With the 2020 proxy season around the corner, we have prepared a brief review of key corporate governance trends that can inform how you frame your company's prior-year performance and objectives for the coming year. We focus on the top five trends gleaned from 2019 proxy statements to ensure our clients and other company leaders have the tools they need to successfully navigate this important regulatory terrain.
The picture emerging from the filings as well as recent news reports indicate that the ground is shifting and near term shareholder value is no longer the only consideration for the C-Suite. Nearly 200 leading chief executives signed a groundbreaking Business Roundtable statement in August saying that companies "must also invest in their employees, protect the environment and deal fairly and ethically with their suppliers." Institutions in the United Kingdom followed the Roundtable's lead a few months later, and in December the World Economic Forum released a Davos Manifesto outlining ethical principles for corporations to follow.
Institutional investors are increasing their vigilance as these shifts affect corporate governance, though they're not always voting differently. That means it's important to know where momentum is building and what changes are afoot. Here are five trends to watch as you get ready for the 2020 proxy season.
1. Increased Opposition to "Say-on-Pay" Proposals
Investors seem to be taking an increasingly dim view of executive compensation, as seen in the approval rates of "say-on-pay" proposals. These nonbinding measures, in which companies seek shareholder approval of compensation packages for top executives, were mandated by law in the Dodd–Frank Wall Street Reform and Consumer Protection Act.
Data from ISS Analytics show that opposition rates to these proposals are inching up and are at the highest levels since they were first introduced to U.S. ballots in 2011.
Among Silicon Valley 150 companies, our data show that six companies failed to receive majority votes and 10 others received support below 70%.
However, these companies were not representative of the majority. Shareholders still overwhelmingly approved executive compensation proposals in Silicon Valley and beyond, with 23 companies receiving support of 98% or more in the 2019 proxy season. About 70% of the SV 150 companies received 90% or more support.
2. CEO Pay Continues to Increase, With Shift to Stock-Based Compensation
Even as more shareholders voted down executive compensation proposals, pay increases for CEOs across all market segments and almost all industries reached record highs, according to data from Institutional Shareholder Services.
These larger CEO compensation packages are relying more heavily on stock-based compensation. For the first time, CEOs at large companies saw the stock portion of their compensation cross the threshold of 50%.
This trend was even more evident among the top 50 Silicon Valley companies, where half the CEOs had packages composed of more than 70% stock-based compensation. Eighteen earned over 80% and six over 90% of their compensation in some form of stock.
Also being closely watched for their effect on say-on-pay proposals are the new pay ratio disclosures, also required by the Dodd-Frank Act, which went into effect in 2018. These ratios show a wide gap between the compensation of most Silicon Valley CEOs and that of a "median" employee at their company.
3. Women, Ethnic Minorities Join Boards in Record Numbers
ISS and Spencer Stuart data also showed that women and ethnic minorities are joining boards of directors at rates never before seen.
The share of women on boards reached a record high in 2019, with 45% of new Russell 3000 board seats filled by women (compared to only 12% in 2008), according to the ISS data. Overall, nearly one in five Russell 3000 board seats are held by women.
And that's not the only metric showing an increase in diversity. A record-breaking 59% of the 432 independent directors added to S&P 500 boards over the past year were women or men belonging to minority groups, according to the 2019 U.S. Spencer Stuart Board Index. Women represented a full 46% of the incoming class, according to Spencer Stuart.
Ethnic diversity is also increasing, albeit more slowly, according to the ISS report. For the first time, the percentage of ethnic minorities at Russell 3000 companies surpassed 10%. New appointments are also increasingly diverse. The S&P 500 companies are leading the way, with more than one in five new directorships being filled by non-Caucasian nominees. At Russell 3000 companies, approximately 15% of new board seats were filled by minorities.
Two of every three companies surveyed reported that diversity would be a board recruiting priority for at least the next three years, according to Spencer Stuart.
4. Companies Continue to Face Gender Pay Equity Proposals
Activist shareholders continue to scrutinize public companies for their efforts at pay equity and to push for reports on the pay gap between men and women.
This year, four Silicon Valley 150 companies—Alphabet, Intel, Adobe and Facebook—faced proposals to require gender pay reports. While all were ultimately defeated by shareholders, the moves highlight the risks to a company's reputation stemming from the pay gap as well as the firm's ability to recruit and retain female talent.
More broadly, outside of Silicon Valley, 12 gender pay equity proposals were filed by shareholders, Nuveen reports (one was withdrawn after company voluntarily published the report requested in the proposal). These measures received an average of 25% support, with more than 30% support at three companies. With this level of backing, it's likely we'll see refinement and additional proposals in coming years.
5. Support Rising for Environmental and Social Disclosures
For the third consecutive year, the volume of proposals to address environmental and social concerns rivaled or outpaced other governance proposals, as shareholders of Silicon Valley companies sought information about political spending, board diversity, human rights and sustainability. Our data show 27 such proposals were actually voted on by stockholders in the SV 150 during the 2019 proxy season.
While none of the proposals received majority support, the level of interest in these issues continues to rise, a trend further illustrated in recent weeks in letters sent by the CEOs of large investors such as Blackrock and State Street Global Advisors.
It's important to note that nearly half of the proposals were withdrawn after companies implemented substantial elements of the proposals. Our takeaway: Effective engagement with proponents of environmental and social disclosure proposals can often avoid a shareholder vote.
CEOs at prominent companies have begun to articulate an understanding that good governance and a variety of environmental, social and governance practices affect a company's ability to generate positive returns for investors over the long run.
"We approach these issues from the perspective of long-term investment value, not from a political or social agenda (aka 'values')," wrote Cyrus Taraporevala, president and CEO of State Street Global Advisors, in his annual letter to investors. In a recent New York Times editorial, Salesforce Chairman and co-CEO Marc Benioff spoke out about the need for companies to value purpose alongside profit.
We will continue to monitor these trends, as we expect them to shape the 2020 proxy season and beyond.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.