Deutsche Bank (33 percent) – where several more extreme shareholder proposals failed to receive significant support. Both of those banks have large free floats, whereas the German government’s dominant ownership position at IKB effectively allowed it to control the proceedings with a two-thirds voting majority. Thus the success of DSW’s proposal at IKB doe not reflect a groundswell of investor support in Europe so much as it reflects political pressure within Germany to get to the bottom of what has been a significant financial hit for the German government (this pressure was further illustrated last month when the opposition Free Democrat party pushed for a special government committee to investigate IKB’s managerial transgressions). In this respect, IKB appears to be an exceptional case, rather than the signal of changing investor sentiment in Europe.

In the lead up to next week’s annual meeting, the bank remains in a precarious financial position, and there is widespread concern in the German financial community that IKB’s collapse could trigger a more wide-ranging banking crisis there. Because the bank’s current liquidity is not expected to last beyond the end of the year, IKB management proposed a EUR 1.5 billion ($2.2 billion) recapitalization passed at the March annual meeting, but the recapitalization was blocked until last month by a number of shareholder lawsuits that were seen by some in the industry as opportunistic. By the time the shareholder lawsuits had been settled, the German government had stepped in to guarantee a subscription of at least EUR 1.25 billion ($1.84 billion) under the proposed rights issue, although this guarantee is currently being reviewed by the European Commission to determine whether it constitutes state aid (the subscription would take the government’s ownership stake in IKB to over 90 percent). This appears to be a formality however, since the government has resolved to sell its stake as soon as possible, preferably for a price of approximately EUR 800 million ($1.18 billion). According to news reports, private equity investors Ripplewood and Lone Star Funds have submitted final bids after Swedish Bank SEB – thought by many to be the preferred candidate – dropped out of the bidding. This creates an interesting scenario in which the German government would end up selling an important midsize domestic bank to a foreign private equity fund only three years after the Social Democratic Party (the junior partner in Germany’s ruling grand coalition) tried to swing national parliamentary elections through populist rhetoric that included branding foreign private equity and hedge funds as “locusts.” An announcement on the winning bid is expected soon, possibly by the end of the week.

Four directors -- Chairman Roy Bostock, CEO Jerry Yang, Ronald Burkle and Arthur Kern -- all received greater than 30 percent opposition at the company’s Aug. 1 annual meeting. The company had previously reported that no board member received more than 22 percent withhold votes. Another director, Gary Wilson, had just under 30 percent opposition, according to a company press release. The revised release, dated Aug. 5, notes that the error originated with Broadridge Financial Services, the firm that Yahoo uses to collect and tabulate shareholder votes.

No other directors received greater than 10 percent opposition. Incumbent director Robert Kotick is due to step down, as the board expands to accommodate billionaire investor Carl Icahn and two of his dissident nominees under an agreement that pulled the plug on Icahn’s bid to replace the entire board in a proxy contest. The three new Yahoo directors are likely to be appointed around Aug. 15, Dow Jones Newswires reported.

The company’s initial vote tally announcement, just after the meeting on Aug. 1, caught the attention of Yahoo critic Eric Jackson, founder of Ironfire Capital. Jackson leads a network of investors owning approximately 3.2 million Yahoo shares. He noted a discrepancy of about 200 million shares between the number of votes cast for directors last year and this year. After Jackson wrote about the error in his weblog, Capital Research Global Investors--which owns a 6.2 percent Yahoo stake--asked for a recount. According to the Associated Press, Capital opposed Yang and figured that he would have received more than the 14 percent opposition originally reported.

Broadridge said that a printing error was responsible for the incorrect results and re-issued the tallies, according to the AP. The revised results show that investors withheld 33.7 percent support from Yang, whereas opposition to his election was minimal last year. Bostock and Burkle had the most re-election opposition this year, with 39.6 and 37.9 percent withholds, respectively, versus dissent of 31.2 and 32.5 percent, respectively, in 2007.

The vote at Yahoo underscores the complexities of proxy voting in the U.S. market, where ownership is widely dispersed and about 85 percent of company shares are held in “street name” by brokers and other custodians. Edward Rock, a law professor at the University of Pennsylvania who co-wrote a 2007 paper, “The Hanging Chads of Corporate Voting,” said the proxy voting process is “crude, imprecise, and fragile.”

“Broadridge delivers more than 1 billion communications to investors per year. . . . It is an accident waiting to happen,” Rock said, according to MarketWatch.

“When it comes to the tabulation of proxy votes, most investors don't even know what they don't know,” said Pat McGurn, special counsel at RiskMetrics Group. “The tabulation process is as airtight as a sieve. It is as transparent as a brick wall. Simply put, the proxy voting infrastructure has failed to keep pace with the complexity of the investment process. It is only a matter of time until there is a complete meltdown at a significant meeting. Officials from the SEC, the stock exchanges, and Delaware must come together with key market players to fix the system.”

The survey focuses on the most significant governance issues, such as director elections and board attendance, separation of chairman and CEO positions, executive compensation (including “say on pay”), proxy contests, and M&A.

For the first time, RiskMetrics also is conducting a parallel survey for all U.S. corporate issuers to gather further market insight on these emerging governance issues. RiskMetrics encourages respondents to complete surveys for all markets in which they have a corporate governance interest.

Individual survey responses will not be shared with anyone outside of RiskMetrics and will be used only by the RiskMetrics Policy Board for policy formulation purposes.

For more information on the surveys, and to participate, please click here. The deadline for responding has been extended to Aug. 19.

There has been a rise in investor support for resolutions asking U.S. companies to produce GHG emissions reports, and also to formulate goals for emissions reduction. However, support has fallen this year for proposals asking for a board committee on human rights, sexual orientation anti-bias policies, and employment reforms.

The average support for social and environmental proposals so far this year is 14.7 percent over 147 meetings where results are known.

Support above 20 percent is considered significant for social and environmental resolutions, as those proposals historically have not received as much shareholder support as governance issues. Around 30 percent of vote results so far this year have exceeded that level--about the same as in 2007.

Notably, social issue proponents have withdrawn 129 resolutions this year, an all-time high. Often, social proponents value a withdrawal agreement over a high vote. Withdrawal of a proposal usually means that companies have agreed to implement part or all of the resolution. Timothy Smith, senior vice president of the ESG (environmental, social, and governance) group at Walden Asset Management, told Risk & Governance Weekly that many of the resolutions that saw high withdrawal numbers dealt with issues on which there is strong public and peer (corporate) pressure to take action. “Increasing investor votes coupled with consumer interest in such issues as climate change makes a ‘perfect storm’ of pressures that result in companies responding positively to reasonably framed shareholder resolutions,” Smith said.

Investor-sponsored resolutions requesting that issuers draw up concrete goals for reducing carbon emissions won 21.8 percent support over six meetings this year, compared with 20.7 percent support in 2007. Investors withdrew three proposals this year when officials at El Paso, Ford Motor, and Williams agreed to enumerate emissions reduction goals. More resolutions were voted this year than last, when four proposals went to a vote and two were withdrawn.

There were more proposals seeking GHG emissions reports on corporate ballots this season; eight went to a vote in 2008 while five were voted last year. Support for the resolution has gone up considerably this year, averaging 31.9 percent at six meetings so far where results are known. The proposal averaged 19.4 percent support in 2007, although this year’s average may change when the two remaining vote results are disclosed.

Investors also have continued their efforts to urge the Securities and Exchange Commission to issue formal guidance to companies on the disclosure of “material” climate-related risks. A coalition of 18 institutions, including pension fund officials from California, Florida, Maryland, New Jersey, New York, and North Carolina, filed a petition with the SEC last September. In June, the investors supplemented their petition with additional evidence on the need for formal SEC guidance.

Meanwhile, Steven Milloy’s Free Enterprise Action Fund (FEAF)--a conservative investment group--submitted proposals asking companies to report on the effect of sustainability efforts on their operations. Milloy is skeptical about global climate change and it was evident in the proposals that FEAF opposes corporate action against global warming. The SEC allowed four companies--Johnson & Johnson, Dow Chemical, Caterpillar, and Wal-Mart Stores--to omit the proposal on the grounds that the firms had substantially implemented it. The companies had already released global warming reports, only the reports detailed environmentally friendly changes in operations. Ten of these proposals did go to a vote. The resolution averaged 3.5 percent support at seven firms where preliminary or final vote results are available.

Resolutions seeking a review of product toxicity have seen increasing support since they were first filed two years ago. The proposals won 36.1 percent at Becton, Dickinson--according to regulatory filings--and 38.3 percent at Kroger, according to proponents. A single product toxicity measure received 26.1 percent support at Bed Bath & Beyond last year, and the issue averaged 8.25 percent over four meetings in 2006.

Calls for reports on company hazards to surrounding communities averaged 9.7 percent support, up from 8.3 percent in 2007. Only two such resolutions were voted both this year and last.

A new proposal asking energy firms to review the impact of their oil sands operations has fared well this year, winning 28.1 percent support at Chevron, and 27.5 percent at ConocoPhillips, proponents reported. Meanwhile, a first-year proposal on establishing a board sustainability committee had single-digit support at three firms, averaging 5.8 percent.

Proposals requesting an environmental sustainability report from the board have fared about the same this year--averaging 28.6 percent support over five meetings this year as opposed to 27 percent support last year. In addition, investors withdrew 22 proposals this year. Among the companies that agreed to produce a sustainability report in exchange for withdrawal were Safeway, Raytheon, and Wendy’s International.

Social Issue Proposals
Support for shareholder requests for reports on corporate political donations and donation policies continued to rise this year, averaging 26.1 percent over 17 meetings. It is the highest average support for the proposal since it was first filed in 2004; it averaged 24.9 percent in 2007, 21.6 percent in 2006, 11.2 percent in 2005, and 9.4 percent in 2004. Proponents have also withdrawn a high number of these proposals. Investors withdrew 15 resolutions so far this year, and 22 last year.

There has been lower support this year for human rights-related proposals. Resolutions asking for a board committee on human rights have won 4.2 percent support over six meetings so far, down from 4.6 percent at four meetings in 2007. Support for proposals asking that companies review, report on, or amend human rights policies dropped sharply, receiving 11.8 percent support over nine meetings. Resolutions related to companies’ human rights policies in 2007 won 28 percent support over four meetings last year.

Filings of human rights proposals have gone up this year due to a number of resolutions relating to business in the African nation of Sudan. Three Sudan-related proposals were withdrawn, at Morgan Stanley, T. Rowe Price, and Merrill Lynch. Merrill Lynch, which came to an agreement with Trillium Asset Management, committed to discussing human rights policy on its corporate social responsibility Web site and to forward the Sudan Divestment Task Force’s list of highest corporate offenders to executives who oversee development on new investment products.

Investors Against Genocide (IAG), an affiliate of the divestment task force, put forward a number of shareholder proposals asking mutual funds to divest from companies supporting the Sudanese government. The resolution received an average of 25.1 percent support at 13 Fidelity funds, IAG reports. Fidelity, as well as some TIAA-CREF mutual funds, halted voting on the measures (CREF until 2009). IAG’s communications director, Susan Morgan, said that no further Sudan divestment resolutions are scheduled to be voted until companies like Barclays, Vanguard, and Franklin Templeton--at which they were submitted--schedule meeting dates.

Equality- and labor-related proposals have also experienced a decline in support this year. New York City’s pension funds again asked companies to implement the “equality principles.” This is a set of 10 guidelines aimed at ensuring there is no discrimination against homosexual or transgender employees. The resolutions have averaged 13.3 percent support over three meetings so far; the vote results for four other meetings have not been disclosed. Last year, the issue won 32.7 percent support over four meetings. The city pension funds withdrew 13 proposals this season, as compared with eight in 2007. Companies that settled with proponents this year included Family Dollar, Frontier Oil, and Borg-Warner.

Similar proposals asking for a clause in company documents affirming a policy of non-discrimination on the basis of sexual orientation also had lower support this year. The issue received 28.9 percent support over five meetings, down nearly 10 percentage points from 2007’s average of 37.5 percent over four meetings.

Notable exceptions to the decline were investor requests that issuers implement the United Nations’ International Labour Organization (ILO) guidelines. These proposals won 16.8 percent support over four meetings this year, up from 13 percent last year.

A new social proposal this year addresses consumer health care. Shareholders, led by religious groups, asked companies to adopt principles for health care reform based on those drafted by the Institute of Medicine. The resolution received only 4.3 percent support across eight meetings where it went to a vote, but investors withdrew 13 of the 27 total proposals filed. Companies like McDonald’s, IBM, and Target agreed to issue news releases or post statements about the principles online. The SEC allowed three health care companies to exclude the resolutions from their proxy ballots on the grounds that the proposals related to those firms’ “ordinary business.”

RiskMetrics Group’s ESG (Environmental, Social & Governance) Research Team contributed to this article. A longer article on shareholder voting on social and environmental issues is available in the latest issue of RiskMetrics’ Corporate Social Issues Reporter.

The Republican commissioner, who left the SEC August 1, noted that none of the 17 shareholder proposals on the ballot at ExxonMobil’s 2008 annual meeting passed. He also cited Delaware Chancery Judge Leo Strine’s comments at the SEC’s proxy roundtables last year that the state’s corporate law does not address non-binding proposals and that these resolutions are a result of federal action (under the SEC’s shareholder proposal rule). Atkins said the proxy process “should facilitate proposals concerning only those subjects that could properly be brought before a meeting under the corporation’s charter or bylaws and under state law.”

Numerous investors expressed support for the shareholder proposal process and its impact on corporate behavior at the SEC roundtables, but Atkins believes issuers could adopt a bylaw that limits the consideration of non-binding proposals at annual meetings. “To date, I am not aware of any company that has sought to implement such a bylaw, but it would not come as a surprise if a company decides to do so in the future,” he said.

Atkins also denounced the efforts by some institutions to negotiate withdrawal agreements with companies. “The abusive use of the shareholder proposal process by some institutional investors is troubling,” he said. “What we are seeing basically is large institutional investors, who have no duty to other shareholders, pushing behind the scenes particular measures that fail at company after company when actually put up for a shareholder vote . . . Essentially, they are using their particular influence, the threat of shame or whatever, to try to get the company to acquiesce to their position.”

“It would not surprise me if, more often than not, the board simply applies a simple cost-benefit analysis and then takes the path of least resistance,” Atkins said. “So we must be vigilant that the shareholder proposal process does not result in the tyranny of the minority.”

The company is the latest financial firm to try to address shareholder anger over mortgage-related losses by changing its board leadership. In early June, Washington Mutual named new chairs to its finance and personnel committees after the two former panel leaders received more than 42 percent opposition. On June 30, Swiss firm UBS announced a new risk and strategy committee, appointed a new senior independent director, and said that four directors would leave the board in October.

The committee shakeup at Citigroup, one of the world’s largest financial firms, had been expected by investors. Before its annual meeting in April, the New York-based company pledged to undertake periodic committee chair rotations. The AFL-CIO labor federation urged investors to vote against then-audit and risk committee chair C. Michael Armstrong, but dropped its campaign after Citigroup announced the rotation plan. Armstrong still serves on the board, but is no longer a member of the audit and risk committee.

Board member John Deutch, who previously held no chairmanships, has been named to lead the audit and risk committee, Citigroup said in a July 22 press release. Richard Parsons, former chair of the compensation committee, will head the nomination committee, while former nomination panel chair Alain Belda will lead the compensation committee. Both Belda and Parsons received significant withhold votes at Citigroup’s annual meeting, with 30 and 31 percent opposition, respectively. The withhold votes appeared to stem from investor concerns over the company’s compensation practices, including the retirement package for former CEO Charles Prince. Also this week, the company named Lawrence Ricciardi, a former IBM executive, to the board as a new independent director.

“We're pleased to see that Citigroup is fulfilling the commitment it made to investors earlier this year and look forward to working with the new board leadership,” AFL-CIO Associate General Counsel Damon Silvers told Risk & Governance Weekly.

However, Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County, and Municipal Employees, says the union sees little value in rearranging committee chairs. “What we really need is new blood on the board that will expand strategic vision for the future of the company that includes focus on the core business,” Ferlauto told R&GW.

Richard Clayton III, research director at the Change to Win Investment Group lauds the move. “I think that it’s valuable for members of the committees to get some sense of what the other committees are doing,” Clayton told R&GW. “It contributes to an atmosphere of collective responsibility.” Earlier this year, Change to Win threatened to oppose Citigroup directors if the company did not report on how it tried to mitigate credit losses, but the labor investment group ultimately did not wage an opposition campaign.

Also this week, AFSCME called on Citigroup to outline clearer strategies for share growth. In a July 21 letter to board chair Sir Winfried Bischoff, the labor union writes that much of Citi’s financial underperformance is due to a lack of a coherent financial strategy. In the past year, the company’s share price has fallen approximately 60 percent--from above $50 in July 2007 to about $20 this week. The letter also comes after the July 18 release of Citigroup’s second quarter earnings statement, which documented a $2.5 billion profit loss.

Still, the $2.5 billion loss is less than the minimum of $3 billion that Wall Street analysts expected. The loss was half that of the first quarter, when mortgage-related investments resulted in a $5.1 billion loss. CEO Vikram Pandit wrote in the earnings release that writedowns in Citi’s securities and banking businesses decreased by 46 percent last quarter.

In AFSCME’s letter, Chairman Gerald McEntee claims that Citi is in continued financial danger from its multiple and diversified non-core businesses. “While the stock price has been dropping in large part because of the mounting subprime losses, we contend that much of the current depression of the stock price reflects investor confusion over Citigroup’s sprawling makeup,” McEntee wrote. He goes on to say that the “unwieldy jumble” of diverse businesses under the Citi name blinded it to subprime-related risk.

Pandit, who took over in December after Prince’s resignation, is implementing a restructuring plan that will cut costs by $15 billion in the next three years, according to the earnings release. The company has shed a number of its subsidiaries--including the April sales of commercial finance division CitiCapital to General Electric, and the Diner’s Club International credit division to Discover. AFSCME lauded the sale of non-core assets, but suggested that Citi might ultimately benefit from breaking into two separate entities--one for securities and investment banking, and one for retail banking.

Early on, it seemed that 2008 would be marked by frequent displays of shareholder discontent. Activist institutional investors, angered by the Securities and Exchange Commission’s decision in November to bar proxy access proposals, appeared ready to rally behind shareholder proposals seeking independent board chairs and advisory votes on executive pay. The SEC also frustrated activists by allowing many firms affected by the credit crisis to exclude most of their new proposals that sought compliance committees, mortgage risk reports, and better CEO succession planning.

After the labor-affiliated Change to Win Investment Group (CW) threatened “vote no” campaigns against directors at six large financial companies in January and February, it appeared that many investors would vote against board members at other financial firms and homebuilders. Democratic lawmakers joined the fray, holding a hearing in early March to denounce the generous compensation received by outgoing executives at Countrywide Financial, Citigroup, and Merrill Lynch.

However, shareholder views appeared to shift after Bear Stearns, an 85-year-old Wall Street stalwart, suddenly collapsed in mid-March. The firm, which had traded at $170 per share a year earlier, initially agreed to be sold for $2 a share to JPMorgan Chase in a government-supported bailout (JPMorgan ultimately agreed to pay $10 per share).

“Simply put, the bear market mauled the 2008 proxy season,” said Pat McGurn, special counsel for RiskMetrics Group's ISS Governance Services unit. “The collapse of Bear Stearns on the eve of the season let most of the air out of the shareholder activism balloon.”

The fall of Bear--along with soaring oil prices and falling real estate values--helped drive consumer and retail investor confidence and optimism to new depths. The TIPP economic optimism index--conducted by TechnoMetrica Market Intelligence for Investor’s Business Daily and the Christian Science Monitor--hit an all-time low in April and has continued to fall. The Yale School of Management’s Stock Market Confidence Index (the one-year outlook) for individual investors also hit its low point for the decade in April.

The season’s vote results suggest that many shareholders were more inclined to back management and refrain from supporting shareholder proposals or initiatives to unseat directors. With a few notable exceptions where compensation concerns were raised or a heavily staked hedge fund led the charge, most directors at U.S. companies were elected with wide support. While investors expressed slightly more support for “say on pay” advisory vote proposals and independent board chair resolutions, the increases were less than what some governance observers had expected at the start of the year. At six financial firms, support for “say on pay” actually declined from 2007 levels.

“People are focusing on whether there is going to be a tomorrow in the market, and not on these traditional governance issues,” James Cox, a securities law professor at Duke University, told Risk & Governance Weekly. “Some institutions may believe--given the trauma of the marketplace--that management shouldn’t be distracted by these concerns.”

Activist investors also appeared to shift their tactics after Bear’s collapse. The American Federation of State, County, and Municipal Employees (AFSCME) and two state pension funds dropped plans to sue Bear and JPMorgan over the exclusion of proxy access proposals. CtW decided to wage “vote no” campaigns at just two of its targeted six financial firms, while the AFL-CIO dropped a campaign against C. Michael Armstrong, Citigroup’s audit and risk management committee chair, after the company announced that he would leave the panel. The California Public Employees’ Retirement System, the largest U.S. public pension fund, focused its attention this year on firms outside the troubled financial and homebuilding sectors (with the exception of a “vote no” campaign at Standard Pacific).

This muted investor response was apparent at the April 8 meeting of Morgan Stanley, the first of the major Wall Street firms to hold its annual meeting. Despite a “vote no” campaign by CtW against two directors and Chairman/CEO John Mack, all the directors won at least 90 percent support, which is consistent with historic voting patterns at the firm. Several other factors may have contributed to the results. Mack is well liked on Wall Street, so many investment managers were reluctant to vote against him, CtW officials said. Most of Morgan Stanley’s writedowns stemmed from a single failed trading strategy, rather than broad exposure to mortgage-backed securities; Mack responded by firing the head of trading and replacing the chief risk officer, which helped assuage investor concerns. Duke University’s Cox also noted that Mack’s decision not to accept a bonus in 2007 also dampened potential opposition.

At most financial firms, directors received overwhelming support this year. Wachovia’s board members all received more than 92 percent support at the annual meeting, which occurred before the company reported more problems in its loan portfolio and fired its CEO in June. At Lehman Brothers, the directors all won at least 95 percent support. Bank of America also avoided an opposition campaign this year, but it may face greater scrutiny from investors in 2009 over its purchase of Countrywide. Countrywide, which was the largest U.S. mortgage lender, was targeted by labor funds late last year, but it didn’t hold a regular 2008 meeting.

At some companies, there may have been a limited response because investors didn’t learn of the full extent of their firm’s problems until after the annual meeting. Lender IndyMac and mortgage financiers Freddie Mac and Fannie Mae--whose troubles made headlines in July--faced no organized investor opposition at their meetings in May and early June and received just one shareholder proposal.

For instance, all six financial firms targeted by CtW agreed to meet with the labor investment group. The United Brotherhood of Carpenters and Joiners of America withdrew more than half of its pay-for-performance proposals after negotiations with companies. A record number of issuers have sponsored board declassification proposals this year. And at ExxonMobil, independent chair proponents say their proposal would have done better but for the oil company’s “unprecedented outreach effort . . . to solicit votes from institutional and retail investors.”

“What shareholders were looking for was responsiveness from directors, and in those cases, they gave them a break,” recalled Richard Ferlauto, director of pension and benefit policy at AFSCME.

Notable Withhold Votes
The most notable display of investor discontent occurred at Washington Mutual’s April 15 meeting. CtW urged investors to vote against Mary Pugh, chair of the finance committee, and James Stever, chair of the human resources committee, which oversees compensation. AFSCME waged its own campaign against Stever and four of his fellow panel members at the Seattle-based lender. The labor investors assailed the human resources committee’s decision to shield 2008 executive bonuses from the firm’s subprime losses, while CtW argued that Pugh should be held accountable for the company’s risk management failures. Investors also complained about equity dilution after WaMu negotiated a $7 billion cash infusion from TPG Capital.

Overall, nine WaMu directors received at least 26 percent opposition. A year earlier, all the directors received at least 92 percent support. Pugh stepped down after receiving 49.9 percent opposition, while Stever and director Charles Lillis received more than 40 percent negative votes. In early June, WaMu responded by appointing an independent chairman, adopting majority voting in board elections, and naming new chairs to its finance and human resources committees.

Michael Garland, CtW’s director of value strategies, said the WaMu results show that an increasing number of money managers and mutual funds will consider voting against directors if “there is a compelling fact pattern.” “At Washington Mutual, it all came together,” he said, noting the firm’s “strategic failures” and poor compensation practices.

There also were notably high withhold votes at several firms where there were no concerted opposition campaigns. At Citigroup, three pay committee members received more than 25 percent opposition--all the firm’s directors had at least 93.7 percent support in 2007. The dissent this year appeared to be a reaction to former CEO Charles Prince’s exit package. He received a $10.4 million bonus for 2007, even though the company’s shares fell 43 percent that year. Citigroup also agreed to give him an office, an administrative assistant, and a car and driver for five years (or until he commences full-time employment with another employer), and pay certain taxes on these post-termination benefits.

While Capital One Financial was not targeted by investors, three pay panel members received almost 21 percent opposition. In 2007, the three directors running for reelection to the firm’s classified board all won more than 93 percent support. This year’s vote appears to stem from the compensation committee’s decision to grant stock options worth $23.5 million to CEO Richard Fairbank in 2007, while the company’s stock price fell. The shares at the McLean, Va.-based credit-card firm posted a 38.4 percent one-year decline, and a 17.4 percent decrease over three years.

The director votes at Citigroup and Capital One suggest that compensation concerns still resonated among many shareholders, even in the absence of “vote no” campaigns. At Washington Mutual, the executive bonus policy was a significant factor in fueling opposition, whereas investors did not raise compensation concerns at Morgan Stanley. “Compensation seemed to be key,” recalled Ferlauto of AFSCME. “When investors seemed to be incensed by pay, there was a reaction.”

In the homebuilding industry, there were greater than 23 percent withhold votes against directors at Toll Brothers, KB Home, and Hovnanian Enterprises that also appeared to be a reaction to compensation practices. Most of the homebuilders have yet to report their official board election results, so there may have been significant opposition at other firms, such as Ryland Group, which faced a CtW “vote no” campaign.

Mixed Results for “Say on Pay”
While compensation concerns led to significant withhold votes against some directors, that discontent did not translate into greater support for “say on pay” proposals. At six financial companies where the issue also was on the ballot in 2007--Merrill Lynch, Wachovia, Citigroup, Morgan Stanley, Capital One, and Wells Fargo--there was lower support this year. At Merrill Lynch, support fell from 45.6 percent to 37.5 percent, while the vote at Citigroup declined from 46.2 percent to 41.9 percent this year. Ferlauto of AFSCME, which filed numerous pay vote resolutions, attributes the lower results at Merrill Lynch and Citigroup in part to CEO changes. “There’s a honeymoon period,” he said. “At Merrill and Citi, there was new management, so shareholders gave them the benefit of the doubt.”

Within the financial sector, the best showings for “say on pay” were 44.9 percent support at Bank of America and 45.6 percent at Goldman Sachs. Neither firm faced that proposal in 2007. Ferlauto said he believes the issue also would have done well at Washington Mutual, but proponents did not file that resolution there because they were focusing their attention on Countrywide and the Wall Street firms.

At the same time, the overall support for advisory vote proposals increased marginally at U.S. companies. According to preliminary and final results available as of July 15, those proposals have averaged 42.7 percent support over 52 meetings this year, up slightly from 42.5 percent support over the same number of meetings in 2007. Shareholders at nine companies, including Lexmark International and Apple, gave greater than 50 percent support (based on the votes cast for and against) to “say on pay” proposals through July 15, compared with eight majority results during all of 2007. Notably, all of this year’s proposals earned at least 30 percent support, except at Wal-Mart Stores where officers and directors control a 43.4 percent stake.

A total of 75 “say on pay” resolutions are slated for a vote this year, up from 50 in 2007, according to RiskMetrics data. Most of the remaining vote results will become available when companies file their second-quarter 10-Q reports in early to mid-August. Investors withdrew two proposals, at Johnson & Johnson and Verizon Communications, the latter of which has committed to holding an investor pay vote in 2009. The SEC allowed companies to omit an additional nine resolutions.

This is the third year that shareholder pay vote proposals have been on the ballot at U.S. firms. They appear unlikely to match the third-year success posted in 2006 by investor proposals seeking a majority voting threshold in director elections. In that year, majority vote proposals averaged about 50 percent support at 84 companies and won majority support at 36 firms, according to RiskMetrics data.

James Cox, the Duke University law professor, expects that investor support for advisory votes will increase in the future, and said this year’s showing may be “a product of the times.” “It’s hard to imagine not having ‘say on pay’ in some form, given that it exists in England,” Cox noted. Both major U.S. presidential candidates have endorsed the concept of advisory pay votes.

Other Compensation Proposals
Pay-for-performance proposals have averaged 27.4 percent support over nine meetings where results are known, as opposed to 29.5 percent support over 38 meetings last year. This average does not include a 91 percent result at Credence Systems, where management supported the measure, however. Twenty-five proposals have gone to a vote this year, according to RiskMetrics data.

The most notable development this season was the increase in investor-issuer engagement on this issue. The Carpenters and other investors withdrew more than 30 performance-based pay resolutions after discussions with companies, as compared with 17 withdrawals last year. (For more on those proposals, please see this week’s “In Brief” section.)

Early results suggest that investors were more receptive to limits on supplemental executive retirement plans (SERPs). Just eight SERP-related proposals were filed this year, and half of those were withdrawn. Resolutions asking for greater disclosure of, limits on, or shareholder approval of SERPs have won 35.8 percent support at AT&T and 44.7 percent at Black & Decker so far this year. SERP proposals averaged 32.9 percent support at 14 meetings last year.

One compensation proposal topic has fared considerably less well this year--shareholder requests to “claw back” management bonuses in case of a restatement or malfeasance. Five proposals this year won an average of 10.7 percent support, as opposed to 31.9 percent support at 10 meetings in 2007.

A new AFL-CIO proposal that seeks “responsible” executive employment agreements garnered 33.9 percent support over two meetings. Only three were filed this year, but Daniel Pedrotty, director of the labor federation’s office of investment, told Risk & Governance Weekly that the proposals will be re-filed next year, though he said it was too early to determine which firms will receive the proposals.

A new AFSCME proposal to prohibit tax payments, or “gross ups,” to executives, won 44.5 percent support, on average, over four meetings. Resolutions asking for stock options to be performance-based received 15.9 percent support at General Motors and 32 percent at Boeing, proponents say.

Board Reform Proposals
Independent board chair proposals received record support this year--31.3 percent support over 20 meetings, 4.6 percentage points higher than last year, when they averaged 26.7 percent support over 43 meetings. Twenty-seven proposals have gone to a vote this year, though, with seven meeting results still outstanding. While an independent chair is the prevailing practice in the United Kingdom and many international markets, many U.S. firms have been reluctant to embrace this reform. Forty-five percent of S&P 1,500 companies have separate chairman/CEO positions, but just 17 percent of those firms have independent chairs, according to RiskMetrics data.

The resolution receiving the most media attention was an independent chair proposal at ExxonMobil. While a coalition of activist investors, state pension fund officials, and Rockefeller family members endorsed the measure, the proposal received 39.5 percent support, less than last year’s 40.7 percent showing at the oil giant. An independent chair proposal received 51.5 percent support at Washington Mutual, which since has appointed an independent chairman. Wachovia took that step in May, although it didn't have an independent chair resolution on the ballot this year. Other high votes include 43 percent support at Time Warner and 42.8 percent at Pfizer.

A new proposal this year that asks boards to establish an independent “lead director” has garnered an average of 36.3 percent support over four meetings. Only four proposals were voted this year, all filed by individual investors.

Fewer resolutions seeking majority voting in uncontested board elections went to a vote in 2008, as more companies agreed to adopt bylaws on that topic. So far this year, 47 of the 90 majority vote resolutions filed have been withdrawn by proponents. At the 16 meetings this season where results are known, majority voting proposals won 50.4 percent support--the same percentage as last year. This average does not include the 90 percent-plus votes at Analog Devices and RadioShack, where the shareholder resolutions were supported by management. Including those votes, the overall average support rises to 55.2 percent. The total number of proposals filed has declined from 134 last year and 143 in 2006.

Meanwhile, 31 firms have asked shareholders to approve a majority vote standard this year, while 32 did last year, according to RiskMetrics data. More than 72 percent of S&P 500 companies have adopted some form of a majority vote standard, according to Claudia Allen, a partner with the law firm Neal, Gerber & Eisenberg, who conducts an annual study on majority voting.

Investor calls for cumulative voting have also seen increased support so far, with 37.7 percent support over 12 meetings, compared with 33.7 percent over 24 meetings last year.

Takeover Defenses
Resolutions asking firms to end staggered boards received slightly less support so far this year, with 60.2 percent average support at 16 meetings where results are known. This compares to 63.9 percent support over 38 meetings in 2007. Support for shareholder declassification proposals has waned since 2006, when the topic averaged 66.8 percent. The highest vote so far this season came at Kilroy Realty’s May 20 meeting, proponents say, when 93 percent of investors supported annual director elections, despite management opposition. The average support for this year may change as more results become available, as 80 proposals have been or will be put to a vote in 2008. Investors withdrew six declassification proposals, while the SEC allowed companies to omit an additional 13.

What is notable this season is the number of board declassification proposals put forward by management. So far this year, 79 companies have placed declassification resolutions on the ballot. There were 54 company-sponsored proposals in 2007, and 72 management resolutions in 2006, according to RiskMetrics data.

Investor calls to eliminate supermajority requirements for bylaw changes and other matters also continue to garner significant support, although less than the 2007 peak average of 67.9 percent. The measure has won 60.5 percent support over 12 meetings this year.

The number of proposals asking for the right of shareholders to call special meetings increased dramatically this year--from 22 in 2007 to 51 proposals filed in 2008. Twenty-two companies this year were allowed to omit special meeting proposals, while 31 went to a vote. At the 26 companies where results are known, those proposals logged 45.9 percent average support, a drop from last year's 56.5 percent support over 18 meetings. Shareholder activist John Chevedden, whose network of retail investors filed most of the special meeting proposals, recalled that proponents revised their resolved clauses in the middle of the 2008 submittal period to remove a 10 percent shareholding requirement. Many of those resolutions were excluded at the SEC or received less support, he said, adding that investors later reverted to their original proposal language.

Investors are continuing to submit fewer proposals that target “poison pill” takeover defenses. Just 13 have been filed in 2008, down from 22 in 2007, 35 in 2006, and 51 in 2005. Of this year's resolutions, five have gone to a vote, while six were withdrawn, and two were omitted. So far, those proposals have averaged 50.3 percent support over four meetings this year, compared with 37.6 percent average support over 16 meetings last year.

Hedge Fund Activism
2008 is on pace to shatter the all-time record for proxy challenges, although few contests have gone to a vote. Given the market meltdown, many boards have been willing to provide board representation to dissidents. Hedge funds have brokered seat-ceding settlements at scores of boards, including those at Sprint, Dillard's, Charming Shoppes, the New York Times Co., Borders Group, Tiffany, and Zales.

“While many public and labor funds appeared reluctant to rock a sinking ship, hedge fund activists were only too happy to raise the Jolly Roger,” noted McGurn of RiskMetrics.

Editor’s Note: RiskMetrics reports vote percentages based on “for” and “against” votes cast, excluding abstentions or broker votes. This is the same approach the Securities and Exchange Commission uses under Rule 14a-8(i)(12) to evaluate the support received by proposals in previous years. Note that many results are preliminary and do not include all 2008 meetings as of July 15, because some companies have declined to release vote totals on shareholder resolutions until their next quarterly regulatory filings. The figures in the table below do not include management-sponsored or supported proposals.

The bylaw proposal was filed by the American Federation of State, County, and Municipal Employees as an alternative to proxy access resolutions, which the Securities and Exchange Commission has allowed companies to omit. The AFSCME proposal would have required the board to reimburse successful dissidents for their “reasonable expenses” in future short-slate contests.

The case is the first time that the Supreme Court has granted a request by the SEC to rule on the legality of a shareholder proposal. Islandia, N.Y-based CA, which--like a majority of U.S. public companies--is incorporated in Delaware, asked the SEC for permission to exclude the AFSCME proposal from the proxy statement for its Sept. 9 annual meeting.

The CA v. AFSCME decision can be seen as a partial victory for investors because the Supreme Court ruled that an election-related bylaw is a proper matter for shareholder action. As Justice Jack Jacobs noted in the court’s opinion, “the shareholders of a Delaware corporation have the right ‘to participate in selecting the contestants’ for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election.”

However, the Supreme Court went on to conclude that AFSCME’s bylaw would violate Delaware law because it would prevent CA’s board from fully exercising its fiduciary duties. While the labor union’s proposal specified that the board should award only “reasonable” expenses, Jacobs said that provision “does not go far enough because the bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all.” The court noted that a board has a fiduciary duty to deny reimbursement in cases where a proxy contest is “motivated by personal or petty concerns” or would promote interests “adverse” to the corporation.

Following the CA decision, AFSCME said it would renew its efforts to pursue proxy access at the SEC. A short-staffed commission voted last November to allow companies to resume omitting access bylaw proposals, but SEC Chairman Christopher Cox has pledged that the agency would revisit the issue. With the U.S. presidential elections less than four months away, it’s unclear whether the SEC will tackle this controversial issue as it confronts other regulatory concerns that stem from the credit crisis.

“This decision makes Delaware less relevant to future discussions about shareholder rights, and makes a federal solution the only alternative for shareholders seeking fair and open elections,” said Richard Ferlauto, AFSCME’s director of corporate governance and pension investment. “The ball is pushed back to the SEC for when the next chairman will finally have to resolve shareowner rights to proxy access.”

J. Travis Laster, a partner with the Abrams & Laster law firm in Wilmington, Del., offered a more sanguine view of the CA decision in a posting on TheCorporateCounsel.net weblog. “Although many will likely view this as a loss for stockholders, I believe they should view the case as a significant win. Yes, the director-reimbursement bylaw was held invalid, but the court held that the election process was a proper subject for stockholder action. A bylaw mandating the inclusion of stockholder nominees on the company’s proxy statement should fare much better under a CA analysis,” he wrote.

However, Laster cautioned that the ruling would be “generally negative” for stockholder bylaws that don’t relate to elections. The court’s analysis “should doom any substantive component to a [poison] pill redemption bylaw, such as a requirement that directors not adopt or renew any pill that could be in place longer than a year,” he wrote in his posting.

The New York law firm of Wachtell, Lipton, Rosen & Katz, which represents companies and boards, hailed the CA ruling and concluded that the Supreme Court’s reasoning would preclude shareholder bylaws that would prevent boards from adopting poison pills. “The Delaware Supreme Court’s unequivocal and welcome holding should discourage further efforts by stockholder activists to erode the fundamental prerogatives of the board of directors. The opinion will hopefully signal that the courts will not permit directors to be undermined or constrained in the exercise of their fiduciary duty in the broad range of subjects traditionally within their ambit as stewards of the corporation,” the firm wrote in a memo on the case.