Spring Proxy Season 2018: Early Projections
What trends will heat up the next proxy season and beyond? That’s a burning question for the 80 percent of public companies that hold annual meetings during the first half of the year according to statistics from Broadridge, as well as for those that will wrap up the year later in the fall mini-season. Prognosticating what’s to come this season is no easy task, since proxy season is a complex process.
Sometimes the trends we predict are no more than wishful thinking. To make plausible predictions, we must find empirical clues from shareholder resolutions (hundreds each year), director elections (at thousands of companies each year), and then consider the activity that happens behind the scenes in private dialogue.
Bearing in mind our evidence, we can ask a number of questions:
- What new rules will be effective? New requirements will raise expectations during this proxy season.
- What proposals were most successful in 2017? Success (getting more than a 50 percent vote) emboldens proponents, so these issues are unlikely to go away.
- What proposals were most frequent in 2017? Even if vote tallies are low, proponents may try again.
- What proposals or other actions are being planned right now for the 2018 spring season—based on survey data and other sources?
After seeking answers, we will conclude with what we think will be hot in the 2018 proxy season.
Clue 1: What new rules or policies will be effective?
Proxy seasons can be shaped by new rules put in place by the Securities and Exchange Commission (SEC), as well as by new voting policies from proxy advisors such as Institutional Shareholder Services (ISS). This spring, a few major developments are notable. First, this is the first year that the pay ratio rule will require disclosure of the ratio between the total pay of a company’s median employee and its CEO (or, alternatively, the median total pay of all the company’s employees, minus the CEO). Despite new SEC guidance on calculation, the results, when disclosed prior to the annual meeting, are likely to spark some shareholder outcry at annual meetings.
A few additional issues stand out based on 2018 ISS Americas Proxy Voting Guidelines Updates. ISS has said that it will support shareholder proposals asking for more disclosure on environmental risk, and its updates point to recent policy changes from the Task Force on Climate-Related Financial Disclosures (TCFD). “The updates to ISS’ climate change risk policy better aligns it with the TCFD’s recommendations, which explicitly seek transparency around the board and management’s role in assessing and managing climate-related risks and opportunities,” the report says. Other proxy season trends may include more support for resolutions opposing excessive director pay and resolutions supporting gender pay equity, as predicted in this recent report from Gibson Dunn.
Clue 2: What proposals were successful last year?
Let’s look at the most successful proposals at the 250 largest companies by revenue throughout 2017 according to full-year data from Proxy Monitor. This source is representative of broader trends because, as noted in Proxy Monitor’s early 2017 overview, shareholder proposals are more common at the largest companies. Moreover, “the companies in the Proxy Monitor database encompass the majority of holdings for most diversified investors in the equity markets, making this analysis appropriate for the average shareholder.”
According to the report, governance proposals seem to take the prize. Fifteen of the 294 proposals at the top 250 public companies in 2017, or about 5 percent of the 294 proposals from investors, received a majority vote. Most of these winners can be called “corporate governance” proposals, rather than social issues. Three were for environmental impact reports (at Occidental Petroleum Corp., Exxon Mobil Corp., and PPL Corp.), but all the rest had to do with governance.
Five proposals were victories for proxy access (National Oilwell Varco, Humana, IBM, and Kinder Morgan, Inc.), five for simple majority voting (Cognizant Technology Solutions Corp., Marathon Petroleum Corp., L Brands, Paccar, and First Energy Corp.) and two were specific governance proposals. Shareholders at CVS Health Corp. voted to reduce required ownership to call a special meeting, and shareholders at ADP voted to repeal a bylaw provision that had been adopted without shareholder approval. That vote happened in November, in the so-called “mini-season” (the one experienced by the 20 percent of companies that hold their annual meeting in the second half of the year).
Clue 3: What proposals were most frequent last year?
Now let’s look at the resolutions proposed most frequently last year. Looking again at the 294 resolutions studied in the Proxy Monitor data, the trends are clear. Classifying the proposals generally into the three categories, we see that social policy, with 164 resolutions, was the most popular proposal category, followed by corporate governance issues at 107. Executive compensation did not draw shareholder ire; only 23 resolutions focused on it, down from higher levels in the past.
- Within social policy, the double-digit issues raised across at least 10 companies were environmental (48 issues were proposed—or 52 if you count four “sustainability metrics” proposals), lobbying (38), political spending (13), employment rights (17), gender equality (12), and human rights (12).
Diversity proposals are also notable. Although they were relatively rare compared to other 2017 issues, they showed show signs of growth. There were only three such proposals at major companies the previous year, while there were five in 2017. Furthermore, although they did not propose board diversity resolutions, State Street Corp., a major institutional investor, voted against directors serving on nominating committees for boards without women, and BlackRock also voted no at some boards over the diversity issue.
- Within corporate governance, the double-digit issues were chair independence (28 resolutions), proxy access (22), and special meetings (15). Remaining corporate governance issues were introduced at 9 or fewer companies. Although ISS flagged director overboarding as an issue for 2017 and revised its guidelines accordingly, there were no proposals about this last year.
- Finally, within executive pay, no particular issue dominated. Various new requirements in pay approval and pay disclosure (say on pay, pay ratio, etc.) have largely resolved this issue.
Clue 4: What proposals or other actions are being planned for 2018?
As of early January 2018, we have little data on shareholder resolutions to be included in 2018 proxy statements. While some companies have already released their 2018 proxies, none of these contain shareholder resolutions. However, we do know what ISS is recommending with respect to shareholder resolutions in the newest revisions to its proxy voting guidelines for 2018.
As reported in the Wall Street Journal on December 22, companies preparing their 2018 proxy statements can expect “continuing pressure from investors to enhance disclosures regarding board composition, climate change risk, and cybersecurity.” The prediction is based on a survey conducted by executive search firm Russell Reynolds. Secondary trends included the usual mix of corporate governance, board composition, and executive compensation.
Of course, shareholder proposals are not the only way to change a company. Instead of submitting a shareholder resolution on an issue, a shareholder can wage a so-called proxy fight by sending investors a separate proxy voting card with an alternative slate of directors, or, in the case of companies with proxy access, by including a dissident slate in the company’s proxy. (There is still no such thing as a universal proxy card that allows investors to mix and match candidates from the nominating committee and dissidents, despite an SEC proposal in that regard.) According to FactSet, 2017 saw 75 proxy fights for board seats. While this is fewer than in 2016—which at 101 proxy fights was a banner year—the battles were waged upon household names: ADP, General Motors Co., and Procter & Gamble Co., among others.
What’s Hot and Why
Here is our short-list of five proxy issues that are likely to appear in 2018.
- Pay Ratio. Shareholders will be reading these disclosures for the first time.
- Environmental proposals. They have been both frequent and successful in recent times, and because ISS is drawing attention to them again this year.
- Governance mechanics. Why? Because they matter. They are rarely discussed by bloggers due to their dry and technical nature, but governance issues continue to be popular proxy issues, with more than 100 last year, and with the highest rate of success (12 wins last year—a strong result since majority votes on resolutions remain extremely rare).
- Activism. As Douglas Chia, head of corporate governance at the Conference Board, stated in a recent Equilar report, “public company boards will have their work cut out for them in 2018 with activism continuing to dominate the governance landscape.”
- Behind the scenes changes. A number of new NACD publications—notably the 2018 Governance Outlook and the 2017–2018 NACD Public Company Survey—shed more light on the upcoming season from behind the scenes.