What next for proxy access? Will directors come under fire for overboarding? What’s the reaction to France’s Florange law?
At a glance
Investor focus on board issues – such as director tenure, diversity, overboarding and the right to appoint directors – is set to continue in 2016. And the 2015 proxy season certainly holds lessons for companies looking at the year ahead.
Summing up the 2015 season, professional services firm EY notes that while proxy access was the big governance story of the year – and one that is ‘tied to the increasing investor scrutiny of board composition and accountability’ – the number of votes opposing director nominees was actually the lowest it’s been in recent years. Indeed, Broadridge and PwC’s 2015 proxy season wrap-up report notes that ‘shareholder rights, rather than dissatisfaction, appeared to be the driving force’ behind the push for proxy access.
Looking back over 2015, EY also notes the ongoing growth of company-investor engagement, the continuing challenge from activist funds and the high number of shareholder proposals. Little of this is expected to change in 2016, while old favorites like say on pay and board diversity are also expected to resurface.
New on the cards will be a focus on the many outside directors Japanese companies need to bring in, and the heating up of multiple voting rights issues in France.
While some of the upcoming proxy season issues are specific to certain regions, overboarding is of global concern, according to ISS. ‘The underlying issue is the same everywhere: will the director be able to operate effectively if he/she is overcommitted? This particularly applies if he/she has a demanding or key role, such as board chair or CEO,’ explains Georgina Marshall, head of global research at the proxy advisory firm.
So just how many seats should a director have? ISS’ benchmark US policy for non-CEO directors is a maximum of six for a single director. The firm’s annual global voting policy survey – which this year has more than 400 respondents, 114 of which are institutional investors – shows that a fifth of investors support this benchmark. A higher proportion – 34 percent – believes a lower, four-directorship limit is more appropriate. This number drops for sitting CEOs: almost a third (32 percent) of investors agree with ISS that a maximum of three board seats is acceptable for those leading a company. Notably more, however – 48 percent – believe just two seats, including the one at the CEO’s own company, are enough.
Another issue highlighted by ISS is concern over potential governance lapses at controlled firms, with News Corp and Walmart providing high-profile examples. More than nine out of 10 investors say their engagement with controlled companies is less constructive than at non-controlled firms, while more than half distinguish between the two in the investment decision process.
Outsiders in Japan
These findings lead into the biggest story in Asia for the coming year: outside directors at Japanese firms. Not necessarily known for high governance standards, the country’s corporate governance code, which came into force in June 2015, is going to shine a light on Japanese companies.
‘In Japan, controlled companies are a fact of corporate life, either through family holdings or so-called cross-shareholdings that create less obvious but often tight business groupings,’ explains Marshall. ‘Control there has led to traditionally low levels of independent or outside board members, with often only one outside director on boards.’
But this is changing. The new code requires companies to appoint at least two independent outside directors – and for many companies, this will be the first time such an appointment is made. This is good news for investors but it does raise the issue of potential overboarding as companies seek those outsiders best qualified to sit on a board. And what marks someone out as a good candidate for a seat on a Japanese board? Independence from the company comes top in the ISS survey, while an outside director’s skill set, service on other boards and the number of years of industry experience are all deemed important.
Elsewhere in Asia, James Wong, CEO of Computershare Asia, says investors are set to remain focused largely on the same issues as in 2015. Last year Wong told IR Magazine that compensation, possible dilution, the pre-emption rights of non-controlling shareholders and connected-party transactions were all drawing more attention from institutions. Board diversity and sustainability were being pushed by exchanges but these were not major issues.
What’s changed for 2016 is that companies are looking for more ways to comply with regulation, he says. And what the region’s firms need to do is provide more information. For example, Hong Kong-listed companies often include resolutions on the proxy with little or no explanation as to why they’re up for a vote. ‘While investors have not necessarily voiced concerns over this, they have sometimes voted against those resolutions,’ says Wong. ‘Often, improved communication would get investors onside.’
For Robert McCormick, chief policy officer at Glass Lewis, investor concerns that boards ‘are made up of a CEO’s cronies and are conflicted in some way’ have been ‘resolved for the most part’; but there is a continued focus on the overall diversity of boards.
This is not just about gender, he adds. ‘Investors are looking at whether the board is diverse enough in skill set, experience, background – ‘passport diversity’ is a term I’m hearing a lot – and even age, depending on the type of company and the type of industry,’ he explains. ‘For example, if it’s more of a tech-based company or if its clients or customers are generally younger, investors want to know there is someone on the board who understands social media, or even knows what Twitter is.’
Overall board tenure is another question that’s getting a lot of attention. In the UK it’s assumed that a director loses the presumption of independence after nine years on a company’s board; that isn’t the case in the US. ‘But I think investors feel that if the board hasn’t had a new member in, say, five years and the average board tenure is 10 or 15 years, maybe that’s a risk, particularly if the company strategy is changing,’ says McCormick. ‘In fact, some shareholders are pushing for more board-tenure limitations, or at least evaluations – because how can you add a new, diverse member if you don’t have an opening?’
Then there’s remuneration, which Tony Quinn, managing director at CMi2i Proxy, says is ‘always going to be a global issue’. It remains the focus of both investors and regulators, adds McCormick, particularly in Europe this year. While some countries, including the UK and Spain, have moved to a three-year binding vote on executive remuneration, at the time of writing, amendments to the EU Shareholder Rights Directive still hadn’t been published. McCormick says others on the continent are ‘taking a wait and see approach’ as European policy makers prepare to formally adopt the amended directive.
A rights issue
The growth of proxy access as an investor demand has been impressive. Around 100 high-profile companies faced proxy access shareholder proposals in 2015, ‘more than four times the total submitted for 2014,’ notes EY.
‘Some directors believe widespread adoption of proxy access across the US market is now only a matter of time,’ write the authors of EY’s ‘Four takeaways from proxy season 2015’. ‘These directors say proxy access is likely to follow in the path of de-staggered boards and majority voting for director elections, which have become standard practice among large companies as a result of investors pushing for these changes, company by company, through shareholder proposals, letter-writing campaigns and dialogue.’
McCormick agrees. ‘Proxy access does seem like an issue that, if anything, will get even more attention in 2016,’ he says, adding that it’s not the kind of issue where you might see lots of different permutations of different thresholds. There’s a wide consensus around the SEC’s original ‘three and three’ proxy access proposal, where investors holding 3 percent of company shares for at least three years can make nominations, he explains. ‘Also, some shareholders feel very strongly about this as a fundamental right all shareholders should have,’ he adds.
Meanwhile, Italy’s U-turn on plans to extend a legal provision for listed companies to offer ‘loyalty shares’ to long-term shareholders in February 2015 followed pressure from some of the world’s largest institutional investors. But the issue remains.
‘In France, in particular, multiple voting rights for long-term shareholders have been – and remain – an issue,’ says Marshall. ‘The French government introduced automatic double-voting rights through the Florange Act, which took effect fully in 2015, with companies and shareholders having to actively opt-out to avoid automatic introduction.’ While she adds that encouraging long-term shareholding ‘is a laudable aim’, these provisions can entrench controlling shareholders. ‘It also runs counter to the widely held investor principle of equal treatment and one share, one vote,’ she says.
ISS’ research backs this up. ‘At French companies, shareholders that had the choice in 2015 voted to maintain the one share, one vote principles at 34 out of 41 companies where such a vote was proposed,’ explains Marshall.
The E&S in ESG
The total number of shareholder proposals (more than 900) that EY was tracking in the first half of 2015 was up around 50 percent, the firm says. And while proxy access may have been the most commonly submitted shareholder proposal in the US in 2015, proposals focused on environmental and social issues are growing steadily. ‘Shareholder proposals on environmental and social topics represent 42 percent of all shareholder proposal submissions in 2015, compared with 46 percent in 2014 and 39 percent in 2013,’ says EY.
Among this 42 percent, EY identifies four top environmental and social sub-categories: political spending & lobbying, climate change & sustainability, equal employment opportunity & corporate diversity and labor & human rights.
In addition to the many shareholder proposals, well-publicized divestment campaigns against coal in 2015 have involved Norway’s $857 bn oil fund, the state of California and even Leonardo DiCaprio, while signatories to the UN-sponsored Principles for Responsible Investment accounted for more than half the world’s institutional assets in June.
Traditionally attracting more attention in Europe, ‘environmental and social issues are continuing to grow in interest’ in general, says McCormick. ‘It’s not huge growth, but it’s steady growth. Most investors now realize these issues are part and parcel of the overall risk factors at a company.’
Getting engagement right
Whatever issue you’re dealing with, talking to your shareholders is key: something that is increasingly being recognized. According to EY’s 2015 proxy takeaways, engagement on governance topics – and disclosure of these efforts in the proxy statement – has jumped from just 6 percent of S&P 500 companies in 2010 to more than 50 percent in 2015.
But companies aren’t always talking about the right issues, says Quinn. Executive compensation is always a popular topic on both sides but CMi2i’s research shows that investors are also looking for ‘more information about risk management, board composition, strategy and succession planning’.
The results of CMi2i’s Annual Investor Survey shows ‘there is a disconnect – and quite a big one on some issues,’ adds Mark Simms, CEO at the market intelligence and IR firm. ‘It makes you wonder whether issuers are burying their head in the sand about certain items’ (see chart below).
At the $184 bn CalSTRS pension fund, however, Aeisha Mastagni, corporate governance portfolio manager, says what the fund wants to talk about is generally in line with its companies. This is true especially ‘if it’s an out-of-season call,’ she says. ‘The tone of the engagement changes leading up to the annual meeting though, because then of course the company wants to talk about what’s in the proxy, which may not be what investors want to talk about.’
This highlights the importance of not only what you talk about with investors but also when; and Mastagni says CalSTRS enjoys higher-quality engagement during the fall – though of course individual timing depends on when a company’s proxy drafting begins, because by then companies are just tasked with defending what’s in the proxy. ‘If a company calls us leading up to its meeting, at that point it’s just a solicitation call: it’s really not engagement,’ she says. ‘It’s just calling to get us to vote the proxy the way it wants us to.’
CMi2i agrees, advising issuers to ‘plan engagement efforts well in advance in order to avoid the busy proxy season period during April, May and June’.
And what advice does Mastagni have for IROs when it comes to engagement? Citing issues like CEO compensation or combining the CEO and chair roles, she says: ‘The most important thing for IR folks is to know when they need to elevate an issue to the board. There are lots of things we as investors are happy to speak about to IR or the corporate secretary’s office or even management, but there are certain issues that are board-level discussions.’
Engagement initiated by issuer vs engagement initiated by investor
Source: CMi2i Annual Investor Survey, Corporate governance trends for 2016. Click for a larger image
One of the surprising findings in CMi2i’s Annual Investor Survey, says CEO Mark Simms, is the response to the question: have you been approached by other shareholders to discuss corporate governance issues or concerns in the lead-up to a shareholder meeting?
Not only do a massive 94 percent of respondents say they have been contacted by other investors on these issues, but 76.5 percent also say their level of engagement with other shareholders has increased over the last three years – up from 55 percent last year. Almost a quarter (23.5 percent) say it has stayed the same and no respondents report a decrease.
‘This has huge implications for issuers in terms of how they look at their shareholder base,’ says Simms. ‘These guys are talking to each other and acting together and could be driving more active involvement.’
Source: CMi2i Annual Investor Survey, Corporate governance trends for 2016
‘The number of companies publicly targeted by activists continues to rise sharply in the US, while this year has been a very busy one in Asia – there have already been 20 instances there, which is higher than in 2014 and double the number in 2013,’ says Josh Black, editor of Activism Monthly Premium. ‘Europe has also seen a fair bit of activity: 40 companies as of [October], one less than the whole of last year.’
What about the upcoming proxy season? ‘I expect to see a lot of focus on companies’ operations,’ Black continues. ‘Activism focusing on ‘lazy’ balance sheets has been in decline lately, and activists are focusing much more closely on how issuers are living up to their guidance, how they are integrating acquisitions, and how strict they are being at cutting costs.’
This article appeared in the Winter 2015 issue of IR Magazine