Lessons from the 2018 Proxy Season

Transcription

1 SC1: Lessons from the 2018 Proxy Season S&C Client Webinar September 13, 2018 Janet Geldzahler Melissa Sawyer Marc Trevino

2 Overview of Presentation Environmental/social/political proposals more withdrawn following engagement; higher levels of support Increased focus on proposals to reduce special meeting thresholds and written consent proposals Fewer proxy access proposals; proxy access amendment proposals fail Continued focus on board diversity; matrix disclosure increases Common reasons for director against votes Drivers of results of 2018 say-on-pay votes Near elimination of compensation-related proposals; broad shareholder support for equity compensation plans 2

3 Overview of Shareholder Proposals Summary of Shareholder Proposals* Shareholder Proposals Submitted Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed Type of Proposal 2018 YTD YTD YTD YTD 2017 ESP-related % 22% 8 4 Governance-related % 39% Compensation-related % 22% 0 0 Total *All shareholder proposal data in this presentation is for meetings at S&P 1500 companies through June 30, 2018, and is based on S&C s analysis of ISS and Shark Repellent data as well as public filings. A proposal is described as passing if it receives the support of more than 50% of votes cast. 3

4 ESP Proposals Gain Traction Significant increase in withdrawn proposals due to engagement ESP PROPOSALS Shareholder Proposals Submitted Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2018 YTD YTD YTD YTD 2017 Environmental issues % 29% 5 3 Political issues % 26% 0 0 Anti-discrimination % 16% 0 0 Human rights issues % 7% 0 0 Sustainability report % 29% 1 1 Health and safety % 17% 0 0 Animal rights % 10% 0 0 Other social policy issues % 4% 2 0 4

5 ESP Proposals Gain Traction continued Successful results from engagement vary much more widely than with governance proposals Engagement to continue Board to study proposal Board to generate report addressing elements of proposal may or may not be public Company to increase disclosure on subject addressed by proposal Board to enact proposal or certain elements of proposal Securities law issues raised by disclosure Labor Department caution regarding ESG focus 5

6 Major Proponents of ESP Proposals and Withdrawal Rates Filers ESP Proposals 1. NYS Common Retirement Fund As You Sow Foundation Arjuna Capital Zevin Asset Management Mercy Investment Services Trillium Asset Management Walden Asset Management Friends Fiduciary Corporation NYC Comptroller Calvert Investment Management 8 6

7 ESP Proposals High level of engagement/withdrawals reflect growing acknowledgement of issuers of significance of ESP concerns to institutional investors address, don t oppose Proposals related to discrimination (esp. gender pay equity) had highest withdrawal rate less than 20% went to a vote, and shareholder support doubled Environmental and political contributions/lobbying continue to be most likely to go to a vote ISS supported 74% of ESP proposals, versus 64% in

8 New Types of ESP Proposals Gun Safety Social media fake-news policies Opioid Accountability Project 8

9 Few Governance Proposals Come to a Vote Increase in proposals to lower special meeting right percentage/ grant right to act by written consent Substantial decrease in proxy access proposals Small number of proposals to destagger/adopt majority voting/eliminate supermajority voting requirements Issuers which generally receive shareholder proposals (large-cap companies) have already taken these actions 9

10 Special Meeting Proposals RIGHT TO CALL SPECIAL MEETINGS Shareholder Proposals Submitted Total Shareholder Proposals Voted On Average % of Votes Cast Shareholder Proposals Passed Almost two-thirds of S&P 500 provide stockholders some right to call special meetings 25% threshold is most common 2018 YTD YTD YTD YTD 2017 Adopt new right % 45% 1 3 Lower % on existing right % 41% 4 1 In four of eight proposals that went to a vote to introduce special meetings, issuer made a counter-proposal all issuer counter-proposals received majority support Four successful proposals to lower 25% threshold right to 10% 10

11 Special Meeting Proposals continued No-action relief granted for conflicting proposals AES management sought ratification of existing 25% threshold Narrows application of 2015 Staff Legal Bulletin 14H Capital One SEC conditioned relief on additional disclosure including reference to omission of shareholder proposal to lower threshold, and statement that ratification is a vote against a lower threshold 11

12 Written Consent Proposals RIGHT TO ACT BY WRITTEN CONSENT Shareholder Proposals Submitted Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2018 YTD YTD YTD YTD % 46% 6 3 ISS recommended in favor of 86% Charter amendments to enact successful shareholder written consent proposals can include terms similar to special meeting rights and still be responsive Waiting periods, disclosure requirements, holding requirements, blackout periods see ISS FAQ on permissible restrictions 12

13 Proxy Access Substantially fewer adoption proposals come to a vote, amendment proposals continue to fail PROXY ACCESS Shareholder Proposals Submitted Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2018 YTD YTD YTD YTD 2017 Adopt new right % 59% 3 18 Amend existing right % 28%

14 Proxy Access Main Proponents NYC Comptroller Boardroom Accountability Project Emphasis shifted to matrix disclosure over 70 proposals (adoption and amendment) in 2017, estimated 17 proposals in 2018 Individual proponents (McRitchie/Chevedden) Unlikely to withdraw, but issuers that adopted at 3% were able to exclude as substantially implemented Four exclusions total (including both proposals to adopt and proposals to amend) Proponents continue to tweak amendment proposals 14

15 No Use of Proxy Access to Date Unattractive to activists traditional proxy contests more likely to be successful Greater expense/effort than shareholder proposals Must file Schedule 14N Must comply with advance notice bylaw requirements Director nominees likely to seek indemnification/nomination fees grounds for exclusion in some proxy-access bylaws Complicated legal framework Less attractive to potential nominees? More limited solicitation means lower likelihood of success Will group agree to indemnify, pay nomination fee; is it allowed under bylaw? 15

16 Proxy Access What to Do Now Prepare form of proxy access bylaw Updates included in PLI Public Company Deskbook, written by S&C partners Analyze shareholders positions but assume absent unusual holdings, receipt of proposal will result in adoption of proxy access in some form Stay apprised of new formats of proposals, SEC no-action positions Keep board updated 16

17 Should Issuers Adopt Proxy Access Proactively? Pros Less likely to receive proposal to amend Gets the issue behind the board Proxy access nominations as of yet have not been made Avoids increasingly extensive withdrawal negotiations with NYC Comptroller May avoid getting on radar for initiatives like Board Accountability 2.0 (discussed below) Cons Makes proxy access nominees possible sooner Issuer might not get a proposal for some time, and little pressure on midcap and small-cap companies to adopt proactively Currently, adopting after receiving proposal or losing a vote yields the same terms as proactive adoption (ISS has not recommended against directors at companies that adopted 3/3/20/20 bylaw after proposal passed, even where proposal provided group size be unrestricted) May still get a proposal to amend even following proactive adoption (for example, to remove group size limit) 17

18 Proxy Access Actions on Receipt of Proposal Simply putting to a vote probably still least attractive option Highly likely to lose, but terms adopted following lost vote are as favorable as those adopted proactively, and could be better than if negotiated with NYC Comptroller Adopting following receipt of proposal puts issuer on same timing as to availability of proxy access as simply putting to a vote and losing, but appears more responsive Need for study, evolving landscape arguments not very credible at this point in light of consistency of market practice 18

19 Proxy Access Actions on Receipt of Proposal Adopting 3/3/20/20 in advance of vote is most common response NYC Comptroller should withdraw, but negotiations are becoming more protracted Individual proponents generally won t withdraw, but should be excludable as substantially implemented (as would NYCC proposal if not withdrawn). Successful exclusions have not seemed to increase risk of receiving an amendment proposal For proposals that make it to a vote, prior adoption by company has been successful in defeating proposal in all instances unless 5% ownership required Put forward competing management proposal for vote Less common than adopting in advance of vote, but similar success continued 19

20 Who Gets Shareholder Proposals? Shareholder proposals remain much more common at larger companies The following chart shows the number of shareholder proposals by market cap (note that the small/mid-cap chart covers 3x as many companies): Data derived from ISS and Shark Repellent information. Data is for meetings through June 30,

21 Who Makes Shareholder Proposals? Individuals. Chevedden, McRitchie and William Steiner and family members made over 200 proposals, close to 40% of all proposals submitted and vast majority of governance proposals Public Pension Funds and Entities. Over 90 (140 in 2017) proposals. Focus on environmental, political contributions and lobbying, proxy access, board diversity and gender pay equity Labor Unions. Over 40 proposals, primarily on governance- and compensation-related issues Social Investment Entities. Responsible for most social policy proposals. Most active include As You Sow (37), Trillium Asset Management (32), Zevin Asset Management (29), Walden Asset Management (24), Arjuna Capital (23), and Mercy Investment Services (22) 21

22 NYC Comptroller Shifts Emphasis to Matrix Letters sent to 151 issuers (who previously received proxy access proposals from NYCC) requesting disclosure of board skill/diversity matrix and engagement concerning board refreshment ISS s 2018 annual policy survey asks what format of disclosure (including a matrix of board skills and attributes) is most useful NYCC had engaged with 85 issuers as of late July 29% of issuers provided individual director matrix in 2018, with 17% providing cumulative disclosure of all directors as a group One shareholder proposal to provide a matrix went to a vote at Exxon-Mobil in 2018, only 16.5% voted for 22

23 Independent Chair INDEPENDENT CHAIR Shareholder Proposals Submitted Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2018 YTD YTD YTD YTD % 30% 0 0 Shareholder support has plateaued Lead Independent Director appears to be an acceptable substitute for separating the roles of chair and CEO 23

24 Majority Voting and Board Declassification MOST SUCCESSFUL GOVERNANCE PROPOSALS Shareholder Proposals Submitted Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2018 YTD YTD YTD YTD 2017 Majority Voting in Uncontested Elections % 67% 6 10 Eliminate Supermajority Thresholds % 74% 5 13 Declassify Board % 68% 4 5 Continued decreases in governance proposals coming to a vote Most large-cap companies have these provisions in place Smaller companies tend to adopt these provisions upon receipt of a proposal, due to high success rate if they come to a vote Majority voting is a common proposal at mid-cap companies 24

25 Proposals on Board Diversity INCREASE BOARD DIVERSITY Shareholder Proposals Submitted Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2018 YTD YTD YTD YTD % 31% 0 2 Vast majority of proposals withdrawn In 2017 and 2018, large institutional investors (State Street, BlackRock, Vanguard) have proxy voting and engagement focus on board diversity, particularly gender diversity Several state legislatures (CA, IL, MA, PA) have adopted nonbinding resolutions urging board diversity for companies doing business there 25

26 Board Composition/Tenure Disclosure Trends Director tenure has not been a focus of proposals, but is increasingly a topic addressed by issuers in proxy statements 26

27 Dual Class Voting Proposals DUAL CLASS VOTING Shareholder Proposals Submitted Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2018 YTD YTD YTD YTD % 31% 0 0 Failure of proposals due to existence of supervoting stock ISS 2018 policy updates provide for negative director recommendation at newly public companies with dual class stock Actions by index providers to exclude new dual class companies 27

28 Compensation-Related Shareholder Proposals COMPENSATION-RELATED PROPOSALS Shareholder Proposals Submitted Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2018 YTD YTD YTD YTD 2017 Social compensation issues % 18% 0 0 Limit golden parachutes % 33% 0 0 Clawbacks % 14% 0 0 Stock retention N/A 23% 0 0 Other compensation-related % 18%

29 ISS Recommendations Against Directors 2018 ISS DIRECTOR WITHHOLD OR AGAINST RECOMMENDATIONS (U.S. RUSSELL 3000 COMPANIES) 2018 ISS DIRECTOR WITHOLD OR AGAINST RECOMMENDATIONS (U.S. S&P 500 COMPANIES) Number of Directors Average Shareholder Vote (% of Votes Cast) Directors Receiving <50% of Votes Cast Number of Directors Average Shareholder Vote (% of Votes Cast) Directors Receiving <50% of Votes Cast Independence issues (non-independent directors on key committees or failure to maintain a majority independent board) Newly public company with adverse governance provisions not subject to a sunset % % % % 0 Absence of a formal nominating committee % Shareholders not permitted to amend bylaws % % 0 Poor attendance at board and committee meetings (<75%) % % 0 Impact of an ISS recommendation against a director depends on the reason for it 29

30 ISS Recommendations Against Directors continued 2018 ISS DIRECTOR WITHHOLD OR AGAINST RECOMMENDATIONS (U.S. RUSSELL 3000 COMPANIES) 2018 ISS DIRECTOR WITHOLD OR AGAINST RECOMMENDATIONS (U.S. S&P 500 COMPANIES) Number of Directors Average Shareholder Vote (% of Votes Cast) Directors Receiving <50% of Votes Cast Number of Directors Average Shareholder Vote (% of Votes Cast) Directors Receiving <50% of Votes Cast Compensation issues: Lack of responsiveness to low say-on-pay vote % % 0 Other compensation issues (with no 2017 say-on-pay vote) 25 73% % 0 Other compensation issues (with 2017 say-on-pay vote) 95 80% % 0 Poison pill issues (e.g., failing to obtain shareholder approval) % % 0 Overboarding % % 0 Lack of responsiveness to shareholder concerns (e.g., failure to implement a successful shareholder proposal) % % 0 30

31 ISS Recommendations Against Directors continued 2018 ISS DIRECTOR WITHHOLD OR AGAINST RECOMMENDATIONS (U.S. RUSSELL 3000 COMPANIES) 2018 ISS DIRECTOR WITHOLD OR AGAINST RECOMMENDATIONS (U.S. S&P 500 COMPANIES) Number of Directors Average Shareholder Vote (% of Votes Cast) Directors Receiving <50% of Votes Cast Number of Directors Average Shareholder Vote (% of Votes Cast) Directors Receiving <50% of Votes Cast Failure of risk oversight due to pledging of shares by executives 74 87% % 0 Failure to address material weakness in internal controls 32 82% % 0 Taking unilateral action that reduces shareholder rights 21 71% % 0 General performance or oversight concern 16 71% % 0 Excessive non-audit fees paid to auditors, or failure to disclose a breakdown of fees Failure to opt out of amendment to Indiana law resulting in classified board 18 70% 1 0 N/A % % 0 31

32 Drivers of 2018 Say-on-Pay Results RUSSELL 3000 S&P 500 Overall, U.S. companies had similar say-on-pay results in 2018 to 2017 Of the 22 companies that had failed say-on-pay votes in 2017 and have had their 2018 meeting, 13 received majority support in 2018, with only 9 getting >70% support Results reflect companies continued efforts to engage with shareholders and proxy advisors, as well as clearer compensation disclosure Past success no guarantee of continued success 2018 YTD YTD 2017 Percentage passed (majority support) 97% 99% 98% 99.5% Percentage with >70% support 92% 94% 93% 94% Percentage with ISS Against recommendations 13% 12% 10% 9% Average support with ISS For recommendations 95% 95% 94% 94% Average support with ISS Against recommendations 66% 70% 62% 69% Of the 50 companies in Russell 3000 that failed say-on-pay in 2018, only ten failed their 2017 vote and 24 had >70% support in 2017 The sum S&P 500 companies that failed in 2018 had support levels ranging from 66% to 99.7% in

33 2018 ISS Say-on-Pay Analysis continued ISS recommendations continue to be driven by pay-for-performance analysis, which is focused on stock price most important factor is alignment of CEO pay to Total Shareholder Return 2018 Results of ISS Quantitative Analysis Factor U.S. S&P Companies with Negative ISS Recommendations Total with negative recommendations 41 Number that had high concern on: Pay-for-Performance 39 Compensation Committee Communication and Responsiveness 2 Severance/Change-in-Control Arrangements 3 Peer Group Benchmarking 1 Non-Performance-Based Pay Elements 4 33

34 ISS Pay-for-Performance Analysis Relative alignment of CEO pay and total shareholder return over three years Relative CEO pay to peer group median over one year Absolute alignment of CEO pay and TSR over five years Relative alignment of CEO pay and financial performance over three years 34

35 Janet Thiele Geldzahler Of Counsel, Washington, D.C. T: E: Melissa Sawyer Partner, New York T: E: Marc Trevino Partner, New York T: E: 35

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