35 Russell 3000 companies (1.5%) failed Say on Pay in 2017. Four companies failed since our last report BofI Holding, Oracle, United Natural Foods, and Western Digital 10 5 1.4% 2.6% 2.5% 2.4% 2.8% 1.7% 1.5% 6% 6% 6% 6% 6% 6% 5% 21% 19% 15% 17% 16% 17% 15% 72% 73% 76% 76% 78% PERCENT APPROVAL Below 5 50-7 70-9 9+ 2011 n = 2,660 2012 n = 2,226 2013 n = 2,253 2014 n = 2,545 2015 n = 2,157 2016 n = 2,117 2017 n = 2,357 Cycle of Say on Pay Failure Rate Over Time The 2017 Say on Pay failure rate will fall to its lowest level since voting began in 2011 We expected that the continued homogenization of pay practices, increased communication between companies and stakeholders, and other less tangible drivers that led to a decrease in the 2016 failure rate would continue to push the failure rate lower in 2017. In 2017, the failure rate continued its decline, falling to 1.5%; however, it did not fall below the 2011 failure rate of 1.4%. length of this cycle is unknown Our September 2017 thought piece explained the cyclical nature of Say on Pay voting. We continue to believe that 2017 results support the notion of a cyclical voting pattern which becomes disrupted as investor and/ or regulatory pressures evolve.
Smaller companies will continue to fail Say on Pay more frequently than larger companies Russell 3000 (not in S&P 500) S&P 500 Historical vote results and ISS recommendations suggested a disconnect between large (S&P 500) and small company (Russell 3000 excluding the S&P 500) Say on Pay support. We previously hypothesized that this disconnect is attributable to the level of resources dedicated to ensuring a passing vote. However, in 2017, small and large companies had an equal failure rate of 1.5%, though small companies had an ISS Against recommendation rate that was 2.9% higher than that of large companies. 9 88% 89% 9 92% 92% 9 92% 2011 2012 2013 2014 2015 2016 2017 Shareholders will support an annual Say on Pay vote at over 9 of companies holding frequency votes in 2017 In 2017, shareholders supported an annual Say on Pay vote at of companies holding frequency votes. Holding an annual Say on Pay vote provides companies with an easy good governance practice that carries few risks. As such, management recommendations for an annual Say on Pay vote rose from 54% in 2013 to 88% in 2017. Additionally, proxy advisors carry a preference for annual voting, as it gives investors additional opportunities to communicate with boards and an additional avenue through which boards are accountable to investors. 81% 18% 8% 2011 2017 Note: 0.6% of c om panies in 2011 and 0.4% in 2017 voted to hold a biennial Say on Pay vote. Annual Triennial Median support for environmental proposals will be above 3 in 2017 Shareholder interest in environmental, social, and governance ( ESG ) issues rose throughout 2016, which led the highest median vote support on environmental proposals since 2011. The trend continued through 2017, though median vote support on environmental proposals fell just short of our predicted level. However, median support did rise to 28%, replacing 2016 as the year with the highest level of support since voting began in 2011. Further, four environmental proposals received over 5 support, which was higher than the number approved during the previous six years combined. 2 2011 n = 39 19% 2012 n = 29 Average Support 23% 22% 23% 2013 n = 28 2014 n = 45 Median Support 2015 n = 64 26% 2016 n = 75 28% 2017 n = 67
10 9+ 70-9 50-7 Below 5 0.9% 1.1% 4% 7% 5% 1% 1.4% 1.8% 4% 2.9% 2.5% 2.4% 3.4% 6% 6% 8% 7% 7% 12% 1 13% 19% 15% 16% 18% 15% 18% 28% 5 83% 83% 81% 79% 79% 76% 74% 74% 73% 62% Industrials n = 350 Materials n = 120 Consumer Discretionary n = 349 Utilities n = 72 Financials n = 572 Information Technology n = 336 Consumer Staples n = 102 Energy n = 121 Health Care n = 296 Telecomm. Services n = 29 10 2011 2017 10 2011 2017 88% 95% 5 5 69% ISS Fo r 12% ISS Against ISS For ISS Again st ISS recommended Against 12% of the companies it assessed in 2017 the same Against recommendation rate as in 2015 and 2016 Shareholder support was 26% lower at companies that received an ISS Against recommendation the secondsmallest difference since voting began in 2011 2016 Rec. For Against For 83% of companies (n=1,561) 6% of companies (n=120) 2017 Rec. Against 6% of companies (n=112) 5% of companies (n=88) ISS Against in 2017, For in 2016 (n=112) - +29% ISS For in 2017, Against in 2016 (n=120) 232 companies (12.3%) received both an ISS For and Against recommendation during the last two years A change in an ISS recommendation resulted in a -3 difference in Say on Pay support over the past two years Source: Seml er Brossy data and anal ysi s ; F undvotes, LLC; ISS Voti ng Anal yti cs. Russel l 3000 sampl e effecti ve as of June 27, 2016.
Male Female 96.8% 96.8% 96.7% 96% 93% 9 95.7% 95.6% 95.6% 2015 2016 2017 Above 7 50-7 Below 5 10 5 0.5% 0.4% 0.6% 0.6% 0.1% 0.6% 0.6% 13% 8% 9% 8% 6% 8% 7% 52% 34% 43% 38% 37% 48% 52% 55% 3 31% 28% 65% 61% 65% PERCENT APPROVAL Below 5 50-7 70-9 9+ 2011 n = 632 2012 n = 689 2013 n = 781 2014 n = 805 2015 n = 786 2016 n = 785 2017 n = 829 In 2017, average director nominee election results remained near 96%, consistent with average director support from the previous four years. Additionally, a relationship exists between director nominee vote results and Say on Pay support average vote support for director nominees is 6% higher at companies that received Say on Pay support above 7 in the prior year than companies that received less than 5 support Female directors nominees received 1% higher average vote support than male director nominees in each of the last three years. Further, ISS recommended For female nominees at a rate that was 4% higher than male nominees in 2016 and 2017 Equity plan proposals received support above 9 in 65% of votes held in 2017, which was roughly double the rate seen in 2011. This rate also matches the highest observed rate, which was achieved in 2015 Source: Seml er Brossy data and anal ysi s ; F undvotes, LLC; ISS Voti ng Anal yti cs. Russel l 3000 sampl e effecti ve as of June 27, 2016.
14% Russell 3000 (not in S&P 500) S&P 500 14% 15% 14% 13% 13% 13% 15% 13% 11% 14% 1 9% 9% 9% 1 8% 2011 2012 2013 2014 2015 2016 2017 In each of the last five years, ISS has recommended Against small companies (Russell 3000) more often than large companies (S&P 500) S&P 100 S&P 500 (not in S&P 100) Russell 3000 (not in S&P 500) but within the S&P 500 index, ISS recommended Against S&P 100 companies twice as often as it did for the other constituents of the S&P 500 10 9+ 70-9 50-7 Below 5 2. 1.3% 1.5% 6% 4% 6% 12% 18% 15% 1 of Russell 3000 companies with vote results in each year (n = 1,458) have failed Say on Pay at least once. 31% 65% 5 73% 82% 78% S&P 100 S&P 500 Russell 3000 (not in S&P 100) (not in S&P 500) 1 Below 5 Support at Least Once Below 7 Support at Least Once Below 9 Support at Least Once Since 2011, nearly two-thirds of companies have received at least one vote result below 9, and almost one-third have received a result below 7 The newly required CEO Pay Ratio disclosure will be a prominent governance topic during the upcoming year, and we anticipate that the CEO Pay Ratio will influence Say on Pay voting Environmental, social, and governance (ESG) proposals will continue to gain shareholder support. Large investors, such as BlackRock, have emphasized the importance of ESG topics in their investment strategy In particular, we believe that the topic of board diversity will continue to grow in prominence, especially given the fact that State Street Global Advisors and other investment firms advocate for increased gender parity and racial representation We believe that the 2018 Say on Pay failure rate will remain near the 2017 historic low. However, a changing regulatory environment and potential market volatility may lead to an increased failure rate starting in 2019 Source: Seml er Brossy data and anal ysi s ; F undvotes, LLC; ISS Voti ng Anal yti cs. Russel l 3000 sampl e effecti ve as of June 27, 2016.
2017 Failed Say on Pay Vote Results 1 Russell 3000, n=35 Likely Causes of Votes Under 5 Number Pay and Problematic Rigor of Shareholder Non- Special Say on Pay Vote Results of Performance Pay Performance Outreach and Performance Awards/ Mega- Benchmarking Company 2017 q 2016 YOY Failures Relation Practices Goals Disclosure Based Equity Grants Practices New York Community Bancorp, Inc. 5 - - 2 X X Hospitality Properties Trust 48% 61% -13% 1 X X Oracle Corp. 48% 45% 2% 6 X X X Sanchez Energy Corp. 47% 56% -8% 1 X X X X Universal Insurance Holdings, Inc. 47% - - 1 X Senior Housing Properties Trust 46% 47% -1% 2 X X BofI Holding, Inc. 46% - - 1 X X Microsemi Corp. 45% 83% -37% 1 X X X X Argan, Inc. 45% 64% -19% 2 X X Bed Bath & Beyond, Inc. 44% 23% 21% 3 X X Nabors Industries Ltd. 44% 36% 8% 6 X X Spectrum Pharmaceuticals, Inc. 44% 59% -16% 4 X X X X Sprouts Farmers Markets, Inc. 43% 72% -29% 1 X X X Whitestone REIT 43% - - 1 X X X SL Green Realty Corp. 43% 55% -12% 1 X X X X X SeaWorld Entertainment, Inc. 42% 82% -39% 1 X X X Tutor Perini Corp. 42% 42% 7 X X X Medifast, Inc. 42% - - 2 X X X Western Digital Corp. 42% 93% -51% 1 X X X Endologix, Inc. 4 85% -45% 1 X American Axle & Manufacturing Holdings, 39% 97% -58% 1 X X Immunomedics, Inc. 38% - - 1 X FleetCor Technologies, Inc. 37% - - 2 X X X Virtusa Corp. 37% 99% -62% 1 X X X X PHH Corp. 36% 71% -34% 1 X X Nuance Communications, Inc. 33% 33% 1% 4 X X X X X Atlas Air Worldwide Holdings, Inc. 32% 5-17% 3 X X ConocoPhillips 32% 83% -51% 1 X X CytRx Corp. 31% 59% -28% 1 X X X IMAX Corp. 3 - - 1 X X X McKesson Corp. 26% 8-54% 2 X X Rockwell Medical, Inc. 26% - - 1 X X NII Holdings, Inc. 23% - - 1 X X United Natural Foods, Inc. 23% 94% -71% 1 X X X X Mylan NV 17% 65% -48% 2 X X 1 As of December 31, 2017. Source: Semler Brossy data and analysis; Fund Votes LLC; ISS Voting Analytics. FOR MORE INF ORMAT ION, VISIT US AT SEML ERBRO SS Y. COM SEMLER BROSSY CONSULTING GROUP 11755 WILSHIRE BOULEVARD, 10TH FLOOR LOS ANGELES, CA 90025 310.481.0180 INFO@SEMLERBROSSY.COM 2018 S E M L E R B R O S S Y C O N S U L T I N G G R O U P LLC