The Society's 68th National Conference will be held June 25-28, 2014 at the Westin Copley Place Hotel in Boston, MA. Conference and room registration are open, but rooms are going fast. This year's conference will feature break-out sessions tracking skills-based, Large-Cap, Small & Mid-Cap, Private and Not-for-Profit Company and Specialty topics. 

Wal-Mart Sued by Shareholder to Include Proposal After No-Action Relief Granted

In the first case that we have seen of this type, Trinity Wall Street vs. Wal-Mart Stores, Inc. shareholder proponent Trinity Wall Street sought a preliminary injunction to compel Wal-Mart to include a proposal relating to the review of its products in Delaware federal court. Wal-Mart had previously sought, and received, no-action relief from the Commission on ordinary business grounds. Last week, the district court denied the injunction. The transcript of the hearing is not yet available.

The proposal at issue asked that the Wal-Mart board to:

exercise oversight over management's formulation and implementation of, and public reporting concerning, policies and standards to guide management's decision whether or not Wal-Mart should sell products falling in one or more of three categories: products that are 1) especially dangerous to the public, 2) pose a substantial risk to Wal-Mart's reputation and 3) would reasonably be considered offensive to the community and family values that Wal-Mart seeks to associate with its brand. . . .

DC Circuit Court Finds Part of Conflict Mineral Rule Unconstitutional on First Amendment Grounds; Reverses in Part, Confirms in Part and Remands 

The DC Circuit Court issued its opinion Monday in the conflict minerals suit, National Association of Manufacturers v. the SEC, finding that the SEC did properly craft a conflict minerals disclosure rule as mandated by the Dodd-Frank Act. The Court disagreed with the petitioners' arguments that the SEC acted arbitrarily or capriciously in not adopting a de minims threshold. It also disagreed with the petititoners' arguments related to the due diligence threshold and to the application of the rule to issuers that "contract to manufacture." The court also found the Commission's cost-benefit analysis sound. Stating that an agency need not "measure the immeasurable,"  the court held that the Commission could have "done no better" than it did: 

[T]he Association argues on the benefit side that the Commission failed to determine whether the final rule would actually achieve its intended purpose. But we find it difficult to see what the Commission could have done better. The Commission determined that Congress intended the rule to achieve "compelling social benefits," but it was "unable to readily quantify" those benefits because it lacked data about the rule's effects. That determination was reasonable. An agency is not required "to measure the immeasurable" . . . [citations omitted] 

However, the Court reversed the district court opinion and remanded on the grounds that the rule inappropriately compelled speech in violation of the First Amendment. Specifically, the court held that Section 1502 of the Dodd Frank Act and the final rule violate the First Amendment to the extent that they "require regulated entities to report to the Commission and to state on their website that any of their products have "not been found to be 'DRC conflict free.'" The Court found that a corporation cannot be compelled to, in effect, "confess blood on its hands": 

At all events, it is far from clear that the description at issue-whether a product is "conflict free"-is factual and non- ideological. Products and minerals do not fight conflicts. The label "conflict free" is a metaphor that conveys moral responsibility for the Congo war. It requires an issuer to tell consumers that its products are ethically tainted, even if they only indirectly finance armed groups. An issuer, including an issuer who condemns the atrocities of the Congo war in the strongest terms, may disagree with that assessment of its moral responsibility. And it may convey that "message" through "silence." By compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment. [citations omitted] 

In the final footnote, the Court leaves open the issue of whether the statute itself is unconstitutional: "We only hold that the statute violates the First Amendment to the extent that it imposes that description requirement. If the description is purely a result of the Commission's rule, then our First Amendment holding leaves the statute itself unaffected."  

It is unclear what will happen next. Issuers continue to have an obligation to conduct a reasonable country of origin inquiry and to do due diligence and to file such information, without the description that its products are not found to be DRC Conflict free. However, the SEC could decide to seek a stay of the rule.  

Procedurally complicated as well, the conflict minerals case may be consolidated with American Meat Institute v. USDA, No. 13-5281, which is also pending before the DC Circuit, and reheard en banc. The question in the AMI case is whether regulations requiring meat producers to disclose the country of origin of their products violates the First Amendment. The DC Circuit (Williams, Garland, and Srinivasan) late last month denied petitioners' suit to block the labeling.  

See also Davis Polk memo and Covington & Burling memo. 

U.S. Chamber and Others Petition SEC to Reconsider the Shareholder Proposal Resubmission Rule  

Last week the U.S. Chamber of Commerce, along with several other organizations including NACD and the Center On Executive Compensation, filed a petition for rulemaking with the SEC in which they ask the Commission to re-examine the shareholder proposal resubmission thresholds. The petition notes that the current resubmission rule fails to protect shareholders and forces companies to spend time and resources on many proposals that have already been rejected by 90% or more of shareholders year after year. The petition asks that the SEC significantly increase the threshold, but it does not offer a specified percentage. The petition also does not seek to change the initial shareholder proposal filing limit.  

European Commission Proposes New Legislation on Proxy Advisors, Director Pay, and Engagement

The European Commission last week proposed new corporate governance legislation that would revise the European Union's existing Shareholder Rights Directive. The proposed directive: 1) includes a requirement that institutional investors and asset managers develop a policy on shareholder engagement, 2) includes a vote on director pay, and 3) mandates greater disclosure from proxy advisors. Institutional investors and asset managers would be required to "publicly disclose on an annual basis their engagement policy, how it has been implemented and the results thereof."

Shareholders would be given the right to vote every three years on plans that outline the maximum compensation for directors. The Directive also contains a section on proxy advisors, who would be "required...to publicly disclose certain key information related to the preparation of their voting recommendations and, to their clients and the listed companies concerned, information on any actual or potential conflict of interest or business relationships that may influence the preparation of the voting recommendations."

See also commentary from Marty Lipton of Wachtell Lipton on The Harvard Law School Forum on Corporate Governance and Financial Regulation blog.

TIAA-CREF Buys Nuveen Investments, Creating $800 Billion Asset Manager 

TIAA-CREF announced Monday that it is acquiring diversified investment management company Nuveen Investments for $6.25 billion, including debt. Nuveen has approximately $221 billion in assets under management, giving the combined company approximately $800 billion in AUM. Nuveen will operate as a separate subsidiary within TIAA-CREF's Asset Management business.  

IRRC Survey on Shareholder Director Engagement; More and Longer 

On April 10, IRRC published a report titled Defining Engagement: An Update on the Evolving Relationship Between Shareholders, Directors and Executives, an update to its 2011 benchmarking study of engagement between investors and US public corporations, which was conducted by ISS.

The survey yielded responses from 133 US issuers and from 82 institutional investors with aggregate assets owned or managed of more than $17 trillion. The survey defined engagement as "direct contact between a shareowner and an issuer (including a board member)," and such activity was analyzed by subject matter, frequency, participants, measurements of success, and impediments. The study also evaluated changes in engagement over time. The findings include, as expected, that more engagement is taking place and that more directors are involved. In terms of how each party measures success, issuers think "establishing a dialog" is "success" whereas investors tend to think of success in terms of "concrete action" taken.

How each group views the duration of engagement is also telling: Investors see engagement as longer term, while issuers tend to think of it as "discrete conversations":

[I]issuers are more likely to view engagement as a series of discrete conversations, while investors are more likely to see engagement as an ongoing process. In fact, 61 percent of investors surveyed said that an engagement typically lasts more than a month, while 66 percent of issuers said a typical engagement lasts less than a week...

Some issuers surveyed noted that engagements "typically last a few days or even a few hours" while investors speak in terms of engagement that "may go on for months or years, or even the entire duration of the investment."

The paper notes that engagement with directors remains "the exception rather than the rule." Specifically:  

For investors, answers ranged from zero to 80 percent. The mean answer was 22 percent, but the median was only 10 percent. For issuers, answers ranged from zero to 50 percent, with a mean of 10 percent and a median of 5 percent. 

Harvard Management Company Signs on to UN PRI and Carbon Disclosure Project

Harvard University announced last week that it would sign on to the U.N. Principles for Responsible Investment initiative and the Carbon Disclosure Project. It becomes the first university endowment in the United States to do so. The decision comes after "a yearlong review process...to strengthen Harvard's approach to sustainable investment." The commitment to sustainable investment was endorsed in March by Harvard's Corporation Committee on Shareholder Responsibility.

Group Releases Report Critical of Companies Political Spending Disclosure 

A group called Citizens for Responsibility and Ethics in Washington (CREW) on April 15 released a report titled The Myth of Corporate Disclosure Exposed which alleges that many companies are not complying with the voluntary political spending disclosure policies they adopted in response to shareholder requests. The report states that "CREW compared the contributions disclosed on 8872 tax forms filed by political groups organized under section 527 of the tax code with companies' self-reported political contributions" and found that "[f]or 25 of the 60 companies included in the study, there were significant discrepancies between companies' reports and the 527 organizations' tax forms."

More on Realized Pay  

JPMorgan's proxy begins with a short letter from CEO Jamie Dimon, where he writes that JPM has "made substantial changes to the format of our proxy statement "in response to comments we received from many of you asking for a simpler, more easily understood document."  The proxy includes a summary section with a "CD&A Roadmap" which lays out the structure of that section. Also of note is the clear list of the duties of the lead independent director. 

Hartford Financial Services Group is attractive, with a summary section, colors and good use of tables, charts and bullets. The proxy includes substantial disclosure of realizable and realized pay, including clear definitions of what constitutes each figure. There is also a section on Shareholder Engagement regarding on executive compensation, which outlines specific items the company discussed with shareholders and what and why it made some changes in response.

Hasbro refers to its summary section as "proxy statement highlights" and includes a clear graph comparing "CEO Reported vs. Realized Pay", (with each of the pay components), against TSR. Hecla Mining Company includes a column titled "W-2/T4 Realized Comp" in its "Summary Compensation and Realized Compensation" table. Exxon offers significant disclosure of Realized Pay vs. Reported Pay. Other proxies that discuss alternative compensation (mainly realizable and realized pay) include Alpha Natural Resources, Ensco, Genpact Limited, ITC Holdings Corp., Juniper, ON Semiconductor Corporation, Southern Company and Staples.

Chevron's proxy includes a clear and comprehensive table of the board's and different committee's responsibilities for oversight of risk. It also contains a very clear description of the peers groups used for benchmarking executive compensation and the rationale for using those peer groups and a "What We Do; What We Do Not Do" as part of its compensation program. Finally, Chevron includes an email address that shareholders can use to communicate concerns or questions to the board.
 

Merck's proxy has a very effective summary section and a particularly clear table outlining the duties of the lead director. Other proxies with summary sections include, Ansys, Home Depot, Flowserve, Groupon, Group 1 Automotive, LogMeIn, McDonalds, Quest, Range Resources, Sealed Air, Stone Energy Corporation.

Allstate uses lots of colors and clearly calls out the new governance practices it has adopted in the last year. It also has a comprehensive section, including a flowchart, for its ongoing Nomination Process for Board Election.

Illumina has a management proposal to amend its "Bylaws to designate Delaware as the exclusive forum for the adjudication of certain disputes."

Finally, the Amazon proxy is very concise, coming in at only 25 pages.

Paper Explores Theory of Shareholder Voting

In a wide ranging paper titled Shareholder Voting in an Age of Intermediary Capitalism, Paul H. Edelman and Randall S. Thomas of Vanderbilt University - Law School and Robert B. Thompson of Georgetown University Law Center review how "shareholder voting...has come roaring back as a key part of American corporate governance." The authors develop a theory of shareholder voting, built on shareholders wanting to maximize a firm's residual value, and review "developments have countered that reality and opened the way for voting's new prominence."

Current ISS Proxy & Governance Issues

On This Week in the Boardroom, TK Kerstetter, Chairman, NYSE Governance Services - Corporate Board Member interviews Pat McGurn, Special Counsel, Institutional Shareholder Services.

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