As companies begin to prepare for the 2015 proxy season, it will be important to anticipate the types of shareholder proposals they should expect so that they can develop a more meaningful response. This can be accomplished by (1) directly engaging shareholders and proxy advisory firms, (2) analyzing data from past proxy seasons and (3) knowing what trends and topics are emerging.
Companies can determine the issues about which their shareholders are most concerned by actively and genuinely engaging them. Engagement can take many forms, and the frequency of such engagement varies among companies. However, whatever the form, the goal is to allow companies to anticipate the expectations of their shareholders. At the same time, thoughtful engagement will give a company the opportunity to communicate the ways it is responding to those expectations. Indeed, the most successful engagement is not limited to the proxy season. Off-season communication allows companies to obtain feedback on the voting results from the most recent annual meetings. It also informs companies of what shareholder expectations will be for the coming year.
In addition to engagement with shareholders, companies should consider off-season communications with proxy advisory firms. Such communication will not only inform companies of any concerns the proxy advisory firms may have, but, more importantly, it will give a company the opportunity to explain prior voting outcomes, discuss how the company will respond to these outcomes and determine the issues that advisory firms may find relevant for the next proxy season.
Of course, it is important for companies to avoid selective disclosure of any material, nonpublic information. Having a prepared agenda to limit the discussion to specific topics of discussion will ensure full and fair disclosure. Additionally, it will help a company identify inadvertent disclosure of nonpublic information so that such information can be widely disseminated in compliance with Regulation FD.
2014 Proxy Results
Corporate Governance Proposals. As in past years, shareholder proposals relating to governance represented a significant portion of the proposals during the 2014 proxy season. The three most successful governance proposals for 2014 were (1) the elimination of classified boards, (2) the adoption of majority voting in director elections and (3) the elimination of supermajority voting provisions. Other governance-related shareholder proposals include those relating to having an independent chair, a shareholder right to act by written consent, a shareholder right to call special meetings and proxy access. These received solid shareholder support in 2014, but relatively few actually passed (for purposes of this blog, a proposal passes when it receives a majority of the votes cast, which is how Institutional Shareholder Services measures voting results).
Social/Political Proposals. Shareholder proposals relating to social and political issues continue to be common. They fail, however, in almost all cases and usually by a wide margin. In fact, in 2014, only four of these actually passed. Nevertheless, it is important to note that the most common of this category of proposals is related to political expenditures and lobbying costs. After that, proposals related to environmental issues are most common.
Compensation-Related Proposals. The mandatory say-on-pay vote provides shareholders with an alternative means to express any concerns over executive compensation. Accordingly, the number of compensation-related proposals is far lower than it was in years immediately before the say-on-pay votes began in 2011. Nevertheless, these types of proposals continue to appear, predominantly falling into two categories: (1) those seeking to prohibit single-trigger, accelerated vesting of performance and other equity awards, and (2) those seeking stock retention requirements for executives. In any case, only a few actually pass.
Emerging Trends and Topics
As the more mainstream governance proposals continue to be enacted by large-cap companies, fewer targets remain. As a result, these types of proposals are making their way onto the proxy statements of mid- and small-cap companies. At the same time, new governance proposals will likely emerge among large-cap companies.
For instance, board tenure is attracting greater attention from investors who feel that lengthy board service may compromise a director’s independence. While Institutional Shareholder Services Inc. (ISS) does not currently have a voting policy relating to director tenure, it is a negative factor in ISS’s QuickScore 2.0 governance rating system. Additionally, ISS’s 2013-2014 policy survey found that 74 percent of institutional investors indicated that they viewed long director tenure as “problematic.” ISS announced last year that it would be soliciting input on whether to reclassify long-tenured directors as non-independent or to examine the mix of director tenures on a board as a key factor when making voting recommendations as to nominating committee members. Accordingly, it is likely that director tenure will be another subject of an ISS voting policy.
Board diversity is another emerging issue. In 2014, more than two dozen companies were pressed to improve the gender and ethnic makeup of their boards. Often, these proposals were withdrawn when companies committed to adding a diversity policy to their nominating committee charters.
As a company engages shareholders, analyzes 2014 voting data and identifies emerging trends, it will position itself to more effectively respond to shareholder concerns. Such a response may be in the form of its own proposal or by preemptively implementing changes. In some cases, a company may determine that the interests of the company are not advanced by adopting the particular proposal. However, even here, meaningful engagement may help produce compromises between management and shareholders. In the end, a proactive approach to shareholder proposals will allow management to articulate and develop its own ideas while simultaneously responding to shareholder concerns.