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Moody’s Corporation (NYSE:MCO) and Netflix, Inc. (NASDAQ:NFLX) boards are among the thirty-three out of thirty-five,  which approved declassification, according to a report by Lucian Bebchuk and Scott Hirst, of Harvard Law School. This means that all the board members will be voted in and/or out on an annual basis, rather than after their respective terms in office.

Many companies now prefer declassified boards in place of the staggered classified boards, albeit for various reasons. The shareholder Rights Project (SRP) has been the avenue for declassification, with a goal of helping at least eighty S&P 500 companies have boards declassified; declassified boards are extremely aware of proper corporate governance practices.

A memo proposed to Moody’s board by Nathan Cummings Foundation (NCF),  highlighted some of the key problems with classified boards.

  • NCF quotes various academic sources saying “classified boards are associated with lower firm valuation
  • takeover targets with classified boards are associated with lower shareholders gains
  • firms with classified boards are more likely to be associated with value-decreasing acquisition decisions
  • “Classified boards are associated with lower sensitivity of compensation to performance and lower sensitivity of CEO turnover to firm performance”

Netflix, on the other hand, sought to have its board declassified as well as giving board members with at least a 10% holding the right to call special shareholder meeting. In another publication, it is noted that Netflix was against declassifying the board, and asked shareholders to reject the proposal. However, majority of the shareholders voted in favor of the proposed changes by Los Angeles County Employees Retirement Association (LACERA), the proponent for the process.

Forty-four S&P 500 companies are committed to declassifying their boards, as the various management teams have made agreements on the process,  after receiving declassification proposals. Nonetheless, these companies are facing challenges in arriving at common ground, a good example being Netflix. However, out of the forty four, only thirty-five were submitted by the SRP represented investors.

The current proxy season has seen thirty-three precatory declassification proposals approved from a list of 35 submitted to S&P 500 companies by SRP-represented investors. The rate of approval is very high at approximately 82% of votes cast for each proposal.

So far, only two proposals have failed to meet the simple majority vote requirement of 50%. The two firms whose proposals were not approved are, Kellogg Company (NYSE:K) and PACCAR Inc. (NASDAQ:PCAR), which received 47.33% and 49.76% approval rates.