Stifle a yawn, please, as you ponder this question: Should public company directors stand for election annually or every three years?
To be sure, the issue isn’t as complex as, say, whether there is life after death or whether money can buy happiness. (Or, for that matter, why we need three more seasons of Kim, Kourtney, Khloe and “Keeping Up with the Kardashians” on cable TV.) But for public companies and their shareholders, who will come together at annual meetings over the next few months, the question is among several hot topics this proxy season. Institutional Shareholder Services, an adviser to pension and hedge funds and other large investors, counted more than 300 resolutions as of last month for shareholder action during 2012 annual meetings. Top themes range from corporate lobbying to climate change, from sustainability to animal welfare, according to ISS.
And, thanks to the Harvard Law School Shareholder Rights Project, whether board members should serve one- or three-year terms.
The law school program pairs faculty, students and staff with public-employee pension funds and charitable groups that want to improve accountability at the public companies in which they hold stock. Since the fall, the project has submitted proposals to 80 companies on the S&P 500 stock index — the most widely traded of the big public firms — to “declassify” their boards so that all directors are elected annually, rather than at staggered intervals.
The thinking these days is that one-year terms make directors less beholden to management and more responsive to stock owners.
Resolutions from shareholders are everyday occurrences for public companies. As long as the proposers can meet certain ownership thresholds, they can ask that an issue be taken up at the annual meeting. Often, the proposer is trying to get a company do something that management opposes — for many years, for instance, the late Helen Quirini of Rotterdam submitted a resolution to General Electric Co. to separate the posts of board chairman and CEO. And while a company can seek to block a proposal from the annual meeting, the Securities and Exchange Commission will often intervene as referee.
The Harvard project succeeded in getting 44 companies to agree to bring up resolutions to annually elect directors — one was medical device maker C.R. Bard, which has a plant in Warren County — and offer management’s stamp of approval. For 36 other companies, the proposal will go to the annual meeting but without the imprimatur of management.
Among the latter was Chipotle Mexican Grill, which said it opposed declassification for the reason most companies established staggered terms to begin with: they discourage takeovers. If only a third of a board’s directors are elected each year, it takes longer for an acquirer to gain control.
Despite that argument, many S&P 500 companies have declassified their boards over the past decade. And smaller ones are making the change, too.
Locally, most public company directors, including those at TrustCo, Plug Power and Albany Molecular Research, serve three-year terms. But Buffalo-based First Niagara Financial Group decided at its 2011 annual meeting to phase in one-year terms, so that by 2014 every director will be elected annually.
The company, parent to the growing First Niagara Bank branch network here, said it recognized that staggered terms offered protection against an unsolicited takeover. But after giving the question some thought, the company said it sided with corporate governance experts and institutional shareholders: that a staggered board “has the effect of insulating directors from a corporation’s shareholders.”