Advisory Intelligence: Six trends to watch for this proxy season
With proxy season upon us, a number of challenges raise their head. And when it comes to IR professionals’ preparations, Myles Clouston, senior director of Nasdaq Corporate Solutions’ Advisory Services, has some practical advice.
‘IROs should make sure they are up to speed on the hot topics that are coming in this proxy season,’ he says. ‘And they should make sure they are in sync with their internal team: what that team is focused on, what the expectations are and what can be anticipated. Have a game plan.’
Clouston lists six inter-related issues as some key trends to watch for this year, the first of which is board diversity. ‘This is everything from gender representation – especially when State Street came out on the issue – to racial diversity, and also softer elements, like making sure board members have different skill sets and backgrounds, which helps to minimize groupthink,’ he explains.
Highly connected to this is the issue of an independent chair and effective governance. ‘It’s about having an independent view of the CEO and the rest of the board and [about] driving and stewarding the company strategy,’ says Clouston.
‘This is not just about having an independent chair and CEO, however, but rather about having good representation from people who do not have any potential conflicts of interest and look at the business and strategy from an objective standpoint. People today are looking at the board from a governance standpoint.’
Equally connected is the third element: compensation, pay ratio disclosure and gender pay equality. ‘From a compensation perspective, this is about making sure senior management is aligned with how much employees are being paid,’ says Clouston. ‘This is about pay ratio disclosure – what the senior management team is making versus the median employee. It’s an important metric that is increasingly going to become a big theme.’
Questions for IR teams here are: do they know company pay ratios and gender pay inequality? In turn, what does this mean, and what steps is the company taking to deal with these gaps?
According to Star Metrics, in the UK in 2017 the gender pay gap was 31 percent. ‘Overall compensation, whether it is senior management versus the mean employee, or whether it is looking at gender – these are going to be on the docket in proxy season,’ warns Clouston.
There is also the issue of passive managers being more vocal and using their votes on issues they care about. ‘This has been increasing – whether it’s BlackRock, State Street Global or Vanguard, they are increasingly using their shares in a vocal manner,’ Clouston says.
‘When you look at passive managers, they do not control what they buy and sell – they are just mimicking an index, so what they can control is trying to make the constituents in the index think more about long-termism or how they are running their business and running it in a sustainable manner.’
Then there is a resurgence of traditional activism. ‘This has increased from the governance side, making sure the board and management team are looking to make those right decisions – and it all goes back to long-termism, which has been a big theme with BlackRock,’ notes Clouston.
The final issue is cyber-security. ‘This is something companies are working hard at given an increased prevalence over the several few years,’ Clouston says. ‘It is very much a headline risk and can have a huge detrimental impact on a company. It is built on a reputational standpoint and is more of a technical point: investors want to make sure companies have the right systems to mitigate any potential risk they could face.’
There has been a rise in the number of proxy battles since 2013, and the preliminary data shows 2018 will be a busy year yet again. ‘Looking at FactSet data, all signs show there has been a rise [in activity],’ Clouston says. ‘Interestingly, in 2017 we actually saw a decline in settlements as activists got bolder and therefore we saw an increase in activist wins.
‘That said, the number of withdrawn campaigns rose so, in summary, I would say activists have become bolder and are getting more wins. But with the withdrawals, companies are making sure they get the best outcome they can, so there is constructive dialogue going on in the background.
‘It is going to be a busy season. IROs have a unique lens into the company as well as the investment community and that is why it is important for them to be engaged and proactive during the proxy season.’
This content was produced by Nasdaq Corporate Solutions and first appeared on Nasdaq's website.