Four Takeaways From Proxy Season 2016 by EY
Active – not just activist – institutional investors are reshaping the corporate governance landscape and challenging how boards think about fundamental issues such as strategy, risk, capital allocation and board composition. Large asset managers are increasingly outspoken on governance expectations and urging companies to think long term – and also making clear that they view corporate governance not as a compliance exercise but as an ownership responsibility tied to investment value and risk mitigation.
Companies are responding to investor demands for increased board accountability and transparency. They are enhancing communications with investors to share the board’s message on governance and strategy and highlight director qualifications and board responsiveness to investor concerns. Against this backdrop of increased company-shareholder engagement and evolving disclosure practices, investor support for directors and company pay programs remains high.
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Based on the EY Center for Board Matters’ proprietary corporate governance database and conversations with investors and directors, we offer four observations about the 2016 proxy season.
Adoption Of Proxy Access Is Accelerating Across The Market
Proxy access, a provision that companies fought against for decades, has now been adopted by more than a third of Standard & Poor’s (S&P) 500 companies within a two-year span, driven largely by the submission of shareholder proposals calling for the reform. Around 60% of almost 200 companies that received proxy access shareholder proposals for 2016 annual meetings adopted proxy access bylaws before the proposal even went to a vote.
What this means for boards
Pressure on companies to adopt proxy access is likely to increase. Actions to consider:
- Proactively raise the topic with key shareholders to better understand their views on proxy access, including around preferred terms (e.g., shareholders’ ability to work as a group and the number of board seats that may be filled)
- Confirm that communications around board composition make clear how the skill sets of individual directors are aligned with the company’s strategy and risk oversight efforts, and discuss the board’s assessment, refreshment and nomination processes
Companies Continue To Enhance Investor Communications
Proxy statements continue to evolve from compliance documents to communication tools that serve as an extension of corporate engagement efforts and a formal record of the board’s priorities and governance philosophy. Effective proxy statements are improving readability through enhanced formatting and graphics, demonstrating board engagement and effectiveness and addressing key interests of institutional investors.
Company-investor engagement on governance topics — and disclosure of these efforts in the proxy statement — also continues to grow. While executive compensation remains a primary engagement driver, companies disclosed a variety of other governance topics that were part of those conversations.
And directors are getting involved: among the 287 S&P 500 companies that disclosed engagement this year, 24% disclosed that board members were involved (most often the lead director or compensation committee chair), up from 18% last year.
*Percentages for 2016 based on 436 proxy statements for S&P 500 companies available as of June 10, 2016.
What this means for boards
Proxy disclosures are an efficient way to take the company’s targeted governance message to a broad audience of investors and other stakeholders. Through direct engagement, companies are better positioned to proactively respond to investor concerns, have effective investor communications and secure investor support. Actions to consider:
- Use the proxy statement to directly address investors (e.g., through a letter from the board or a committee, Q&A with the lead director or link to director video interviews)
- Incorporate investor insights into governance decisions and communications
Board Composition Remains A Key Focus – With Director Tenure And Board Leadership Coming Under Increased Investor Scrutiny
While investors evaluate board composition using a number of different lenses, some are now particularly focused on director tenure and the board’s approach to refreshment and succession planning. Several influential investors have recently adopted proxy voting policies that take tenure into account.
Some investors believe lengthy tenure may compromise board independence. Other considerations include the need for gradual board and committee turnover and the fact that board refreshment is critical to recruiting new skills aligned with the company’s evolving strategy — and creating opportunities to enhance board diversity.
Some investors are also paying closer attention to board leadership. They seek assurances that boards have empowered and effective independent leaders with well-defined responsibilities and relevant personal strengths and qualifications. For some, there is no substitute for an independent chair, but others find lead directors to be sufficient.
What this means for boards
Boards’ record of refreshment, assessment process and leadership structures are under increased scrutiny. As some investors weigh their options for encouraging regular, thoughtful board refreshment, it underscores the value in companies enhancing their communications in these areas. Actions to consider:
- Discuss board refreshment, assessment and leadership during engagement conversations with shareholders (and consider making directors available as appropriate), and enhance proxy disclosures related to these topics
- Include proxy statement graphics highlighting the board’s diversity of tenure (25% of S&P 500 companies have done so this year) and letters from (or Q&As with) the lead independent director or independent chair, demonstrating the depth of their role (6% of S&P 500 companies have done so this year)
2016 proxy season: The value of board composition
Learn how board composition plays a valuable role as investors look to support long-term, sustainable corporate strategies.
We are tracking around 890 shareholder proposals submitted for meetings through June 2016, which is close to what we tracked over the same period last year. This sustained high level of proposals is largely driven by the campaign for proxy access and a continued push for increased transparency and accountability around environmental sustainability practices. Some key takeaways include:
- Environmental and social topics remain in the lead among proposal categories, but board-related proposals have increased with the expansion of the campaign for proxy access. This year, 37% of shareholder proposal submissions are board related, up from 28% in 2015.
- The most submitted shareholder proposal topic again this year was proxy access. Shareholder proposals on this topic that go to a vote average close to majority support — and usually fall under that mark only when the target company has already adopted proxy access by the time the proposal goes to a vote or management is submitting a counterproposal to adopt proxy access. The proposal averages 59% when excluding such companies.
- Environmental considerations appear to be moving further into the mainstream, and some proxy votes to date may reflect that shift. Average support for proposals on climate risk have jumped from 7% in 2011 to 28% so far this year, including a proposal at an oil and gas company that nearly received majority support with 49% of the votes cast.
- The percentage of shareholder proposals withdrawn before going to a vote is 26%, which is consistent with recent years.
Most common shareholder proposals submitted in 2016
|Proposal||Average support to date||Proposals submitted||Proposals withdrawn|
|Adopt/amend proxy access||49%||186||37%|
|Review/report on lobbying activities||24%||56||23%|
|Appoint independent board chair||30%||55||15%|
|Review/report on political spending||28%||46||30%|
|Address human rights||7%||39||28%|
|Report on sustainability||28%||33||33%|
|Limit post-employment executive pay||27%||33||27%|
|Review/report on greenhouse gas emissions||25%||31||35%|
|Increase/report on board diversity||32%||27||67%|
Shareholder proposals receiving highest average vote support in 2016
|Proposal||2011 average support||2016 average support to date|
|Adopt majority vote to elect directors||60%||68%|
|Eliminate supermajority vote||59%||61%|
|Adopt/amend proxy access||n/a||49%|
|Allow shareholders to act by written consent||52%||41%|
|Allow shareholders to call special meeting||43%||39%|