Proxy voting and engagement

Transcription

1 SPRING 2017 Proxy voting and engagement AN INTEGRAL PART OF THE EQUITY INVESTING PROCESS

2 2 Mellon Capital INTRODUCTION This paper provides an overview of BNY Mellon s proxy voting and engagement philosophy and explores the ways in which members of the BNY Mellon Proxy Voting & Governance Committee (the Committee ) apply the Proxy Voting Philosophy and Guidelines. Despite the differences in approach to equity investing among the member firms 1 of the Committee, all are aligned in their approaches to proxy voting and company engagement, two of the important aspects of equity ownership. PROXY VOTING PHILOSOPHY Members of the Committee are guided by the BNY Mellon Proxy Voting Philosophy. This philosophy promotes sound corporate governance policies, with an eye toward increasing shareholder value over the long term. To accomplish these objectives, the Committee reviews and discusses resolutions, and directs proxy votes, in a manner that seeks to: Align the interests of a company s management and board of directors with those of the company s shareholders; Promote the accountability of a company s management to its board of directors, as well as the accountability of the board of directors to the company s shareholders; Uphold the rights of a company s shareholders to effect change by voting on those matters submitted to shareholders for approval; and Promote adequate disclosure about a company s business operations and financial performance in a timely manner. The member firms understand that their fiduciary duty is to their clients, the holders of the equity shares they manage. That said, they also understand the powerful impacts companies have on a broader pool of stakeholders and the influence these stakeholders may have over share price. To that end, the Committee, through the work of its members, considers a broad range of data as part of its review, including those often categorized as environmental, social and governance (ESG) factors. PROXY VOTING & GOVERNANCE COMMITTEE The structure of the Committee is unique and impactful in many ways. Most member firms representatives on the Committee are investment professionals who understand how proxy voting and engagement can impact shareholder value and investment. These seasoned investment professionals share valuable insights into the company s operations, which can add value to proxy research and analysis. Their in-depth knowledge of certain businesses and sectors also enables the Committee to have focused and effective engagement discussions with boards or management. The holdings from index and beta strategies, which tend to be longer term, provide the breadth of outreach that truly leverages the synergy of a multiboutique investment firm. The Committee has structured its process to enable it to prioritize the proxies of BNY Mellon s complex-wide holdings with significant economic value or a large percentage of ownership among the member firms. By aggregating votes across BNY Mellon, members seek to strengthen their influence over governance and other issues in an effort to increase long-term value. The Committee is supported by the BNY Mellon Proxy Voting and Governance Research Team (the Team ) which researches, compiles and monitors proxy issues. In addition to the independent research done by the team, AUTHORS Laura D. Kunkemueller Director, ESG Officer, The Boston Company Asset Management, LLC Karen Wong Managing Director, Head of Equity Portfolio Management, Mellon Capital 1 The member firms include Alcentra NY, LLC, The Bank of New York Mellon, The Bank of New York Mellon Trust Company N.A, BNY Mellon, National Association, BNY Mellon Trust of Delaware, The Boston Company Asset Management, LLC, The Dreyfus Corporation, Lockwood Advisors, Inc., MBSC Securities Corporation, Mellon Capital Management Corporation, Standish Mellon Asset Management Company LLC Confidential and Proprietary Do Not Duplicate These comments are provided as a general market overview and should not be considered investment advice. See attached disclosures Mellon Capital Management Corporation

3 Proxy voting and engagement 3 the Committee has engaged both Institutional Shareholder Services ( ISS ) and Glass Lewis ( GL ) to provide data and recommendations, as well as Equilar for compensation data. This data provides direction for the Committee and enables consistency, if not uniformity, across resolution types. Because the Guidelines are not absolute, context matters and may drive different outcomes for different companies. Each week, Committee members receive a packet listing upcoming votes, describing each resolution and the board s response, outlining the ISS and GL recommendations and rationales, and either suggesting a vote based on the BNY Mellon Guidelines or referring the issue to the Committee for discussion. Further research on environmental and social resolutions is provided to the Chairman of the Committee and the Team Leader. If there is historical information, such as the way BNY Mellon voted on the same resolution in prior years, or relevant discussion points from a recent engagement with company management, Committee members will receive information on that as well. It is important to note that the Committee views each vote independently. The inputs described above are a critical component of assessing each resolution s impact on the long-term success and health of the company. Therefore, the Committee may determine a For vote is appropriate in one company s context but an Against vote is appropriate for the same resolution in another company s context. The Committee may also vote against seemingly similar resolutions for a given company over time. GOVERNANCE PRIORITIES Governance is the overarching framework within which both the board and management operate. The board s purpose is to represent the shareholders and in so doing promote the long-term viability of the company. Management s role is to implement the strategic plan determined by the board. Proxy votes enable the shareholders to ensure that the board is fulfilling its purpose by providing a mechanism for feedback and redirection. Over time, the Committee has developed the following governance priorities as it reviews shareholder resolutions: Say on pay. This refers to the alignment of performance and compensation and the shareholders ability to influence executive compensation. Ideally, compensation will be based on both long-term performance metrics such as return on invested capital ( ROIC ) and operating profit growth, not just total shareholder return. We look for value creation rather than actions that artificially inflate share price in the shortterm. In addition, we are aware of outsized compensation packages that are not tied to extraordinary innovation, growth or other shareholder benefit. Board independence. Ideally, we would like to see 100% independence; however, we understand that it is still the norm to have the CEO be a member of the board. Beyond that, we generally do not support the nomination of inside directors. Shareholder access. The board should be outward facing, meaning that it is engaged with and responsive to its shareholders rather than being controlled or overshadowed by management. This is especially true of the Board Chair whose first loyalty must be to shareholders. Approval requirement for bylaw changes. Material changes in the bylaws go beyond the determination of a strategic plan. As a consequence, we believe the board should be required to obtain shareholder approval prior to any such change. Special meetings. We support the right of shareholders to call a special meeting to initiate extraordinary action as well as proxy access where special meetings are not included in a company s bylaws. Confidential and Proprietary Do Not Duplicate These comments are provided as a general market overview and should not be considered investment advice. See attached disclosures Mellon Capital Management Corporation

4 4 Mellon Capital ENVIRONMENTAL AND SOCIAL RESOLUTIONS The number of resolutions related to environmental and social issues has increased over the past several years. Unlike many of the governance resolutions which have converged to common norms over decades, environmental and social resolutions have only recently gained momentum. These resolutions are gaining serious attention from both their proponents and the voting shareholders. The goal of the Committee is to appropriately balance shareholder value, strength of the company and broader corporate citizenship. When reviewing a resolution, we look at a number of factors and anticipate voting for resolutions for which the following questions can be answered in the affirmative: Do we agree that the request either mitigates risk or provides a competitive advantage for the company? Complying with a resolution requires resources. So, there needs to be at least a commensurate amount of benefit to the company to require this additional commitment. Is the time frame contemplated in the resolution reasonable? For example, if a resolution requires a comprehensive review of a multi-national s supply chain within three months of the vote, we would most likely vote against it. Not because we disagree with the sentiment, but because the time frame is onerous. Is the cost of compliance reasonable and commensurate with the risk mitigation or advantage gained by complying? In the previous example, the resolution might be worded in a way that requires extensive hiring of third party consultants to meet the proposed standard. If the cost appears to be onerous or the benefit to the company de minimus, we will likely vote against the resolution. Is the resolution well defined without being proscriptive? Examples of proscriptive requests are those that request formal adoption of a specific code or named policy. While we encourage companies to develop policies on issues such as human rights, supplier conduct and climate change, we prefer to allow boards and management to develop policies which fit their specific contexts. Have peers already adopted the practice thereby isolating the company in its inattention to the issue? Does the company have a history of misbehavior or poor governance in the area addressed by the resolution? Because we are evaluating not only the request but also the impact of compliance on the company, we may vote against some resolutions even if we agree with the sentiment they represent. In these cases, we will often follow up with an engagement meeting with these companies to express our support for the idea of the resolution and explain why we did not vote in favor of it. Specifically, we conduct additional research beyond ISS and GL on environmental and social resolutions. As with the other resolutions, we are looking for areas of risk mitigation (including headline, reputation and regulatory risks) and areas of potential opportunity (e.g. showcase an emissions reducing initiative). Using data sources such as MSCI ESG Research, Bloomberg (including the ESG data) and corporate publications, including websites, we establish a picture of how the company is positioned relative to its peers, its operating environment and its corporate strategy. We then vote in favor of resolutions that will improve one or more of those relative positions. Confidential and Proprietary Do Not Duplicate These comments are provided as a general market overview and should not be considered investment advice. See attached disclosures Mellon Capital Management Corporation

5 Proxy voting and engagement 5 ENGAGEMENT While proxy voting is one direct, often public, way to influence corporate behavior, private engagement with management and the board can be a very effective and impactful complement. Engagements happen at two levels: the Team and the member firms. It should be noted that BNY Mellon, through the collective ownership of its investment boutiques, is frequently on the top 10 shareholder list of many public companies. Given this significant ownership, many companies reach out to the Team for a direct dialogue. If there is a resolution or issue that the Team believes will be of particular interest to an analyst or portfolio manager, the Team will reach out pro-actively to notify the Committee of the meeting. Because of the specialized knowledge of the analyst or portfolio manager, the engagement discussion can venture deep into specific topics such as climate change or executive compensation. We believe engagement meetings are the single most effective mechanism that increases transparency and economic returns to our investors. Generally the Team will engage a company when our views differ from those of management, or there is a failure to achieve our reasonable expectations for investor return. These meetings are most often confidential and private dialogues directly with board and management team. We consider these discussions to be an opportunity to align the interests of management and shareholders. For member firms, engagements are an opportunity for research analysts to understand a company s strategy and to gauge the extent to which the company has recognized risks the analyst believes it faces. Although risk mitigation is not the only reason an analyst might speak to company management directly, these meetings provide a forum for probing into strategy, business model and the assumptions underlying both. CONCLUSION At both the BNY Mellon and the individual member company levels, we take the responsibility of voting proxies seriously and have dedicated significant resources to researching, debating and ultimately voting each proxy. While we have adopted a voting philosophy and general voting guidelines, we understand that no two companies, or their contexts, are identical. Therefore, we consider the merits of each resolution as it relates to the company in question. The ability to provide input to a company s board via proxy voting is a critical responsibility and an important opportunity. We believe holding a board accountable for setting the direction of the company, hiring the appropriate talent, incenting and developing that talent, and delivering on the expected performance ultimately leads to long-term value creation. In addition, shareholder resolutions, and the votes they garner, provide boards and management a window into shareholder priorities. By actively researching resolutions, engaging with companies and voting proxies, BNY Mellon s Proxy Voting & Governance Committee and its members gain valuable insight into company governance and strategy and have a voice to influence both. Confidential and Proprietary Do Not Duplicate These comments are provided as a general market overview and should not be considered investment advice. See attached disclosures Mellon Capital Management Corporation

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7 PUBLICATION DISCLOSURES Mellon Capital Management Corporation ( Mellon Capital ) is an investment adviser registered with the Securities and Exchange Commission ( SEC ) under the Investment Advisers Act of Mellon Capital is a wholly owned subsidiary of The Bank of New York Mellon Corporation ( BNY Mellon ). The firm is defined as Mellon Capital and includes assets managed as dual officers of The Bank of New York Mellon and as dual employees of The Dreyfus Corporation. AUM, client and employee counts are as of December 31, 2016, unless noted otherwise. Mellon Capital s AUM includes assets managed in overlay strategies ($1.5 billion) as of December 31, BNY Mellon Investment Management is one of the world s leading investment management organizations and one of the top U.S. wealth managers, encompassing BNY Mellon s affiliated investment management firms, wealth management services and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally. Any collective investment funds presented are maintained by The Bank of New York Mellon. Employees of Mellon Capital manage the assets of any collective investment funds in their capacity as dual officers of The Bank of New York Mellon. Any collective investment funds presented are not deposits of, and are not insured or guaranteed by, any bank, the FDIC or any other government agency. Please refer to the Schedule A for the Fund (and for each other fund such Fund invests in) for important additional information. Mellon Capital Management and its abbreviated form Mellon Capital are service marks of Mellon Capital Management Corporation. The views discussed here reflect the opinion of the authors as of approximately March 2017, and are subject to change without notice. Comments are provided as a general market overview and should not be considered investment advice. Portfolio positions may vary significantly from those recommended by our models. This presentation does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. This material (or any portion thereof) may not be copied or distributed without Mellon Capital s prior written approval. Statements are current as of the date of the material only. Performance is expressed in U.S. dollars unless noted otherwise. Performance results for one year and less are not annualized. Many factors affect performance including changes in market conditions and interest rates and in response to other economic, political, or financial developments. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Past results are not indicative of future performance and are no guarantee that losses will not occur in the future. Future returns are not guaranteed and a loss of principal may occur.

8 ABOUT US Mellon Capital Global. Insightful. Engaged. Mellon Capital has provided investors with distinct insights into complex capital markets since Our unique approach to fundamentalsbased systematic investing drives our capabilities, which include multi-asset, active, smart beta, and indexing strategies. We re committed to helping our clients reach their investment goals. That s why we ve been an innovative pioneer of dynamic multiasset allocation for more than 30 years. Our intellectual curiosity, sophisticated research platform, global reach, and flexibility to transact in all liquid asset classes help us deliver powerful and unique investment solutions. PRIMARY LOCATIONS Headquarters San Francisco 50 Fremont Street Suite 3900 San Francisco, CA Pittsburgh BNY Mellon Center 500 Grant Street Pittsburgh, PA Boston BNY Mellon Center 201 Washington Street Boston, MA