For the first time, the surveys were also supplemented with three Q&A interviews with leading corporate governance experts around the world—Michael Cheng, Senior Vice President at the Hong Kong Stock Exchange; David Lawton, Head of Markets Infrastructure & Policy at the UK’s Financial Services Authority; and Gilberto Mifano, Chairman of the Board at BM&F Bovespa, the Brazilian securities, commodities and futures exchange.
"Corporate governance changes tend to be incremental," said John Madden, the Shearman & Sterling partner directing the survey, "unless key regulatory initiatives—like Sarbanes-Oxley—accelerate the pace. This year’s survey indicates that the leading U.S. companies continue to make corporate governance a priority and reflects the continuing increase in shareholder activism."
"But what’s particularly interesting is that our Q&A interviews with global business leaders, conducted for the first time, suggest that corporate governance is not just a U.S. issue but, increasingly, a global business priority. There are significant implications for companies no matter where they operate," he added.
Key findings in this year’s Corporate Governance Survey include:
- Majority voting has solidified its position as the primary voting standard used in director elections. In 2008, the number of companies surveyed that had adopted a majority voting standard rose to 71. In comparison, only 11 companies had adopted such a standard in 2006. In addition, the number of companies surveyed that required directors to submit their resignations if they received less than a majority of the votes cast rose to 76.
- Classified boards and "poison pills" are becoming increasingly rare. The number of companies operating with a classified board has decreased by 50 percent since 2004, falling to just 27 in 2008. The Shearman & Sterling survey revealed an even more dramatic decrease in the number of companies with a poison pill. In 2008, only 12 companies surveyed still retained a poison pill. This means that the number of companies with a poison pill has decreased by almost two-thirds since 2004.
- This year’s survey analyzed two new categories that are becoming increasingly relevant: (1) the extent to which companies have taken advantage of the e-proxy rules and (2) the number and types of committees of the board.
- For the first time in 2007, certain companies were permitted to provide their proxy materials to shareholders electronically. Thirty-five of the companies surveyed utilized the “notice-and-access” model for the delivery of their proxies, with 18 of these companies utilizing a hybrid version incorporating both the “notice-and-access” and traditional methods of delivery.
- Many boards form additional committees to focus on areas of particular concern to their company. The survey found that the companies surveyed had formed a wide array of additional committees, highlighting the diversity of their businesses and the industries in which they operate. Other than the audit, compensation and governance committees, the most common committees were the executive, finance and public policy committees.
On the executive compensation side, while the survey findings suggest efforts towards increased transparency, there is still some reluctance at the boardroom level, according to Linda E. Rappaport, head of Shearman & Sterling’s Executive Compensation & Employee Benefits practice.
"My own boardroom experiences reinforce these findings,” Rappaport says. “More and more, I am seeing boards and board members who are very forward thinking and open in terms of their executive compensation dialogue with key stakeholders. But this is by no means universal. Some companies are initiating this stakeholder dialogue more quickly than others."
Key executive compensation findings include:
- While companies have provided more focused, fact-specific disclosure there is still a lack of “analysis” in the Compensation Disclosure and Analysis (CD&A). While the format and layout of many CD&As was greatly enhanced by the use of executive summaries, tables, charts and bullet points, the CD&As remained fairly long and difficult to comprehend.
- There is an aggregate of 89 compensation-related shareholder proposals—an increase of almost 200 percent since 2004. The most common proposal was "say-on-pay," which was put up at 41 of the 100 largest U.S. public companies. Other proposals related to performance-based equity or incentive compensation (put up at 13 of the 100 largest U.S. public companies) and general executive compensation matters such as limitations on compensation levels, restrictions on the terms of employment agreements, elimination of gross-ups and limitations on supplemental retirement benefits (in the aggregate 18 of the 100 largest U.S. public companies).
- Certain companies continued to limit their disclosure of performance targets. While only 65 of the 100 largest U.S. public companies disclosed the specific targets for some or all of their incentive compensation performance measures, this represented a 20 percent increase over last year, when just 45 companies made this disclosure.
- Eighty-four of the 100 largest U.S. public companies have publicly disclosed that they maintain equity grant policies.
- Fifty of the 100 largest U.S. public companies have publicly disclosed that they have a claw-back policy, up from 35 companies in 2007.
"From what we see in our research and in our client work, corporate governance continues to be a high priority for boards and companies’ executive leadership," said Shearman & Sterling’s Madden. "Best practices in corporate governance often revolve around increased transparency on the one hand and increased dialogue with shareholders on the other."
