Proxy Access Proposals: Preliminary 2015 U.S. Postseason Review by Patrick McGurn and Edward Kamonjoh, ISS
- Proxy access exploded on to the scene in 2015 as shareholder proponents lobbed almost 120 proposals into U.S. boardrooms. Almost 60 percent of the proposals voted on so far this year have drawn majority support. Average votes in favor of access have jumped by more than 20 percentage points—from 34 percent in 2014 to 54.4 percent so far in 2015. Spurred by this campaign, more than 40 companies have adopted or made commitments to adopt proxy access provisions.
- Hedge fund activists entered the 2015 season emboldended by two consecutive seasons of sky-high (70 percent) success rates in placing their nominees on boards. This losing streak for incumbent directors appeared to have weakened the resolve of board members, who opted to ink settlements with many dissidents this season. Even with the resulting attrition, contested meetings for the first half of the year still ran ahead of 2014’s volume over the same period, and the median market-cap of targeted firms hit an all-time record of $518 million.
- For directors running without challengers this season, it was the best of times. Average support for nominees at Russell 3000 (R3K) Index companies soared to 96.3 percent; more than 90 percent of them drew support of 90 percent or greater. Unlike recent seasons, the 2015 proxy season failed to produce a signature “vote no” campaign against a group of sitting directors.
- Despite the proxy access juggernaut, proponents of environmental & social (E&S) issues managed to hold their lead dog position with respect to total shareholder proposal submissions to U.S. firms. However, as has been the case in prior years, governance topic proposals ended up grabbing the spotlight at meetings after about 40 percent of the E&S propsals were withdrawn. This high attrition rate reflects continued successful engagements between boards and proponents.
- Compensation issues receded into the background during the 2015 proxy season as the fifth year of Dodd-Frank mandated management say-on-pay votes (MSoP) proved to be less contentious, for some firms at least. Average support on MSoP at R3K firms hit 91.6 percent of votes cast, with almost 80 percent of firms topping the 90 percent support line, slightly above prior years.
Proxy Access Proposals: Preliminary 2015 U.S. Postseason Review – Introduction
Momentum is the buzzword that best describes the 2015 Proxy Season in the U.S. market. Some issues, such as proxy access, hit the ground running and emerged as ballot box juggernauts. Other topics, such as calls for independent board chairs and heightened scrutiny of human rights, stumbled and lost ground. Some new ideas, such as hybrid climate change risk initiatives aimed at impacting board deliberations on compensation and CAPEX, failed to catch fire. Despite the rising proxy access tide, E&S proposals swamped their governance and compensation cousins in the pre-season family reunion headcount. However, big submission numbers failed to translate into growing support. Just one environmental proposal managed to win majority support in the year’s first six months.
Hedge fund activists benefitted from the tailwinds of two consecutive seasons with near 70 percent success rates at meetings, by settling their threatened fights early and often so far in 2015. In an ironic twist, the handful of fights that actually ended in votes this year, including DuPont’s victory over Trian’s Nelson Peltz, favored incumbents and showed that dissident nominees are not always shoo-ins for board seats.
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Perennial shareholder proposal campaigns, including those calling for majority voting and annual director elections, nearly disappeared as letter-writing campaigns and other engagement activities took those issues off proxies.
Coming off of the busiest and most contentious “advisory vote” campaign ever, say-on-pay fatigue appeared to set in for both issuers and proxy voters as “say nay” campaigns ebbed and engagement-fueled support grew.
Proxy Access Proposals: Preliminary 2015 U.S. Postseason Review – Top 5 Trends For 2015
Accounting for upwards of 11 percent of proposal submissions in 2015, and more than 14 percent of shareholder resolutions appearing on proxy ballots to date, proxy access exploded onto the scene this season. This comet-like appearance was ignited by the New York City Comptroller Office’s launch of the Boardroom Accountability Project (BAP). This new campaign accounts for about 65 percent of the almost 120 proxy access shareholder proposal submissions for 2015, according to ISS Voting Analytics data. The vast majority of 2015’s proposals are modeled on the Securities and Exchange Commission’s 2010 proxy access rule (struck down by a Federal court in 2011) and feature a 3-percent-for-three-years ownership requirement and a maximum of 25 percent of board seats proxy access formulation (hereinafter described as “SEC Clones”). The vast majority, roughly 90, of proposal submissions have appeared on ballots.
Earlier in the year, access supporters dodged a potentially fatal blow from the SEC’s no-action process when Chair Mary Jo White overturned a staff interpretation of SEC Rule 14a-8(i)(9) that would have allowed the board at Whole Foods Markets to block a shareholder’s access resolution by placing a management counter-proposal (setting a much higher access hurdle) on the ballot. Other recipients of proxy access proposals had lined up behind Whole Foods by seeking to exclude access shareholder proposals in favor of their own renditions of an access standard. Thus immune from such challenges, after White told Commission lawyers to study the “conflicting” proposal topic during the 2015 season, nearly 50 proposals on ballots drew majority support in the first half of the year.
In the wake of BAP submissions, boards at a dozen companies launched their own access proposals. Boards at five firms convened votes modeled on “near” SEC Clone policies (typically stipulating 3 percent/three years/25 percent of board seats/a 20-shareholder limit on aggregation) in exchange for the withdrawal of proposals by the NYC funds or other proponents or in response to proposals that received majority support last year. Shareholders strongly supported these measures at the five firms, with 89.1 percent support on average – at SLM Corporation, the board’s proposal was favored by 92.2 percent of investors, the highest support level of the five firms, and, most recently, 88 percent of shareholders supported the board proposal at McKesson’s July 29 meeting. Unable to exclude the shareholder proposals thanks to SEC Chair White, boards at seven firms countered investors’ offerings with competing proposals featuring their own more restrictive access models (typically set at 5 percent ownership for 3 years, a cap of 10 to 25 percent of board seats, and nominating group aggregation limits of one to 20 shareholders).
Access shareholder proposals became magnets for support this season. To date, average investor support for the 84 resolutions where vote results are available is 54.4 percent. Forty-nine (or almost 60 percent) of the resolutions have received majority support. Another six resolutions narrowly missed the majority support threshold with at least 49 percent support. In the aggregate, more than 95 percent of access shareholder proposals voted on so far have received at least 30 percent support. Boards at two firms, Citigroup and Apache, endorsed their proponents’ access shareholder proposals, and the board at Republic Services expressed no view on a proposal. Average support for the proposals at these three firms was close to 90 percent.
Vote outcomes at companies where competing proposals were at play were mixed. Investors rejected the lion’s share of both the competing board and shareholder-sponsored proposals. Four of the seven dueling board proposals failed to pass muster with shareholders but three succeeded. Conversely, four competing shareholder proposals failed (although by a smaller margin than the failed dueling board proposals) and three passed. Average support for competing board proposals tallied at 41.8 percent, and average support for competing shareholder proposals weighed in at 55.4 percent, or an almost 14 percentage point gap.
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