In a news release, GMI said that the change was initially brought about by requirements called for under the Sarbanes-Oxley Act of 2002, but more recent change has come about through a combination of more vocal and insistent institutional shareholders, newly engaged activist hedge funds and changes initiated by boards of directors and their advisers. The two major issues for the 2006 proxy season are majority voting for director elections and executive compensation, GMI said.
GMI noted that since its first ratings, released shortly after Sarbanes -Oxley was enacted, the number of independent directors at US companies has risen from 66% to 73% and the average board size has declined by 5%. In addition, there has been a substantial uptake in board evaluation practices (93% versus 35%) and the departure of “old guard” directors and those no longer willing to serve (more than 2,000 people who served as directors at US companies in 2002 are no longer directors at GMI-rated companies).
As recently as last July only a handful of US companies allowed some form of majority voting for director elections, but today more than 120 companies tracked by GMI have adopted some variation of majority voting. Several US companies have votes on this issue coming up soon.
On the matter of executive compensation, shareholders are supporting the Securities and Exchange Commission’s proposal for more detailed disclosure (See SEC Unveils Proposed Exec. Comp. Disclosures Mandate ) and are pressing boards to more closely tie compensation with performance. Option awards are being scaled back and there are now more instances of risk of forfeiture on option awards when performance targets are not met. Attention is also being focused on the range and amounts associated with all kinds of executive perks. GMI said companies that will face some of these kinds of proposals in the next several weeks include Coca-Cola, Pfizer, US Bancorp, Citigroup and Merrill Lynch.
GMI points out that, while these initiatives are a step in the right direction for corporations, its research finds issues at some companies that indicate more work needs to be done.
More information about GMI can be found at www.gmiratings.com .