Rhonda Brauer is a senior managing director of corporate governance at Georgeson Inc. where she helps companies enhance their shareholder communications and analyze their governance practices. She recently joined Latham & Watkins partners Jim Barrall and Steve Stokdyk for a firm-hosted webcast titled “2015 Proxy Season: Lessons Learned and Coming Attractions.”
In this lw.com interview, Brauer describes 2015 as the breakthrough year of proxy access and discusses evolving trends in shareholder-company engagement, the hottest shareholder proposals and issues of increasing concern to investors.
Why has this been the breakthrough year for proxy access and private ordering for this shareholder right?
Brauer: This definitely was a breakthrough year for proxy access. One turning point was the large number — approximately 75 — of proxy access proposals submitted by the New York City Comptroller’s Office in 2015. Overall, 106 proposals were submitted, with only 16 withdrawn or omitted. This is up from approximately 20 or fewer proposals in each of the prior three years, and in those cases, it was generally for so-called “bad actors” that had performance problems and refused to engage their investors.
The average vote so far (as of June 10, 2015), based on the 74 votes that we’ve tracked (as of such date), was a majority of 54.39%, with 44 passing, versus only four last year. So it seems that with this new private ordering process, we’re moving toward a standard similar to the voided SEC Rule 14a-11 of three years and 3% shareholder ownership thresholds, with nominees of up to 25% of the board, and with the nominator not having any control intent.
My personal belief is that the sky is not falling — that proxy access bylaws will become more common, but they will rarely be used in actual practice, which is consistent with what we’ve seen in other countries. They will be used as a carrot — a tool — for engagement by investors and to encourage companies to take actions that they consider important.
What actions did companies take after the SEC blocked relief with Rule 14a-8(i)(9), Conflicting Proposal Exclusions, for their shareholder proposals requesting proxy access?
Brauer: They did seven different things. One: some companies settled with the shareholder proponent. They adopted either the same or slightly different forms of proxy access. They kept the 3% and three-year ownership provisions, but the variations were around what percentage of the board could be nominated with proxy access nominees. It could go down to 20% and still be acceptable to the proponents. Then the size of the nominee group varied, with 20 looking like it may become the standard in the marketplace.
Two: most companies decided to include the shareholder proposal in their proxy statement and express their opposition to it without including their own proposal.
Three: a handful of companies included both the shareholder proposal as well as their own management proposal, with varying success. In about half of the cases, the company proposal passed; in about the other half, the shareholder proposal passed; and in one, neither passed.
Four: at least two companies included the proposal and supported it.
Five: a few opposed it, but agreed to strongly consider adopting it or proposing it by next year.
Six: at least one took no position on it, but included it in their proxy statement.
And I’m including a seventh: one large financial company, Prudential Financial, preemptively adopted a proxy access bylaw without having a vote or a proposal submitted. I think it’s likely that we may see a few more of those in the future.
Concurrently, there were a high number of exempt solicitations sent out by the proponents regarding 68 companies that had the proposal. There were also requests for interim vote tallies by the proponents, which remains an open issue that I think we’ll see develop as these proposals continue to gain steam. As far as I’m aware, only one formal vote tally request was granted. There were some situations where companies likely informally gave information to the proponents and other cases where the requests may have been made but were not followed through on.
What’s next in proxy access for the impacted companies?
Brauer: Three scenarios: one, there are the companies that have already adopted proxy access by-law provisions and could very theoretically have a proxy access nominee in the coming year. We’ve counted 25 that have such provisions firmly in place, 14 with 3% and three years ownership thresholds and the rest with a 5% ownership threshold and between one and five years of continuous ownership. Sixteen limited the percentage of nominees on the board to 20%. Perhaps the number of adopted proxy access by-laws rises to 50 when you include those companies with commitments to adopt within the coming year.
The second scenario is for companies that have either passed or had high votes on their proxy access shareholder proposals from this year. You are likely aware of the high risk of an Institutional Shareholder Services (ISS) recommendation against your directors, if you had a shareholder proposal that passed and you don’t substantially implement it by next year, or put it up for a vote. In the case of such passed or high votes on proxy access proposals, your company should be engaging your shareholders on the issue to understand what they’d like to see and what makes sense for your company, as well as checking with your proxy solicitor to see how your top shareholders voted this past season on proxy access proposals.
Third, for those companies that haven’t gotten the proposal yet, are you target? Really, everyone is. I think that this is a proposal like majority voting, in that it will likely involve a private ordering process, starting with the larger companies and then slowly making its way down to the smaller companies. For such companies, be prepared to engage your shareholders on the issue. During the 2015 proxy season engagement, we saw investors bring up the issue with companies that did not have it on their ballots this year, and I expect that will continue in the off-season.
Overall, remember that either you or your proxy solicitor can check the N-PX filings of your top shareholders to see how they voted in the first six months of 2015. This would be helpful if you think that you might get a proxy access proposal or your board is asking what would happen if you got one. These are the filings that are due by the end of August and are generally available by the third week in September. But be aware that, notwithstanding how some of your investors may have voted, particularly if they voted against the proposal this year, it’s possible that their positions are still evolving. So don’t necessarily take their votes as set in stone in those cases. And, of course, talk to your management team and evaluate the risks of adoption for your particular company.
What are some evolving trends in shareholder-company engagement?
Brauer: One trend is more independent director engagement. If you don’t already have it in place, consider proactively designating your lead or another independent director as your available designee for shareholder engagement, when it becomes necessary, for such topics as a failed or low say-on-pay (SOP) vote. Certainly, if you get a request from any large shareholder to talk to one of your directors, that’s something you should seriously consider doing.
Something to keep in mind, however: ensure that your directors are well prepared, alert and not hostile in the engagement, whether it’s with your investors or the proxy advisory firms. If you can’t get your director(s) to that place, I recommend not doing it at all. Investors have told me that it if the directors are not prepared and alert or if they’re hostile, it hurts the company more than it helps them. And if you’re going to have an agenda or slides — I recommend at least an agenda — circulate it in advance (the night before is still fine, if you can’t get it to them earlier), so that the investor or proxy advisory firm is aware of what you’re going to be discussing.
There are techniques for reaching broader audiences that we’ve talked about before, such as webcasts targeted at your investors on the proxy voting/governance sides of their firms, or introducing your directors via corporate website video interviews or providing video messages from lead independent directors in online versions of your proxy statements.
We also continue to see investor letter-writing campaigns. Most of these letters are to the largest holdings of the investors or S&P 500 companies. A recent letter from Vanguard focused on advancing engagement discussions with independent directors. There has been a lot of discussion around the language in those letters, suggesting there could be “shareholder liaison committees” for this purpose. But the letter also acknowledges that such engagement could also take the form of an already-established mechanism, such as part of the role of the independent chairman or lead independent director.
The lesson here is that you should describe your engagement processes, both in your proxy materials and on your websites, so that it’s easy to find. Vanguard promises to read them, and your other significant investors likely will, too. Therefore, if your directors are open to such engagement, in any form, it’s good to publicly disclose how they can be contacted for this purpose.
There were two other types of investor letters sent to companies this season. First, BlackRock wrote a general letter advancing their theme of avoiding short-termism and encouraging companies, their boards or management team to take a longer-term approach to creating value as part of their duties of care and loyalty to their companies. The letters vary somewhat by market, with the US letters focusing more on specific US tax and share buy-back policies that either encourage or discourage short-termism versus long-termism. Generally, no replies were expected, but they will continue to advance this theme, I believe, in their private and public statements.
The final type of letters was more specifically issue-focused. TIAA-CREF sent a letter to their top 100 holdings, asking them to adopt proxy access by October. CalPERS is likely to send similar letters in advance of the deadlines for submitting shareholder proposals for the 2016 season. We don’t yet know whether such investors will submit proxy access shareholder proposals for 2016. However, by asking for adoption by the fall, they would have the opportunity to do so if they do not receive satisfactory responses to their letters.
What are the hottest shareholder proposals this year?
Brauer: There is really no surprise which of the proposals were the hottest: those requesting proxy access, independent board chairs, and reports on lobbying activity and political contributions.
There are three points, though, to highlight regarding other still popular proposals. The first is the Right to Act by Written Consent. It seems that there’s finally been a halt to the decline in the average vote on this proposal. A few years ago, it had started out at about 50% or 51%, and it was starting to decline every year by about 2%. This year, the decline seems to have halted and it’s actually 1% above the average vote it was last year in early June, plus we’ve seen two pass this year, versus none last year at this point in time. So it seems like we may have stabilized — at least temporarily— in the voting on this issue.
The second point concerns the Right to Call Special Meetings. More went to a vote this year and, for now, I’m attributing that to the fact that, as for proxy access proposals, the SEC temporarily froze the ability of companies to use Rule 14a-8(i)(9) to exclude such shareholder proposals if a company were to put forward a management proposal with a different, usually higher, threshold.
The third point is that there is an increasing focus on sustainability proposals, in all of their many forms. The average vote so far this year for proposals requesting public sustainability reports was almost 32%, and one even passed recently.
What are some of the other issues of increasing concern to investors?
Brauer: The first issue that I’ll note focuses on board structure and accountability. This generally follows from the hottest shareholder proposals that we’ve discussed in the past, such as the annual election of directors, majority voting for the election of directors, and strong independent board chairs — I think that the latter one will take longer to catch on in this country than it has in other countries. It’s still not the majority choice for US board leaders, although the percentage of independent chairs is slowly increasing across all company sizes.
The second issue is director qualifications. Proxy access continued to bring this issue into focus and, to me, it is surprising that more companies are still not using the director matrices in their proxy statements that highlight what qualifications, experience and diversity they have on their boards. There are pros and cons for using director matrices. On the whole, I’m a fan of them, but reportedly still less than 6% of the S&P 500 companies currently have them, although the number is increasing.
Director qualifications also relate to five sub-issues that concern investors: director tenure, director independence, director diversity of gender and race, board succession planning, and board evaluations. These are all things that companies are starting to address in their proxy statements, with charts on what their average director tenure and degree of board diversity and independence are, as well as disclosure on how they do board evaluations and their board succession planning. For the latter, there is no need to disclose names or even necessarily possible board seat openings, but companies are increasingly making it clear that there are thoughtful processes in place. If I had a crystal ball, I think that I could see some shareholder proposals coming out for next season on board succession planning. This is a very important issue to investors who are focused on diversity of gender and race and on companies having the right skill sets on their boards for this particular moment in their companies’ history.
The fourth issue concerns our environment. As I noted earlier, investors are calling for enhanced disclosure, monitoring and management of the related risks. The largest number of shareholder proposals continues to be environmental ones. And we’re starting to see that companies and CEOs understand the importance of sustainability to both the long-term viability and profitability of their businesses. It’s getting through to more companies, following several years of encouragement from investors and other groups.
The next issue is an update on the annual Center for Political Accountability (CPA)-Zicklen Index on political activities and lobbying. They are continuing to expand the benchmarking that they do each year, from the top 300 last year to all of the S&P 500 companies this year. They will look at the same indicators as they have in the past two years. If you’re an S&P 500 company, the data collection has begun and you should be getting preliminary scores by the end of June or early July. These scores will be based on the available information that you’ve made public on your corporate websites, with the final index scores to be available in early October. So if you want to be positively viewed on your related disclosure and practices, get them on your websites soon.
The last issue I want to mention, once more, is cybersecurity. It’s as important for your proxy statement and shareholder engagement, as it is for your risk factor disclosure in your 10-Ks and 10-Qs. It’s becoming an increasing concern for boards and should be mentioned as part of the risk oversight disclosure in your proxy statements. And it is not an issue that’s going away. As far as I can tell from talking with directors and companies, if you and your boards are not yet tired of this issue, then you are probably not considering it enough because it’s something that boards are continually looking at these days.
For More Information
For more information on the 2015 proxy season and the prospects for the balance of 2015, register and listen to the pre-recorded webcast titled “2015 Proxy Season: Lessons Learned and Coming Attractions, available through June 15, 2016 and read What To Expect in the Remainder of the 2015 Proxy Season, a Q&A with Latham partners Steven Stokdyk and James Barrall.