Valero thus becomes the tenth company on this year’s list of majority supported “say on pay” shareholder proposals. The list stopped at eight firms in 2007. Under its bylaws, Texas-based Valero counts abstentions when tallying results for shareholder proposals, and by its reckoning the measure did not pass. Valero spokesman William Day told Risk & Governance Weekly that, so far, the company has no plans to address the proposal.

In another distinction, the Valero resolution is the second to get majority backing from votes cast for two years in a row. The other was voted on at Ingersoll Rand. The measure also garnered 50.7 percent support at computer maker Apple this year after obtaining a near-majority (46.6 percent) in 2007.

While support declined somewhat at several financial firms that had the resolution on their ballots over the last two years, overall “say on pay” shareholder proposals have averaged about 42 percent support so far this year over more than 50 meetings where votes have been reported, according to RiskMetrics data – virtually the same level as 2007. Only two votes remain pending for fall meetings, at Procter & Gamble and Oracle. Proponents may currently be more focused on this year’s political election, which may give a boost to their push for advisory pay votes. According to the draft Democratic national platform released on Aug. 7, for example, party leaders “will ensure shareholders have an advisory vote on executive compensation, in order to spur increased transparency and public debate over pay packages.”

Valero thus becomes the tenth company on this year’s list of majority supported “say on pay” shareholder proposals. The list stopped at eight firms in 2007. Under its bylaws, Texas-based Valero counts abstentions when tallying results for shareholder proposals, and by its reckoning the measure did not pass. Valero spokesman William Day told Risk & Governance Weekly that, so far, the company has no plans to address the proposal.

In another distinction, the Valero resolution is the second to get majority backing from votes cast for two years in a row. The other was voted on at Ingersoll Rand. The measure also garnered 50.7 percent support at computer maker Apple this year after obtaining a near-majority (46.6 percent) in 2007.

While support declined somewhat at several financial firms that had the resolution on their ballots over the last two years, overall “say on pay” shareholder proposals have averaged about 42 percent support so far this year over more than 50 meetings where votes have been reported, according to RiskMetrics data – virtually the same level as 2007. Only two votes remain pending for fall meetings, at Procter & Gamble and Oracle. Proponents may currently be more focused on this year’s political election, which may give a boost to their push for advisory pay votes. According to the draft Democratic national platform released on Aug. 7, for example, party leaders “will ensure shareholders have an advisory vote on executive compensation, in order to spur increased transparency and public debate over pay packages.”

What are your views on "say-on-pay" this year. Please let us know.

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.

Download file Chart 1 illustrates the RM 2006 VaR forecast vs. realized log spread changes on the 2006-1 AAA ABX tranche. The first warning was a 300% vol increase from Dec 12 to 21 '06. The second was a 12 standard deviation / 350% vol spike on Feb 23 2007 (this was the day after HSBC announced that it fired the head of its US mortgage lending business as losses reached $10.5bn... the alarm bells were clearly ringing). Even though spreads almost tripled on that day from 11 to 30.8 bps, as seen in Download file Chart 2, it was not too late to hedge. In fact, spreads proceeded to tighten to a low of 14.08 bps on June 25 '07 before widening significantly in three major bear waves. In other words, risk managers had between two to six months lead time to execute hedges.

The main lessons are (1) pay attention to early warning signals, and (2) not all VaR models are created equally. To be useful, VaR should be dynamic and responsive to market conditions. After all, risk is dynamic. And while no model is perfect some models are certainly more useful than others.

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.

Given the federal and state regulator’s views on auction rate securities, we’re likely to hear more actions in the months ahead. Please let us know your thoughts on the auction rate securities situation.

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.

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.

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.

For an excerpt of our Biggest Concerns list performance update, please access the report here.