2015 Proxy Season Review by Sullivan & Cromwell LLP
Proxy Access Proposals Most Significant Development of 2015; Significantly Higher ISS Support of Independent Chair Proposals Does Not Translate to Higher Votes; Board Withhold Recommendations Continue to Increase With Board Responsiveness a Key Driver in Resulting Votes
This Paper summarizes significant developments relating to shareholder proposals to date during the 2015 proxy season. Although shareholder activists pursuing strategic or management changes continue to dominate the headlines, they do not choose to wage those campaigns through shareholder proposals made under Rule 14a-8, which are addressed by this Paper, choosing instead private or public pressure, and often a threatened or actual proxy contest. Nonetheless, the widespread governance changes brought about through successful 14a-8 proposals have played no small part in the continued growth and success of shareholder activism.
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During the 2015 proxy season, proxy access has been the most significant development. Far more proposals have been made and support has been substantially stronger. There have been 82 proxy access proposals to date in 2015, as opposed to 17 in all of 2014. In 2015, shareholders have approved 48 proposals to date (as opposed to five for all of 2014), and the average votes cast in favor have risen to 55% from 33% in 2014. Perhaps most significantly, modestly more restrictive management-enacted proxy access provisions apparently did not deter shareholders from proposing, and, in many cases, winning on the now standard shareholder proposal format of 3%/3-year/25% of board.
When proxy access proposals are eliminated, overall governance proposals dropped 6%, with majority election of directors and board declassification proposals in particular being proposed much less frequently than in prior years. This decline, however, may principally reflect the previous adoption of these two governance arrangements by numerous companies. Although ISS support for independent chair proposals increased significantly this year, based on its new approach to this proposal, average support and the number of successful proposals actually declined somewhat. In light of the SEC’s decision to suspend no-action relief for conflicting proposals, conflicting proposals for proxy access and special meeting rights appeared in a number of proxy statements.
ISS recommendations to withhold or vote against directors increased in 2015 with notable increases in the number of withhold recommendations for a lack of responsiveness and for unilateral actions taken by the board that restricted shareholder rights (primarily through bylaw amendments), as well as for independence, compensation and overboarding issues. Average support on advisory say-on-pay votes remained strong, and largely unchanged from prior years.
The data in this Paper incorporates shareholder proposals made at meetings held on or before June 30, 2015. We estimate that about 415 of the S&P 500 companies had held their meetings by that date.
Overall Trends In Rule 14A-8 Shareholder Proposals
Overview Of Shareholder Proposals In 2014 And 2015
The following table and pie charts summarize, by general category, the Rule 14a-8 shareholder proposals voted on at U.S. companies in 2014 and 2015, and the rate at which they passed.
As indicated above, companies still receive a large number of social, political, and compensation related proposals, though it is also still the case that the vast majority of proposals that pass are those relating to governance issues. Only one out of 188 social/political proposals and five out of the 76 compensation-related proposals received a majority of votes cast in 2015 thus far.
Companies That Received Shareholder Proposals
Before turning to a detailed discussion of the various categories of shareholder proposals received by U.S. public companies in 2015, it is worth taking a moment to focus on which companies generally receive these proposals. Traditionally, the vast majority of shareholder proposals have been received by large-cap companies. Over time, this has led to a bifurcated corporate governance landscape, with so-called “shareholder-friendly” governance structures, such as destaggered boards, majority election of directors, special meeting rights and simple majority vote thresholds, being much more common at larger companies than smaller companies.
In 2015 so far, non-S&P 500 companies received 20% of all proposals voted on, although large-cap companies continue to be the primary focus of shareholder proposals across all categories of proposals.3 The number of shareholder proposals at non-S&P 500 companies is substantially similar to 2014 despite the fact that no political proposals were made at non-S&P 500 companies in 2015 (nine were made in 2014).
The overall number of non-proxy access governance proposals at both S&P 500 and non-S&P 500 companies remained relatively constant, although the composition between the two groups has changed. As indicated by the chart below, the 2015 proxy season reveals a significant decrease in proposals for majority voting for directors at the S&P 500 (undoubtedly due to the fact that more than 80% of the S&P 500 now have majority voting for directors), but a much smaller decrease in that proposal at non-S&P 500 companies. The decline in proposals for majority election for directors and declassification at the S&P 500 in 2015 was largely offset by small increases in written consent, cumulative voting, and independent chair proposals. The 2% decline in non-proxy access governance proposals at smaller cap companies relative to 2014 would suggest that many proponents are not electing to direct their attention to smaller cap companies once the larger cap companies have adopted shareholder governance initiatives, with the possible exception of majority voting for directors.
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