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 mostsuccessful 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 arebeing planned right nowfor 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.”
Former DuPont CEO Ellen Kullman spoke with National Association of Corporate Directors’ (NACD) President and CEO Peter R. Gleason at the 2017 Global Board Leaders’ Summit. Kullman—known for leading the DuPont management to victory in the 2015 proxy battle against Trian Fund Management’s Nelson Peltz—shared insights into oversight of long-term value creation and tactics for succeeding in a proxy battle.
Before discussing the finer points of DuPont’s proxy battle, Kullman addressed the company’s relationship with its stakeholders. Kullman once said that DuPont adheres to stakeholder theory by focusing on four areas: engaging employees, satisfying customers, supporting the community and, in turn, providing success for shareholders. “As a company that operated all around the world, many times our manufacturing plants were the biggest employer in the area,” Kullman said. “If we wanted to be successful, we had to support the citizen.”
Gleason compared DuPont’s relationship with Wilmington, Delaware, to Corning and the company’s headquarters in his own hometown of Corning, New York. “Attracting the right talent is an investment by the company,” Gleason said. “Corning had a philharmonic orchestra in a town of ten thousand people. However, investments in the community may have been seen as low-hanging fruit to shareholders more interested in seeing direct returns.”
In the case of DuPont, its small hotel and golf course in Wilmington became activist targets despite the sense of community they created with the citizens of the town. “Young people today have a choice about where they work,” Kullman said. “If you want to attract the best and brightest, you have to make the community something they want to be a part of. Why does Google have free food and good infrastructure? It’s not a historic appendage, it’s to keep employees working hard. The question is how much [do you want to invest to retain talent] because you can never calculate a return on it.”
Tell Investors Your Story
Kullman shared a number of tactics that helped DuPont emerge victorious in its proxy fight.
1. Keep Telling Your Story to Investors: “We understood our investors and our strategy, and I don’t think [Trian] did. A board member that had been [with DuPont] for three years did a better job explaining our strategy [to investors] than I did. He kept it to the points that were important and was helpful in making the connection as a shareholder.”
2. Get Ahead of the Activist by Communicating Early and Often with Regulators: Kullman pointed out that activists’ communications tactics have a time advantage over their target companies because public companies must file shareholder communications first with the Securities and Exchange Commission (SEC). “I constantly rewrote letters to the SEC and filed responses [in order to be able to communicate with shareholders in line with the SEC rules for solicitation]. Going to CNBC would have been a no-win situation. That’s how we got that transparent information out to the investor and news community to make sure it wasn’t a one-sided innuendo from the activist.”
3. Trust the Management Team to Run the Business: “You have to have a top team. The CFO, regional vice presidents, vice presidents, and general managers of our businesses had to focus on running the company, while we took a small group of people to focus on the fight. I had to have a foot in both camps: I ran the fight during the day and the company on nights and weekends.”
4. Maintain Constant Board-CEO Communication: “You need to spend a lot of time with your board and you need to know where each board member is individually. Whenever I had an interaction with the activist, I would summarize it to the board right away. Say you want help and ideas from your board members because they have a lot of experience. At that point [in our proxy fight with Trian] there were no bad ideas.
5. Engage Retail Investors: “Proxy advisory firms came in to talk to the board and me about what we needed to do to protect ourselves. They said that retail investors vote for management, but they don’t vote. So we identified shareholders that owned more than $1 million in stock. I called them personally and some of them actually called me back.”
6. Use Social Media: “I was new to social media, but I had to learn quickly. With such a large retail base, we couldn’t assume they were all retired investors—and they weren’t. We had to use as many vehicles as possible to get our story out there.”
Learn more about the 2018 NACD Global Board Leaders’ Summit and register here.
Investors now see corporate governance as a hallmark of the board’s effectiveness and one of the best sources of insight into the way companies operate. In response to this trend, Farient Advisors LLC, in partnership with the Global Governance and Executive Compensation Group, produced the report 2017—Global Trends in Corporate Governance, an analysis of corporate governance practices in the areas of executive compensation, board structure and composition, and shareholder rights covering 17 countries across six continents.
NACD, Farient Advisors LLC, and Katten Muchin Rosenman LLP cohosted a meeting of the NACD Compensation Committee Chair Advisory Council on April 4, 2017, during which Fortune 500 compensation committee chairs discussed the report’s findings in the context of the current proxy season. The discussion was held using a modified version of the Chatham House Rule, under which participants’ quotes (italicized below) are not attributed to those individuals or their organizations, with the exception of cohosts. A list of attendees’ names are available here.
Global Governance Trends
2017—Global Trends in Corporate Governance finds that governance standards around the world have strengthened in response to financial crises and breakdowns in corporate ethics and compliance. Those crises and breakdowns have led to greater pressure from governments and investors, who are demanding economic stability and safe capital markets. In regard to executive compensation, the report notes a number of global governance trends:
Source: Farient Advisors, 2017—Global Trends in Corporate Governance, p. 18.
Most of the 17 countries surveyed (94%) require executive compensation disclosure, although the disclosures made and the quality of these disclosures varies from country to country. Surveyed countries that had the least developed disclosures are South Africa, China, Brazil, and Mexico.
Say-on-pay voting is mandatory in most developed countries, although there is variance on whether the votes are binding or not. For developed countries where the vote is voluntary (e.g., Canada, Belgium, Germany, and Ireland), it still remains a leading practice.
Common leading practices are to use competitive benchmarks, such as peer groups to establish rationales for pay, and to provide investors with information on components of pay packages and performance goals.
2017 Proxy Season Developments
Meeting participants shared a number of observations and practices from the current proxy season:
Continuous improvement on disclosures Council participants indicated they are sharing more information with shareholders, in a more consumable way. “We want to be in the front ranks as far as providing information to shareholders,” said one director. “Instead of asking ‘why should we share that?’ we’re starting to ask ‘why not?’” Another director added, “Over the last few years we’ve moved from a very dense legalistic document to something that’s much more readable. Our board set up a process to do a deep-dive review every two years; this fall is our next review. It’s a way to ensure our disclosures keep pace with current practices and also reflect where we are as a company and board.”
Council members also discussed the status of Dodd-Frank rulemaking, given the new presidential administration and SEC commission. S. Ward Atterbury, partner at Katten Muchin Rosenmann LLP, said, “While it’s unclear exactly what the SEC will do with Dodd-Frank requirements in the future, investors have spoken on some of the issues, especially on things like say on pay and pay for performance. There may be less formal regulation, but the expectations on companies and boards are still there [to provide pay-for-performance disclosure].”
Growing interest in board processes According to one director, “We’re hearing more interest about CEO succession as it relates to strategy. Investors are asking us to describe our process—they understand we can’t discuss specifics.”
Director Pay Dayna Harris, partner at Farient Advisors LLC, discussed the increased focus on director pay: “Given the recent law suits regarding excessive director compensation and an increase in director pay proposals in 2016, Institutional Shareholder Services (ISS) created a new framework for shareholder ratification of director pay programs and equity plans.” ISS’ framework evaluates director pay programs based on stock ownership guidelines and holding requirements, equity vesting, mix of cash and equity, meaningful limits on director pay, and quality of director pay disclosure. ISS’ updated factors for evaluating director equity plans include relative pay magnitude and meaningful pay limits.
Environmental, social, and governance (ESG) issues Meeting participants agreed that social issues, such as ESG and gender pay equity, are increasing in popularity among investors. In particular, nonbinding shareholder proposals on climate change received majority support this year at Exxon Mobil Corp., Occidental Petroleum Corp., and PPL Corp.
Refining approaches to outreach and engagement with investors Meeting participants discussed leading practices for engaging shareholders. Some directors indicated that investors have turned down their offers to speak on a regular basis because of time constraints. One delegate emphasized that just making the offer to meet with shareholders is appreciated, even if that offer is turned down. One director said, “We invited one of our major long-term shareholders to speak at one of our off-site [meetings] as part of a board-education session. It was a different type of engagement and very valuable.”