Hot Topics 2013 Proxy season highlights

Transcription

1 Hot Topics 2013 Proxy season highlights Recent governance trends, regulatory developments, and the expectation of future governance-related legislation were highlighted in the June 25 Deloitte Dbriefs webcast titled 2013 Proxy Season Highlights and Other Corporate Governance Developments. The session was hosted by Donna Epps, a partner in Deloitte Financial Advisory Services LLP. Webcast attendees heard insights from Consuelo Hitchcock, a principal in Deloitte LLP; Bob Smith, corporate secretary, vice president, and deputy general counsel of NiSource; and Bill Ultan, senior managing director of Morrow & Co. They discussed a number of developments in corporate governance, including issues arising from the proxy season; the changing landscape for auditors and audit committees; and themes such as shareholder engagement and board and management considerations. In this article, we will highlight a few of the topics covered in the webcast. Proxy season hot topics In this year s proxy season there has been a slight increase in the number of shareholder proposals received compared to previous years (1.27 proposals introduced per company for the Fortune 250 in 2013 compared to 1.22 in 2012 and 1.18 in 2011). 1 The success rate of these proposals remained very low, with only seven percent of shareholder proposals receiving majority support. 2 The presenters focused on the following five topics from this year s proxy season: Say on pay Proxy access Board declassification Social and environmental policies Independent chairmen and leadership structure Say on Pay This is the third year for say-on-pay proposals, and the first year small-cap companies were required to include say on pay; it appears that say-on-pay proposals have normalized somewhat. Companies are improving the disclosures provided in the proxy and through shareholder engagement activities. Many analysts note a positive trend in the quality of compensation disclosures compared to previous years. 1 Proxy Monitor, 2013 Proxy Season Wrapping Up, 2 Ibid.

2 So far, results have been largely in favor of management, with 91 percent average support at S&P 500 companies for compensation packages. 3 The presenters on the webcast noted that Institutional Shareholder Services, a prominent proxy advisory firm, has recommended a vote in favor of nearly 90 percent of say-on-pay proposals. 4 Proxy Access Continuing the trend from last year, proxy access has been a concern among shareholders. Proxy access allows shareholders to place their own director nominees on the company s proxy card, along with the board candidates nominated by the company. Shareholder proposals on this topic either request that the board implement proxy access processes or request amendment of the company s bylaws to implement proxy access. 5 Some proposals to implement proxy access are expected to gain momentum this year; however, most of the shareholder proxy proposals that did come through this year did not pass. The private ordering process permits shareholder proposals that either request the board to grant proxy access or that bypass the board and directly amend the company s bylaws to implement proxy access 6. Three proxy access proposals passed this year, each with a three-percent/three-year holding requirement. This means that if shareholders, in aggregate, hold three percent of shares and have held these shares for at least three years, they can nominate a director on the ballot. Proxy access may continue to affect many companies in the years ahead. Board declassification Board declassification shareholder proposals, which support the annual election of all directors, have been primarily focused on small and mid-cap companies, which are more likely to have classified structures. The vast majority of large-cap companies have annual election of all directors. Last year, there was an increase in both the number of board declassification proposals submitted for a vote (21 in 2011 versus 38 in 2012) and the number of proposals passed (20 in 2011 versus 35 in 2012). 7 Social and environmental policies Social and environmental proposals have gained ground this proxy season, with almost a third of the proposals related to this topic. 8 Many of the proposals address sustainability, political contributions and lobbying, fracking, and water usage. Companies that have been proactive in providing disclosures on these issues are likely to receive fewer proposals than those that have not followed these practices. 3 Morrow & Co., LLC 2013 Proxy Season Updates Year-to-Date, June Ibid. 5 Sullivan & Cromwell on Proxy Access & Private Ordering, Ibid. 7 Alliance Advisors The Advisor, 2012 Proxy Season Review: Shareholder Resolution, September Morrow & Co., LLC 2013 Proxy Season Updates Year-to-Date, June Copyright 2013 Deloitte Development LLC. All rights reserved. Hot Topics July

3 Independent chairs and leadership structure Independent chair proposals remain strong; however, the average supportive votes remain in the low 30 th percentile. 9 There appears to be a disparity between how U.S. and non-u.s. investors view these proposals. Non-U.S. investors are more likely to support an independent chair for all companies, whereas U.S. investors are typically open to different structures, including a lead or presiding director who may have robust and substantive duties that demonstrate independence and objectivity. When this issue was introduced in the 2013 proxy statements, support was relatively low; this was consistent with last year (31.5 percent in 2013 versus 35.6 percent in 2012). The SEC has mandated leadership structure disclosures that explain why a company operates with its particular structure, which has helped companies explain their positions on leadership structure to investors. Other topics affecting governance New rules and changes to old rules During the webcast, speakers discussed other recent events, trends, upcoming regulations, and changes to regulations that may affect the governance agenda; these included Regulation Fair Disclosure, the conflicts minerals rule, compensation committee independence, and the Dodd-Frank Wall Street Reform and Consumer Protection Act. In April, the SEC announced that public companies may be able to use social media outlets to share material corporate information under certain circumstances without violating Regulation FD. Regulation FD is intended to promote full and fair disclosure of information by issuers, and to clarify and enhance existing prohibitions against insider trading (e.g. selective disclosure of material nonpublic information). The April announcement came after a CEO posted company information on his personal social media page, causing controversy about whether this should be considered selective disclosure under Regulation FD. The SEC provided some guidance for such situations, but also noted that an employee s personal social media site is not typically considered to be a channel of communication to investors. The presenters suggested to the audience that this is an area where companies should consider developing policies for disclosures on social media sites. The Conflict Mineral Rule was adopted by the SEC in August 2012, as a part of the Dodd-Frank Act. It requires companies to disclose the use of conflict minerals, which include tin, tantalum, tungsten, and gold that is mined in the Democratic Republic of the Congo. Affected companies will have to file their first reports by May 31, 2014, for the 2013 calendar year. The SEC recently released frequently asked questions to assist companies in meeting this deadline. A presenter remarked that the FAQs were very helpful and recommended that companies read through them when considering compliance requirements. 9 Morrow & Co., LLC 2013 Proxy Season Updates Year-to-Date, June Copyright 2013 Deloitte Development LLC. All rights reserved. Hot Topics July

4 New listing standards on compensation committees independence and compensation committee adviser/consultant independence went into effect on July 1, 2013, at both the NYSE and the NASDAQ, as required by the Dodd-Frank Act. Compensation committee independence requirements go into effect for the first annual meeting after January 15, 2014, or by October 31, 2014, whichever is earlier. The listing standards differ slightly and webcast attendees are encouraged to stay abreast of these requirements when selecting and evaluating members, advisers, and consultants for the compensation committee. The webcast also highlighted four governance topics that are pending implementation as part of the Dodd-Frank Act: Pay for performance demonstrate the relationship between compensation paid and the financial performance of the issuer Pay ratio disclosure related to CEO pay Hedging disclosures directors or employees are permitted to hedge company securities Claw-back policies incentive-based compensation based on financial information or in the event of a financial restatement. None of the Dodd-Frank Act governance topics listed above has undergone rulemaking by the SEC; however, the presenters noted that the SEC is expected to roll out rules in the coming year. Audit committees The webcast also addressed issues related to the audit committee that have received attention in this year s proxy season, including multiple PCAOB and SEC initiatives: PCAOB exploration of ways to enhance auditor independence, objectivity and professional skepticism; much of the focus of the discussion has been on the role of the audit committee in supporting these qualities in the outside auditor. New Audit Standard 16: Communications with Audit Committees The objective of this standard is to reinforce the relationship through enhanced required communications between audit committees and the independent auditors. PCAOB Release: Information for Audit Committees about the PCAOB Inspection Process The PCAOB objective is to provide information and recommendations to audit committees to help them better understand the PCAOB inspection process and its effect on the outside audit. In addition to the PCAOB SEC initiatives, investor groups have shown increased interest in transparency within audit committee reports regarding oversight of the external auditor. The Council of Institutional Investors amended its policies in April 2013 with regard to factors for audit committee consideration when retaining independent auditors, reporting responsibilities, the inclusion of meaningful information in reports, compensation of independent auditors, and how to make retention decisions for auditors who have been present for more than 10 consecutive years. Likewise, the United Brotherhood of Carpenters continued a letter-writing campaign it began last year, requesting that over 20 companies provide specific disclosures related to the oversight of the independent auditors. Our presenters noted that they have seen more pressure for audit committee oversight and reporting related to the external auditor and it will likely to continue. Copyright 2013 Deloitte Development LLC. All rights reserved. Hot Topics July

5 Concluding thoughts Recent regulatory developments and the expectation of governance-related legislation have boards and financial executives seeking insight into leading trends and practices. The Deloitte Dbriefs webcast 2013 Proxy Season Highlights and Other Corporate Governance Developments provided meaningful dialogue and insight to attendees. For further statistics and discussion related to corporate governance trends on shareholder engagement, management considerations, and additional upcoming regulations, please refer to the replay of the Dbriefs webcast. Hot Topics articles are featured in each issue of Corporate Governance Monthly, a newsletter with the latest information for boards of directors and their committees from the Center for Corporate Governance ( This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. Deloitte is not responsible for any loss sustained by any person who relies on this publication. As used in this document, Deloitte means Deloitte LLP and its subsidiaries. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Member of Deloitte Touche Tohmatsu Limited Copyright 2013 Deloitte Development LLC. All rights reserved. Hot Topics July