United States: Are There Clues In The Last Proxy Season About The One To Come?

Last Updated: October 7 2019
Article by Cydney Posner

In 2019 Proxy Season Recap and 2020 Trends to Watch from consultant ICR, posted on The Harvard Law School Forum on Corporate Governance and Financial Regulation, the author concludes that, although, initially, the changes in voter behavior during the 2019 proxy season appear marginal, on a closer look, the changes portend an "already-shifting pattern of voter behavior, and contain important clues as to what companies must do to prepare for the 2020 proxy season." These clues are reinforced by recent developments, such as the new Statement on the Purpose of a Corporation issued by the Business Roundtable (see this PubCo post).  In the article, the author analyzes trends in say on pay, director elections, shareholder proposals and ESG and IPO governance issues, and prognosticates about what it all means for 2020. 

Say on Pay

Although the percentages of average support (90%) and failures (2%) among the Russell 3000 remained about the same in 2019, the author identifies a "marked rise in the percentage of SOP with support rates below 80%—which is the threshold at which both investors and proxy advisory firms begin scrutinizing Compensation Committee members for their oversight of the pay program, as well as their responsiveness to investor concern."  What accounts for the increase in opposition? The author attributes the increase to reluctance by passive investors to support one-time retention awards to executives  or discretionary equity awards that are not performance-based, reluctance to rely only on general pay-for-performance alignment based on relative TSR, and the increasing view that problematic pay practices may reflect a lack of proper oversight.  The author also observed a strong correlation between pay-ratio data (presumably the reference is to unusually high ratios) and SOP results, which, he argues, could lead more investors to begin to take pay-ratio data into account in SOP votes. Interestingly, he cautioned companies to avoid "excessively 'Non-GAAP'-izing" pay-ratio data, which he suggested could backfire.

Director Elections

The author also detects a rise among the Russell 3000 in the percentage of directors that failed to receive majority votes in favor, from .19% (36) in 2018 to .28% (45 in the first half of 2019), a trend that he finds correlates to the increase in SOP opposition. In addition, this year, BlackRock and other large asset managers began to apply stricter overboarding policies, with a maximum of four boards for non-CEO board members emerging as the new standard. For example, in 2018, 36% of non-CEO directors serving on six or more boards received less than 80% of the vote in favor, compared to a hefty  57% in 2019. Board refreshment to increase gender diversity may play an increasing role: for example, the author expects BlackRock to take a bright line approach in 2020, voting against boards with fewer than two women. He also highlights a new ISS policy against excessive director pay, which could lead to withhold votes for relevant directors if director pay is excessive relative to peers for two or more consecutive years without mitigating disclosure.

Shareholder Proposals and ESG

In 2019, over 64% of shareholder proposals submitted for a vote—and a majority of the proposals that passed—related to corporate governance matters, particularly, proposals to adopt a majority voting standard.  However, more E&S proposals were actually submitted to companies year over year (454 v. 367), but E&S proposals were withdrawn "at record levels" following investor engagement.  The author contends that social proposals were ascendant in 2019, even over environmental proposals.  For example, about 56% of proposals related to human capital management went to a vote in 2019, as compared with 22% in 2018.  Here, the author cites the impact of BlackRock CEO Larry Fink's annual letter (See this PubCo post) and the Business Roundtable Statement, which  "moves away from shareholder primacy" as a guiding principle and outlines in its place a "modern standard for corporate responsibility" that makes a commitment to all stakeholders. He believes that this emphasis on a broader group of stakeholders will continue into 2020 and advises companies to be prepared for investor "ESG screens" to affect voting and investment decisions.

Intensifying Scrutiny on Recent IPO Companies

With regard to IPO governance provisions, such as classified boards, multi-class share structures and supermajority voting provisions, the author characterizes ISS as "rather dogmatic" in its voting policies against these types of governance provisions; however, he notes, institutional investors have been more pragmatic approach and willing to engage on these issues. Nevertheless, he sees "investor sentiment on these starter kit IPO governance provisions...rapidly turning more negative," observing that shareholder proposals for one-share one-vote structures continue to enjoy "healthy support." He recommends that recent IPO companies engage with their shareholders before proxy season begins to communicate their views on these issues.  He also notes that CII will be tracking and disclosing the names and all board seats of directors who, pre-IPO, participated in decisions to adopt dual-class share structures.

2020 Proxy Season

What to expect for 2020?  The author identifies these as hot topics for the 2020 proxy season: board gender diversity; director overboarding; combined CEO/Board Chairs; director accountability related to climate change risk; sunset provisions for multi-class share structures; and  board responsiveness to low SOP support.  He advocates that companies "craft a compelling engagement strategy," reach out to their shareholders regarding governance and sustainability and tie these issues into their long-term corporate strategies.

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