After a short networking break, we reconvened at The Economist’s 7th General Counsel Conference for a panel discussion of “The election of directors: Could 2010 be the perfect storm?” The panel included moderator TK Kerstetter, President and Chief Executive Officer of Board Member Inc/Corporate Board Member, Michael McAlevey, Vice-president and Chief Corporate, Securities and Finance Counsel of General Electric, Peggy Foran, Vice-president, Chief Governance Officer, and Corporate Secretary of Prudential Financial, and Shelley Dropkin, General Counsel, Corporate Governance of Citigroup.
Kerstetter asked the panelists to start by commenting on their biggest concerns as the proxy season gets started. Dropkin said that it’s a combination of losing 452 on directors and majority voting, which could have unintended consequences. Now there’s a great concentration of institutions, activists and investors in the vote and she’s concerned about the degree to which they’re influenced by proxy advisors. Dropkin asked how responsible would institutions be in exercising their vote. She foresees a lot of strange results that could occur and have magnified impact because of the reduction of the retail vote. McAlevey said that he is concerned about a couple of things. Tactically, for a company like his, they have a significant retail vote, so this is meaningful and they need to come up with a way to encourage them to vote. They’ll need to look at the discretionary vote and do the math, so that they can see how it will affect them. He suggested hiring a proxy advisor firm to find new ways to contact and remind people to vote. His more seismic point was that much attention is focused on giving more weight to shareholders without making adjustments, but the economic crisis in 2008 was also the shareholders responsibility. The steps being taken may empower shareholders even more and encourage short-term interests. Foran believes there will be directors who are not elected. She said that activists kill what is already dead. Agreeing with the others, she shared that she was afraid of the impact on the boardroom. They’ll need courageous directors for the future, because those doing the right thing may get voted off. She feels it will be important for directors to communicate and engage, to tell their story before someone else tells it.
Kerstetter then asked about the election slate, saying that companies will spend millions of dollars to do proxy solicitations, which adds an expense to their budget. Foran said they have more confidence in their institutional investors. She said that getting their top investors to meet with the board works better than paying for proxy solicitors. She knows that in some cases, the company will have to hire proxy solicitors to show the board that they care, but there are more effective ways to accomplish the job. Kerstetter asked if it was taking a risk to do that. Dropkin said it’s necessary to have a combination of both. It’s important to have a dialogue with the institutions to understand what they think about the issues, but proxy solicitors help them to reach the investors that they can’t. Foran asked what percentage do vote and asked for suggestions for creative ways to encourage voting, without getting the SEC after them. Dropkin said she didn’t have the answer for how to incentivize people, but she was thinking about the ways that Publishers Clearinghouse gets people to open their envelopes and look at their content. She said that encouraging people to vote electronically works better for her. What the SEC has unintentionally done, she thought, was to disenfranchise the voters and she felt it was unfair that a whole group of people won’t realize that they’re not voting anymore. They’ve spoken to the SEC about voter education and hopefully, over time, it will change, but she doesn’t know how to incentivize voters in the meantime.
McAlevey commented that his comment about proxy solicitors wasn’t about institutions. Most big companies have a relationship with their top 25-30 institutions already. Instead, it’s about the retail vote and how to get that vote represented. The SEC missed an opportunity and they’re coming around again to consider some alternatives. They need to look at the rules and figure out ways to level the field. Foran added that modeling can help. Go in with the numbers, show what Risk Metrics control and influence and superimpose this year’s requirements. Look at what would happen if the vote went against and recognize that the contests will come down to influence. She suggested talking to the boards about it and simplifying it so that they know what’s different this year. Kerstetter commented that courageous board members have changed because of Risk Metrics, saying that someone may be trying to do the right thing, but they’ve violated a Risk Metrics proxy guideline, so it’s a different playing field. Foran said that board members can do what’s right and communicate it. They can’t just do the right thing; they also have to talk about it. Kerstetter said that CDNA is almost too late, and requires too much reading, so he asked how they can get the information out there before legalese proxy? McAlevey said that boards will have to be more aggressive about managing themselves. He said they’ll need to look at age limits, term limits, skills, activity levels and actively manage the population. If the board doesn’t, someone else will, and in an embarrassing way. Speaking to Foran’s earlier point, Dropkin said that the board can’t go out and announce their decisions and that investors should evaluate on the company’s performance and decisions. On one side, she’s responsive to the idea of finding out what really qualifies directors, but she’s concerned about the holes that can be poked and the legal issues it raises. She said it would take some time for this to be read and the directors real qualifications to be identified. Dropkin added that it’s hard to talk about real skill sets, like people who are able to synthesize arguments. Explaining that is very difficult. Because they’re getting ready to legislate, it’s something that should be talked about. Foran agreed with Mike, saying that boards now are one of many, but now the question is why you? They’ll have to figure out ways to manage directors who will be low-hanging fruit.
Bart Schwartz, Chief Legal Officer at Assurant, asked about the logistics, wondering who they go to and the relationship between the portfolio manager and the proxy people, and in the company, how they approach the relationship with IR. Foran answered thatthey need to find out who, because different funds allow the portfolio manager to vote. She said it’s important to see Risk Metrics before things get crazy, and that they’re fairly reasonable people. She suggested planing the seed early, going with a board member to explain. They’re looking for the long-term stability of the company, and though that’s difficult to communicate, it’s important to try to start the discussion. She boiled it down to basic human relations and showing long-term instead of short-term, because they don’t have the time. Dropkin said that one is IR and has an ongoing relationship with the folks on their side. She suggested reaching out through IR to proxy solicitor to get contacts at mutual funds and institutional investors. Foran mentioned that there is a list on the internet of these contacts. She said there’s tremendous pressure on mutual funds for voting with management, and they’re getting dinged if they do that. The other pieces that they need to know are to see it in the statistics, where the union sites will rate them. McAlevey said that for corporate legal departments, they’re entering a phase where voting was a 1-person shop, and now, to protect the companies and the board, it will require an investment of time, people, and travel. Foran aded that sometimes you can meet a larger number of people at an industry meeting. She also suggested talking to the activists, which can pay dividends.
Kerstetter asked if they could share the conversations that they plan to have with their boards, and what do GCs say to them to benchmark what they’re doing. Dropkin started by saying that GCs should make it a habit of involving them in the approach to proxy statements, keep them updated on changes to the rules, and apprised of proxy access, 452, and interactions with institutional investors. She said it wasn’t different to other years in strategy, just in the challenges and keeping up with the rule changes as they happen. McAlevey said that it’s education and setting a context of why it’s happening and preparing them psychologically. Foran said it’s important to let them mourn the good old days. She said education is key and thinks it won’t be as bad as they predict, but there will be companies taken by surprise and directors will lose seats. She emphasized again that modeling is important, and encouraged GCs to look at where they’re vulnerable. She said it’s better to think about things before they happen and prepare for them. She also said that it shouldn’t take up much of their time.
Another audience member asked a question about Risk Metrics, saying that they seem to have an inherent conflict in their model, so is it necessary to use them? Foran said that they do consulting work and in past years, with a stock plan, they would run the numbers through their black box model to see if it cleared, though there were no guarantees. She doesn’t think there’s a conflict, but she’s not sure that she’d use them again, though she does think you have to use them. She said in the interest of full disclosure, she’s on their advisory board. McAlevey said that there is a potential conflict. The way that they manage it isn’t completely transparent. He said that the thing that’s frustrating is that as predictable as they think management is, Risk Metrics is as predictable. They are always driving towards more independence. He also mentioned that if someone has sat on another board that had trouble, they can use that against them on another board. Dropkin mentioned that it’s necessary to engage with them because they influence a large percentage of the institutional base. She won’t comment on the issue of a conflict, but companies should be aware of their policies and engage. She finished by saying that they won’t necessarily agree, but it’s important to factor them in as companies evaluate.