2015 Proxy Season Preview: Four Major Issues
Proxy season, the time of year when corporations hold their annual meetings and shareholders vote on proposals and director elections, begins next month. These affairs were traditionally, and at many corporations continue to be, routine events where management's proposals are passed by an overwhelming majority. However, recent years have seen an increase in contentious contests as activist shareholders, and other institutional investors no longer willing to blindly follow management, take issue with what they see as corporate misbehavior and investors become more engaged on matters such as board composition and say-on-pay.
In that vein, four expected hot button areas for this year include shareholder activism, the composition of the board of directors, proxy access , and executive compensation:
- Shareholder Activism: The rise of activism in recent years has certainly been well documented, and considering that last year saw a 20% year on year increase in activist campaigns a 16% rise in their effectiveness in securing board seats via proxy fights, it should come as no surprise that they will be major force during the 2015 proxy season. While activists are increasingly pursuing avenues outside of the annual meeting to affect change and more companies are settling before a campaign reaches that point, there still may be some fireworks this year. For example, DuPont, the 200+ year old chemical company with a $70+ billion market cap, is facing a proxy fight from experienced activist Nelson Peltz's Trian Partners.
- Board Composition and Terms: Electing directors to a company's board is always one of the most important issues to come before shareholders at the meeting, and board efficacy is expected to be a prime issue in 2015. In fact, after the proxy summary and material related to compensation, proxy information pertaining to director nominees' skills and qualifications is what investors are most likely to look at first when evaluating a proxy statement, according to a recent survey. Specific aspects that investors are keeping their eye on include boards' tenure (some worry that long serving directors are not as independent and engaged) and diversity. ISS, the proxy advisory firm, considers a director's tenure of greater than 9 years to potentially be excessive, and Patrick McGurn, ISS' Executive Director and Special Counsel thinks that in 2015 ""Board refreshment' appears primed to morph from buzzword to buzz saw." With regards to diversity, when ISS examined the results of the 2014 proxy season, they found that growing "number of investors are giving weight to the issue of board refreshment and diversity" and that 60% consider overall diversity when evaluating a board.
- Proxy Access: Ever since the courts vacated the SEC's Dodd-Frank mandated proxy access rule in 2011 (which would allow shareholders who meet certain thresholds to directly nominate directors) commentators have been predicting a meaningful uptick in shareholder proposals on this topic. It appears as though 2015 will be the year that prediction comes to fruition with an estimated 100 such proposals submitted so far, including 75 from the New York City Comptroller alone. The Norwegian sovereign wealth fund, the world's largest, has also come out strongly in favor of such proposals, as has TIAA-CREF.
- Executive Compensation: Say-on-pay, the nonbinding shareholder votes mandated by Dodd-Frank, has made executive compensation a perpetual priority for corporate boards. While these votes are nonbinding, a "no" vote, or even a "yes" that passes by a less than overwhelming margin, can be a reputational black eye for a company and a sign of serious investor discontent. Specifically, the aforementioned survey found that that large investors believe say-on-pay votes that pass with less than three quarters of the vote indicate that a company should make changes to their compensation practices. That survey also found that only 21% believe CEO compensation is appropriate among the companies they own shares in. Moreover, that survey also found that portfolio managers are more likely to participate in voting on say-on-pay than any issue other than a merger or a contested director election. While companies who have previously had issues related to say-on-pay may be the most at risk for difficulties this year, prior shareholder approval is certainly no assurance of a landslide "yes" vote, especially considering the new Equity Plan Scorecard that ISS released this year.
In future posts, we will look at how companies can communicate and engage with investors in order to address these issues—something that will be of especially paramount importance as passive funds, which are major holders at most companies, get increasingly active on corporate governance.