Key Shareholder Proposals
The 2014 Proxy Season is quickly approaching. In 2013, U.S. trends have emerged with respect to the proposals filed by shareholders with S&P 500 and Russell 2000 corporations. Four main themes of interest stand out.
First, shareholder proposals have again been filed to implement proxy access. The proposals seek to allow a shareholder or a group of shareholders under certain conditions to have their own director candidates included in the proxy form. Such proxy access would be conditional on the shareholders holding a certain threshold of the corporation's shares (e.g. 3%) for a certain period of time (e.g. 3 years).
Second, U.S. corporations continue to be targeted with majority voting proposals introduced for the stated purpose of improving shareholder democracy. While majority voting is becoming standard in large U.S. corporations, with 84% of S&P 500 corporations having now adopted such a policy, majority voting is not as prevalent among small and medium-sized public corporations.
Third, proposals seeking to eliminate staggered boards in favor of a system of annual election of directors have again attracted attention this year.
Finally, while the value of separating the roles of chair and CEO in the U.S. remains the subject of debate, a number of proposals on the subject have been received. The proposals tend to target financial institutions whose governance practices have been criticized in the wake of the financial crisis.
From a Canadian perspective, we note that some of those proposals have been addressed by new rules of the Toronto Stock Exchange. The TSX mandated the annual election of directors on an individual basis. Although true classified boards were not permissible under Canadian corporate law, directors can no longer be elected by slate or for terms of more than one year. Moreover, listed issuers must either adopt a majority voting policy or disclose in their annual proxy circular the reasons why they have not done so (comply or explain). And, where the listed issuer does not have a majority voting policy, it must notify the TSX where one director receives more withheld votes than votes in favour.
It is also worth emphasizing two differences between Canada and the U.S. in respect of shareholder democracy. The first is that Canadian corporate law already provides a form of proxy access through the shareholder proposal mechanism. However, shareholder proposals are seldom used to nominate candidates. Second, the separation of the roles of chairman and CEO is an accepted practice of governance with the majority of Canadian public corporations.
Say on Pay
In the U.S., 2013 marks the third year since Say-on-Pay became mandatory for public corporations. Even though the Dodd-Frank Act leaves the choice to shareholders to decide whether they opt for an annual, biennial or triennial advisory vote, the vast majority of public corporations (80% of companies in the Russell 3000 index) hold annual say-on-pay votes.
For the first half of 2013, the average support for say-on-pay proposals was 92%, up from 90% in 2012. Proxy voting advisory firm ISS continued to exercise an influence on say-on-pay results. ISS recommended voting against management compensation packages in 10% of the 473 recommendations issued hitherto, in contrast with 13.3% negative recommendations in last year's proxy season. Where ISS issued a negative recommendation, half of the companies targeted received less than 70% support for their say-on-pay proposal. Although compensation assessments involve a number of quantitative and qualitative factors, pay for performance remains a central determinant of ISS recommendations.
For a pdf version of this post, see Legal Trends Fall 2013.