I. ANNUAL REPORTS AND SHAREHOLDER MEETINGS

Transcription

1 I. ANNUAL REPORTS AND SHAREHOLDER MEETINGS Presenters: James E. O'Bannon, Jones Day Muriel C. McFarling, Texas Instruments James E. Parsons, Exxon Mobil Ronald M. Schneider, RR Donnelley SEC Hot Topics Institute Dallas, TX September 8, 2016

2 SEC Hot Topics Institute Annual Reports and Shareholder Meetings James E. O Bannon Partner Jones Day Ron Schneider Director of Corporate Governance Services RR Donnelley James E. Parsons Coordinator, Corporate Securities & Finance Law ExxonMobil Muriel C. McFarling Corporate Counsel Texas Instruments Incorporated 2

3 Annual Reports and Shareholder Meetings: Overview Activism Highlights What Attracts Activists The Changing Nature of Activism Defensive Measures Proxy Contests 2016 results 2017 predictions ISS and Proxy Access Virtual annual meetings Mechanics Pros and cons 3

4 Annual Reports and Shareholder Meetings: Overview Disclosure developments and planning Regulatory Risk vs. Shareholder/Governance Risk Audiences for Proxy Statements Drivers of Proxy Evolution Enhanced Online Proxy Statements Pay ratio disclosure Pay versus performance Risk factors 4

5 Annual Reports and Shareholder Meetings: Overview Disclosure developments and planning continued Supplementing a proxy statement why and how SEC guidance on titles for shareholder proposals Inline XBRL Incentive-based compensation arrangements 5

6 Activism 6

7 Activism: Highlights Activism is here to stay Activists are attracted by poor performance, balance sheet or governance issues Most activist successes do not result from proxy contests, but rather from settlements Activists won an increasing number of situations every year from 2012 to 2015, even as their success rate fell by over ten percentage points; this validates the market perception that many board contests in were poorly chosen Even in the face of activist pressure, there is no free pass ; shareholders still expect the board and management to operate the business and drive results There is no higher trump card against an activist than strong business performance in pursuit of a viable strategy supported by a majority of the shareholders There are no private conversations between directors or management and the activist or any other non-insider Settling with one activist does not mean you are protected against future approaches by the same or new activists 7

8 Activism: What Attracts Activists? Financial Performance Valuation lags vs. historical performance or peers Weak share-price performance Sub-par operational metrics (key line items or ratios) Discrepancy between sum-of-the-parts and market valuations Balance Sheet Excess cash Capacity for leverage (potential for recaps) Availability of non-core assets that could be used to fund growth, share repurchases or dividends Governance Issues Governance issues may serve as secondary levers that provide altruistic messaging to accompany the activist s pursuit of more self-interested financial or business objectives Common hot button issues include: board tenure, board composition, compensation practices, public gaffe by directors or management, personality conflicts between specific holders and directors or management, shareholder voice issues (voting thresholds, proxy access, special meetings, ability to act by written consent, etc.) and structural provisions (declassified board, majority voting in uncontested elections, term limits, etc.) Institutional investors and other occasional activists may focus on governance issues alone By expanding the scope for shareholder action at the company, governance activism today serves as a platform to leverage other activist objectives in future 8

9 Activism: The Changing Nature of Activism Shareholder Activism Has Evolved Identity of Activists: Bigger; More Diverse More assets under management and in more funds More occasional activists Perception of Activists: More Mainstream Tacit encouragement by many passive investors Traditionally supported by academic community More alliances between traditional activists and strategic and passive investors Goals of Activists: Expanding Campaigns no longer limited to capital return, M&A and CEO change pushing into operational focus and non-traditional transactions Tactics of Activists: Heightened Ability to Pressure Most activist campaigns do not end in proxy contests targets frequently settle or voluntarily undertake actions proposed by the activist Activists have made IR/PR a core competency white papers, websites, lobbying proxy advisory firms Responsive Strategies Must Keep Pace The Old Defend The Keep Mindset Does Not Work Companies that simply refuse to engage with activists or focus only on impending activists have not been successful Traditional corporate defenses seek to prevent actual changes of control activists now assert their influence primarily through IR/PR Every Year Is An Election Year There is greater pressure on companies than ever before to relay strong, proactive messaging to their shareholders The legal elements of defense nomination and election procedures, etc. are relevant, but they aren t really central; excellence in IR/PR is Companies Should Not Underestimate Themselves Many activist campaigns quickly settle some commentators think companies have started to settle too quickly Activists have valuable ideas but it is equally important to keep perspective on relative expertise 9

10 Activism: Defensive Measures Traditional defensive measures were designed to prevent unsolicited takeovers. Although there are some exceptions, most activist investors are not seeking to take over a company themselves. Rather, they seek influence over matters of corporate strategy or governance by threatening a proxy contest. As such, defensive measures are best analyzed based on how they affect shareholder action. Defenses Focused on Elections of Directors Defense Impact Most Effective Against Classified Board Requires at least two annual meetings to replace a majority of directors Activists; Unsolicited Offers Removal of Directors Only for Cause Difficult to remove and replace directors outside of annual meeting Activists; Unsolicited Offers Board Authority to Fix Size of Board and Fill Vacancies Directors Elected by Plurality; No Resignation Policy No Direct Access to Proxy Statement for Director Nominations Stockholders are not able to increase the number of directors and fill newly created vacancies Majority vote not required to elect management s slate of directors; marginalizes impact of withhold campaigns Proxy access permits stockholder nominees to be included on the company s proxy card Activists Activists Activists 10

11 Activism: Defensive Measures Defenses Focused on Shareholder Action Generally Defense Impact Most Effective Against No Stockholders Ability to Call Special Meeting Only board can call special meetings; proxy contests can only be initiated at annual meeting Unsolicited Offers; Activists No Stockholder Action by Written Consent Stockholders only able to act an annual or special meetings Unsolicited Offers; Activists Advance Notice Bylaws Board has time to evaluate alternatives and provide thorough response to stockholderproposed business at meetings Unsolicited Offers; Activists Supermajority Vote to Amend Bylaws or Charter Higher threshold for shareholders to change bylaws or charter to weaken or eliminate other defenses Unsolicited Offers; Activists Exclusive Forum Bylaws Avoids forum-shopping by plaintiffs firms and limits costs and uncertainty of parallel litigation Unsolicited Offers; Activists 11

12 Activism: Defensive Measures Traditional Defenses Focused On Share Ownership and M&A Defense Impact Most Effective Against Shelf Rights Plan Prepared and ready for adoption in response to threat Unsolicited Offers Implemented Rights Plan Deters substantial stock accumulations and abusive takeover transactions Unsolicited Offers Statutory Freeze-Out Provision (Delaware) Restricts business combinations and other transactions with 15% or more stockholder outside of board approval Unsolicited Offers Other Statutory Defenses Depends on state, may include control share acquisition, fair price, disgorgement, antigreenmail, expanded constituency or other protections Unsolicited Offers Supermajority Votes for Mergers High hurdle for bidder to acquire the company without board approval Unsolicited Offers 12

13 Activism: Proxy Contests Some activist campaigns involve a proxy fight Typically extremely disruptive and can adversely affect a company s business and operations White papers, fight letters, etc., will negatively characterize current management / board and draw public attention Particularly in minority-slate context, activist investor does not always need to be right to earn investor support for its candidates if its arguments are well presented Companies are increasingly willing to settle rather than submit a contested election to a shareholder vote 13

14 Activism: Proxy Contests Shareholder Activism ( ) (percentage of new investments in which board representation is sought) 1200 Activist Success Rate ( ) (percentage success rate for activists; omits ongoing situations) YTD Proxy Contest Sought Without Proxy Contest No Board Seats Sought YTD Activist Successful Ongoing Activist Failed Source: Activist Insight. As of April 30, Activists defined to include gadflies and social groups, as well as institutional investors or others engaging in one-time or occasional shareholder agitation. 14

15 Activism: 2016 Results 463 companies subjected to public demands by shareholders and 96 companies publically targeted by activist short sellers through June 30, % of public activist demands worldwide were at companies with a market capitalization of >$10 billion Key topic of the 2016 season was proxy access, with roughly 200 shareholder proposals submitted (almost twice as many as in 2015) Companies generally took a more proactive approach, taking board action to implement proxy access bylaws, bypassing the shareholder vote altogether ~60% of the ~200 companies that received proxy access proposals adopted proxy access bylaws before it went to a vote More than 36% of S&P 500 have adopted proxy access bylaws 15

16 Activism: 2016 Results The 3% / three-year ownership threshold is now standard for proxy access The implementation of proxy access by private ordering took less than two years to gain traction Proxy access proposals were the most common proposals in the 2016 season, but shareholders submitted proposals on other topics, including: declassify boards (8 proposals; 81% average support of votes cast) eliminate supermajority requirements (15; 60%) permit shareholder-called special meetings (18;42%) permit shareholders to act by written consent (17; 41%) 16

17 Activism: 2016 Results Proxy contests in first half of 2016 In the United States, 20 proxy contests went to a vote 23 total proxy contests in total proxy contests in 2014 There were 14 additional situations where activists filed proxy statements, but either a settlement was reached or the activist withdrew 30 Board seats gained by activists at U.S. companies out of 98 sought In contests that were settled, activists got no seats 15 times Activists won an increasing number of situations every year from 2012 to 2015, even as their success rate fell by over ten percentage points This validates the market perception that many board contests in were poorly chosen 17

18 Activism: 2017 Predictions Activism will continue at high levels In 2016, activism campaigns achieved approximately a 75% success rate Mutual funds, like T. Rowe Price, Fidelity Investments and Wellington Management, have supported activists agendas, either openly or behind the scenes; we expect to see this trend continue Companies are now settling with activists more frequently avoiding the often long, drawn-out battles of past years It is unclear at this point whether and how investors will use proxy access bylaws because, as of June 2016, no proxy access mechanisms had been used Companies will continue to adopt proxy access bylaws 18

19 Activism: ISS and Proxy Access December 2015 ISS issued new FAQs regarding its 2016 US proxy season voting policies ISS will evaluate a board s implementation of proxy access in response to a shareholder proposal that received majority support by examining whether the major points are implemented Since ISS issued FAQs, many public companies facing proxy access shareholder proposals voluntarily amended their bylaws to adopt proxy access March 2016 ISS updated the FAQs regarding US executive compensation policies and added two new questions regarding equity awards and disclosure concerning inventive programs 19

20 Activism: ISS and Proxy Access Moving away from its historical case-by-case approach, ISS now generally recommends in favor of management and shareholder proposals with the following guidelines: a maximum ownership threshold of not more than 3%; a maximum holding period of not more than three years of continuous ownership for each member of the nominating group; minimal or no limits on the number of shareholders that can form a nominating group; and a cap on the number of nominees to generally 25% of the board. 20

21 Virtual Annual Meetings 21

22 Virtual Annual Meetings Virtual annual meetings are being embraced as a mechanism to promote transparency and shareholder access More than 30 states allow companies to incorporate a virtual aspect into their annual meetings, including Delaware and Texas Hybrid meetings provide shareholders with the option of participating virtually or in person In 2015, more than 90 virtual meetings were held and more than 44 hybrid meetings were held These numbers are expected to increase significantly in

23 Virtual Annual Meetings: Mechanics Meeting invitations and instructions are received in regular proxy mailings Shareholders sign in online using a control number Shareholders view an online meeting page, which delivers streaming audio or video Meeting pages allow shareholders to cast votes, enter questions and view company messages as well as view welcome letters, video bios, and links to other materials Dashboards display key statistics, such as votes and attendance totals 23

24 Virtual Annual Meetings: Mechanics Pre-meeting reports can give issuers prior access to shareholder questions and can also tally the total shareholders registered to participate online and display survey results Issuers can open a shareholders forum online before the meeting to broaden shareholder engagement Issuers can privately view and manage shareholder questions before and during the meeting without broadcasting the questions to other attendees Post-meeting reports can summarize attendees and votes 24

25 Virtual Annual Meetings: Pros Bringing the annual meeting into the digital age Many shareholders will be accustomed to interaction in a digital format Shows that the company is up-to-date with current trends Logistically convenient Allows participants to join the meeting from any location Reduces cost Eliminates the financial burden on shareholders and company of arranging travel, lodging, food, etc. 25

26 Virtual Annual Meetings: Pros Managing the Dialogue Meeting host can manage queue of questions, giving company spokespersons adequate time to prepare answers Company can better control the flow of the entire meeting Minimizes exposure to potential protesters Lack of disruption ensures higher quality of discussion and reduces the potential for a public relations disaster Expanded shareholder access Zero travel demand leads to increased participation levels 26

27 Virtual Annual Meetings: Cons Shareholders fear inability to freely ask questions Shareholders can see virtual meetings as a tactic to insulate management from tough questions Shareholders may not know how questions submitted electronically are being filtered or screened by the company before they are addressed Shareholders lose face-to-face interactions Human dynamics, such as reactions and body language, are not easily replicated over video It can be difficult for shareholders to get a feel for management during a virtual meeting The in-person shareholders meeting is one of the sole opportunities for shareholders to meet and talk with management 27

28 Virtual Annual Meetings: Cons Companies lose the opportunity to build goodwill In-person shareholders meetings can build goodwill with shareholders In-person meetings allow companies to build strong culture Some companies annual meetings are organized as weekend events with opportunities to test new products and designs 28

29 Disclosure Developments and Planning 29

30 Disclosure Developments and Planning: Regulatory Risk vs. Shareholder/Governance Risk Meeting regulatory requirements, while necessary, is not sufficient for addressing investor concerns As investors increase their focus on corporate governance and executive compensation practices, many companies are transforming their proxies from SEC Form 14A disclosure documents, to more visually inviting and informative communications pieces that tell the company s best governance and compensation stories This innovation did not develop in a vacuum, but rather was the result of earlier robust dialogue with investors 30

31 Disclosure Developments and Planning: Regulatory Risk vs. Shareholder/Governance Risk Most companies don t seek to be the vanguard of new disclosure practices; most also don t want to be perceived as laggards so they often emulate peers One size does not fit all; proxy innovations should align with each company s unique culture and support is business, corporate governance and proxy solicitation goals Companies increasingly utilize crossfunctional internal teams including Legal/Corporate Secretary, Finance/Investor Relations, HR/Executive Compensation, Corporate Communications (with board review of major changes) 31

32 Disclosure Developments and Planning: Audiences for Proxy Statements Proxy statements have multiple audiences; each reads proxies through different filters and may use the information for different purposes. These audiences include: The SEC and other regulators to confirm compliance with applicable disclosure requirements The media to identify trends and discover holy cow CEO pay figures Employees to learn how much their company s leaders are paid Sue on Pay law firms seeking to hold shareholder meetings hostage Proxy advisers to apply their policies, run their quantitative models and make their voting recommendations Investors to learn more about their portfolio companies and how to determine how they will vote on the various proposals. These include institutional investors with different investing styles, risk profiles and investment time horizons, as well as retain investors and employee/owners Institutional investors report using the proxy more as a reference than a reading document. Length may not be a problem provided there is easy navigation to key content. 32

33 Disclosure Developments and Planning: Drivers of Proxy Evolution Concerns that increased proxy length is contributing to declining readership Concerns about the influence and impact of proxy advisors Desire to make company disclosures the primary information source for voters Say on Pay Need to tell your best compensation story, and explain how pay supports company strategy Activism Need to tell your best board and corporate governance story Poor vote results in one year reacting to the results Investor feedback on the company s disclosures 33

34 Disclosure Developments and Planning: Drivers of Proxy Evolution What peer companies are doing Requests by governance teams and voters at institutional investors for proxies to include some business context early in the document explaining the environment the company operates in, and which helps them to make more thoughtful, company-specific voting decisions Anticipating and responding to proposed new disclosure requirements (e.g. pay vs. performance disclosure, clawbacks for restatements, hedging policies, CEO/median employee pay ratio) 34

35 Disclosure Developments and Planning: Enhanced Online Proxy Statements

36 Disclosure Developments and Planning: Pay Ratio Disclosure September 2013 SEC proposed rule June 2015 SEC provided additional analysis related to the proposal considering the potential effects of excluding different groups of employees from the pay ratio calculation August 2015 SEC adopted rule The SEC's acknowledgement that there are significant challenges in quantifying the potential economic benefits, if any, from the proposed pay ratio disclosures may signal an expectation of or possibly even an invitation for litigation challenging the rules 36

37 Disclosure Developments and Planning: Pay Ratio Disclosure Companies must report: Median annual total compensation of all employees other than the CEO Annual total compensation of the CEO Ratio between these two figures must be disclosed as a factor, not a fraction (e.g., 50 to 1 or the CEO s annual total compensation is 50 times that of the median total compensation of all employees ) Total compensation is to be calculated in accordance with Item 402 of Regulation S-K Disclosure: Required in any filing that calls for executive compensation disclosure under Item 402 of Reg. S-K Not required for smaller reporting companies, foreign private issuers and emerging growth companies 37

38 Disclosure Developments and Planning: Pay Ratio Disclosure Timing: Existing Registrants first reporting period is first full fiscal year beginning on or after January 1, 2017, and disclosure will begin in 2018 New Registrants first full fiscal year after being subject to Exchange Act for at least 12 calendar months and having filed one annual report without pay ratio disclosure Smaller Report Companies and EGCs will be required to disclose ratio one year after they lose status (e.g., if EGC loses status at January 1, 2018, disclosure not required until 2019) 38

39 Disclosure Developments and Planning: Pay Ratio Disclosure All employees Full time, part-time, seasonal and temporary employees employed by registrant or any consolidated subsidiary, including non-u.s. employees subject to privacy law and de minimis (<5%) exemptions Excludes independent contractors, leased workers and CEO May provide additional ratios to explain effect of certain groups of workers May use cost of living adjustments Annualization adjustment permitted; fulltime equivalent adjustments prohibited Median employee compensation Calculation required only every three years unless change in employees could cause significant change in ratio May use a methodology that uses reasonable estimates review of tax/payroll records, whole population/statistical sampling Must disclose methodologies, assumptions, adjustments and estimates 39

40 Disclosure Developments and Planning: Pay Ratio Disclosure In July 2016, the House of Representatives passed the Financial Services and General Government Appropriations Act for fiscal 2017 Among other things, the bill includes an amendment stating that none of the funds made available by the Act may be used by the SEC to finalize, implement, administer or enforce the pay ratio disclosure rules Unlikely that the bill will remain intact in the Senate; unlikely that the President will sign into law as is Even if the amendment survives, it does not eliminate the pay ratio disclosure rule, only the SEC s enforcement of the rule 40

41 Disclosure Developments and Planning: Pay versus Performance April 2015 SEC proposal for pay versus performance disclosure Requirement disclose the relationship between actually paid named executive officer ( NEO ) compensation and total shareholder return in proxy statements Mandatory details: Both Summary Compensation Table ( SCT ) total compensation and compensation actually paid to the CEO Both the average SCT total compensation and the average compensation actually paid to the company s other NEOs The company s annual total shareholder return and the annual total shareholder return for a peer group 41

42 Disclosure Developments and Planning: Pay versus Performance Actually Paid = Summary Compensation Table Total Compensation Minus: the change in actuarial present value of pension benefits, and the grant fair value of equity awards granted during the year Plus: actuarial present value of benefits attributable to services rendered by the NEO during the year, and the fair value of equity awards that vested during the year, whether or not they were exercised 42

43 Disclosure Developments and Planning: Pay versus Performance Required time periods Disclosure for five most recently complete fiscal years Transition period will only require three years Newly reporting companies only require their most recent year with each subsequent proxy requiring an additional year Public comment period ended July 6, 2015 No final rule yet; no word on when final rule will be adopted 43

44 Disclosure Developments and Planning: Risk Factors April SEC issues a Concept Release - Business and Financial Disclosure Required by Regulation S-K SEC sought comment on ways to identify significant risk factors specific to a particular company and asked whether: the SEC should specify generic risks that companies are not required to disclose; certain risk factors should be included in a separate section or in an exhibit to distinguish them from the most significant risks; and there should be a risk factors summary in addition to the complete disclosure. 44

45 Disclosure Developments and Planning: Risk Factors The SEC sought comments on whether it should require companies to: accompany each risk factor by a specific discussion of how the company is addressing the risk; discuss the probability of occurrence and the effect on performance for each risk factor; describe assessment of risks; disclose the specific facts and circumstances that make a given risk material to the company; present risk factors in order of management s perception of the magnitude of the risk or by order of importance to management; and identify and disclose the ten most significant risk factors (without limiting the total number of risk factors disclosed) Changes are not likely to be in effect any earlier than

46 Disclosure Developments and Planning: Supplementing a Proxy Statement Why and How Why: To add new information To correct misinformation or errors To add new proposal(s) To respond to unbundling comments 46

47 Disclosure Developments and Planning: Supplementing a Proxy Statement Why and How How: File supplemental proxy material with the SEC by checking the Definitive Additional Material box on the cover page of Schedule 14A Contents of supplement vary, but may include: a letter to stockholders, press release, presentation, explanatory note or an employee communication Include Additional Information Legend re See other proxy materials File a revised proxy card if the contents change due to the supplemental proxy material File materials with SEC and post on website, but may also need to take further steps to get information to stockholders depending on the reason for the supplement 47

48 Disclosure Developments and Planning: SEC Guidance on Titles for Shareholder Proposals March 2016 New C&DI regarding how Rule 14a-8 shareholder proposals should be described on issuer proxy cards in compliance with Rule 14a-4(a)(3) Rule 14(a)-4(a)(3), as amended, provides that the form of proxy [s]hall identify clearly and impartially each separate matter intended to be acted upon whether proposed by the registrant or by security holders. Based on the new C&DI, overly vague, generic or generalized descriptions of Rule 14a-8 proposals will not be deemed to meet the requirement that proposals be described clearly. 48

49 Disclosure Developments and Planning: Inline XBRL On June 13, 2016, the SEC issued an order to allow operating companies to file structured financial statement data required in their annual and quarterly reports using Inline XBRL through March 2020 Benefits Decreases filing preparation costs Improves the quality of structured data Increases the use of XBRL data by investors and other market participants Issues EDGAR validation system will suspend filings that contain major technical errors in embedded XBRL data 49

50 Disclosure Developments and Planning: Incentive Based Compensation Arrangements June Seven federal agencies published a notice of proposed rulemaking to impose new requirements on incentive-based compensation arrangements as required by Section 956 of Dodd-Frank Institutions subject to the rule include: national banks, federal savings associations, federal branches and agencies that have average total consolidated assets of at least $1 billion Comment period closed July 22,

51 Disclosure Developments and Planning: Incentive Based Compensation Arrangements Covered institutions would be divided into three categories Level 1: institutions with assets of $250 billion and above Level 2: institutions with assets of $50 billion to $250 billion Level 3: institutions with assets of $1 billion to $50 billion Proposed rules include requirements for recordkeeping, policies and procedures, risk management and governance Proposed rules prohibit arrangements that encourage inappropriate risks such as providing excessive compensation, fees or benefits, or lead to material financial loss 51

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