Say on pay, proxy access and board declassification are likely to be high on the agenda
Shareholder engagement shows little sign of slowing down in proxy season 2013, with say on pay, proxy access and board declassification proposals likely to continue to take center stage at US annual meetings.
Indeed, the number of companies facing shareholder votes on these issues is only likely to increase this year in the US, with say on pay expanding to mid-sized and smaller American companies, for instance, and activist investors using lessons learned experimenting with various proxy access proposals in 2012 to target more companies in 2013.
‘This year will be the same old, same old – but by that I mean, a continued shift and changing playing field toward shareholder rights,’ says Brad Robinson, managing director specializing in corporate governance at proxy firm Eagle Rock.
‘That means it’s even more important for issuers to be aware of the current trends in governance, because this really doesn’t seem to be reversing. We have not yet hit the high-water mark.’
For anyone who still doubts the imperative of shareholder engagement, proxy season 2012 offered a strong cautionary tale in the UK, which experienced a ‘shareholder spring’ marked by the outright defeat of remuneration reports at five companies – and the subsequent departure of CEOs at four of them.
Those results were a ‘revelation to everyone’ and are likely to profoundly affect the way companies in the UK prepare for proxy season 2013, says Angelika Horstmeier, director of global corporate advisory services at Ipreo.
‘Investors in the UK really gave boards a big slap on the wrist and it’s not going to happen again,’ she notes. ‘Companies will not want to be plastered all over the press again for something like that.’
Getting in early
In the months leading up to proxy season 2013, companies ‘will be looking further in advance for shareholder opinions and shareholder guidelines on policies,’ Horstmeier continues.
‘There wasn’t enough education before. Companies are likely to engage much earlier with shareholders to find out what is important to them and what they need to know.’
Those lessons learned follow trends toward increasing pre-proxy season shareholder engagement in other European countries, many of which have had remuneration votes on corporate agendas for a couple of years.
In Germany and France, Horstmeier notes, engagement has only continued to expand in the lead-up to proxy season, as large investors are increasingly setting up in-house corporate governance teams and interfacing directly with companies, rather than relying solely on outside advisory agencies. And these teams are engaging with the companies they invest in directly.
The large French investors BNP Paribas and Amundi Asset Management have been increasingly engaging with German companies they invest in to discuss remuneration structure and help with their analysis, Horstmeier points out.
‘They used to write a letter to the companies stating their guidelines, basically saying, Have a look if you want to, but don’t worry if you don’t,’ she says. Over the last three years, however, pre-proxy season IR has evolved and ‘now meetings are scheduled, they go through investor relations team to communicate and get information, and then go to meetings with the board that sometimes include the CFO and CEO.’
In the US, pre-proxy season engagement on issues like say on pay is also likely to continue to grow. About 90 percent of the companies that saw their say-on-pay plans voted down in 2011 were able to garner strong support in 2012 from those same shareholders by making changes to the pay packages – in large part thanks to increased outreach and lessons learned by US listed companies.
‘There was a lot of engagement,’ says Amy Borrus, deputy director of the Council of Institutional Investors. ‘It’s embarrassing to have a high ‘no’ vote on say on pay and directors do not like it. They don’t want to defend it.’
‘By and large, US investors were more satisfied with the way companies responded to the issues in 2012,’ says Patrick McGurn, vice president and special counsel to proxy advisory firm ISS. ‘You just didn’t see the escalation [in the US] that we saw in Europe and the UK last year.’
No modest proposal
In the months leading up to 2012, ISS threatened to recommend ‘no’ votes against compensation committee board members who failed to respond to 2011 votes on say on pay. ISS didn’t have to follow through on the threat at most companies because 90 percent made changes and received strong majority votes in favor of their 2012 pay packages.
‘We made very few red card recommendations regarding board members this year, because most boards were responsive,’ McGurn says. ‘Based on what our institutional clients told us, we found that boards have been very responsive ‒ and engaged in aggressive outreach.’
In an effort to build on that momentum, ISS announced it was considering strengthening its position to ‘hold directors accountable’ in a policy that, if implemented, is likely to take effect before 2013.
Under its current policy, ISS recommends a vote against or withhold for the entire board if it fails to act on a shareholder proposal that receives the support of a majority of shares outstanding the previous year and fails to act on proposals that received majority support in the last year and one of the previous two years.
The new proposal would recommend ‘against or withhold’ if the board failed to act on a proposal that received a simple majority of the shares voted in the previous year. If adopted, it ‘is going to put some real teeth into shareholder proposals in future,’ says Sanjay Shirodkar, of counsel at DLA Piper.
‘Boards are going to take shareholder proposals a lot more seriously and have to take certain actions before the next proxy season rolls around, and take some steps to address whatever the issue is.’
Perhaps the most significant development likely to occur in proxy season 2013 is the expansion of some corporate governance proxy votes to small and mid-sized US companies that have so far avoided them.
In 2011 the SEC adopted a temporary two-year exemption for advisory say-on-pay votes and the frequency of such votes for companies with a public float of less than $75 mn.
That exemption is set to expire for all annual meetings occurring after January 21, 2013, ensuring a whole new round of fireworks in the upcoming proxy season.
Shareholders are also likely to target smaller companies for initiatives that require directors running for seats in uncontested elections to receive majority votes, which means a significant amount of withhold votes against a director could trigger a resignation.
‘More than 70 percent of S&P 500 companies have already adopted majority voting for uncontested elections,’ says Borrus. ‘I think the focus is increasingly going to be on mid-sized and smaller companies.’
Both declassifying boards and majority voting continue to get ‘very, very high shareholder support. Investors will continue to press those holdout companies that still have classified boards and majority voting ‒ it is a process of building it out’ from boards that have already acceded to shareholder demands to holdouts and smaller companies, Borrus explains.
McGurn agrees. ‘I expect majority voting to continue to make inroads into mid-cap and small-cap companies,’ he says. ‘You have near unanimity among the large caps, so a lot of activist investors are setting their sights downstream on the mid-caps and small-caps now.’
Proxy access is also likely to be a hot issue in 2013. Last year was a test year of sorts, following a 2011 US court decision to strike down a new SEC rule that would have allowed investors who have owned 3 percent of a company stock for three years to get their own director candidates onto the official company proxy statement.
In its decision to strike down that rule, the court upheld the right of investors to place their own proxy access proposals onto company ballots, and last year represented the first year such proposals were offered up at annual meetings.
Over the last 12 months, activist investors experimented with various form of proxy access to see which ones would pass SEC muster, and which ones would garner majority shareholder support. In the end, the proposals most closely aligned with the SEC’s original proxy access proposals – 3 percent ownership for three years – proved the most successful.
Overall there were two dozen proposals, about a dozen of which came to a vote: two received majority support at Chesapeake and Nabors, both of which were non-binding resolutions.
‘Last year, we saw more than 20 proposals and a dozen came to a vote,’ McGurn says. ‘I think we will see a significant increase on that this year; we could easily double it. There’s going to be a bumper crop.’
Making a contribution
Some corporate governance and IR experts expect campaign finance disclosure to heat up in 2013 in the wake of the 2012 presidential election.
After the US Supreme Court’s Citizens United decision, which allowed unlimited political campaign contributions, a number of activist shareholders put forth proposals aimed at forcing disclosure or restricting corporate political spending in recent years.
‘It hasn’t gone that far,’ says Borrus. That’s due in large part to the fact that ‘mainstream institutional investors are more focused on core governance issues like executive compensation and other board accountability issues,’ she explains.
But Robinson expects the 2012 presidential election to change all that. By the time proxy season rolls around, information about how public companies are spending their money on campaign contributions will be in the public sphere.
‘I think various groups will latch onto contributions, either because they don’t agree with them or think they should have been larger,’ Robinson says. ‘And I think you will see more proposals for companies to have some sort of accountability to shareholders for political spending.
‘This is the first major national election where people and media are up to speed on the implications of the campaign spending laws. I think you will see a big focus on some of these companies when it comes to political spending.’