by Cydney Posner
This article from Compliance Week concludes that the 2014 proxy season turned out to be a “relatively quiet one, as investor gadflies and proposals on social issues gained little support from fellow shareholders. Companies also generally fared better on ‘say-on-pay’ votes.”
One reason may be that many companies took the idea of shareholder engagement seriously: according to one academic, “’[t]he contention is coming down….Management is much more in tune to what shareholders are saying compared to five years ago; they’re more sensitive to these issues.’” In many instances, proactive shareholder engagement is leading companies to reach agreements with shareholders in advance of the vote. To be effective, that approach requires that companies study their shareholders bases, including any changes from year to year, and gain an understanding of how their larger shareholders have historically voted on various issues and the nature of any guidelines on which they rely., By initiating a dialogue early, companies, armed with this information, may be able to convince investors to withdraw any planned proposals.
In addition, according to the article, there were fewer proposals made. “Companies faced a lower number of shareholder proposals this year than last, continuing a decline that began in 2010, according to the 2014 Proxy Season Midterm Report by the Manhattan Institute for Policy. The report, which contains results through May 30, also finds that fewer proposals gained majority support. In 2014, companies faced an average of 1.18 proposals each, according to the Manhattan Institute report, compared with an average of 1.50 annually between 2006 and in 2010. Just 5 percent of the 2014 proposals gained majority support, a drop from 13 percent in 2010.” The article speculates that the reduction may reflect the increased adoption by many companies of governance changes that were previously the subject of proposals. Another suggested reason may be the absence of significant new proxy statement disclosure rulemaking in the past few years. At the same time, some companies have become more proactive by adopting anticipated disclosures in advance of SEC rulemaking. For example, although the SEC has not yet issued specific rules implementing the clawback provision of Dodd-Frank, “89 percent of Fortune 100 companies had publicly disclosed clawback policies by 2013, according to the Equilar 2013 Clawback Policy Report.” These actions reflect a more strategic approach by many companies.
According to the article, 48 percent of shareholders proposals during the 2014 proxy season “fell within the ‘social policy’ category, ProxyMonitor reports, up from 41 percent in 2013. The increase likely reflects a jump in the percentage of proponents that are religious-affiliated or focused on social investing and public policy. They accounted for 29 percent of shareholder proposals so far in 2014, compared to 25 percent in 2013.” However, only one of these proposals won majority support – “a ‘laudatory resolution’ sponsored by the Humane Society and asking [the company] to work toward higher animal welfare standards within its pork supply chain.” These types of proposals can be significant for consumer-oriented companies, and, one commentator suggests, they may be accepted by image-conscious companies, “particularly if it concerns issues they’ve already started to address.” The commentator notes, however, that “many institutional investors outside the social responsibility sphere tend to either vote against or abstain from voting on social proposals….” The largest group of proposals addressed political spending or lobbying, although none passed. The article suggests that, ultimately, investors may decide that “management is in the best position to handle these concerns.” One-third of proposals were introduced by “investor gadflies” such as John Chevedden.
With regard to say on pay, a number of companies have made changes to attract increased shareholder support and, according to the article, there were fewer total say-on-pay failures relative to prior years. [Note that the WSJ reports that say-on-pay failures were up slightly overall between January and May 2014, with 72 failures as compared with 54 last year. However, failures at larger companies decreased, while those at mid-size companies increased. See my email of 6/27/14. ProxyMosaic reports that, as of June 11, approximately 76% of Russell 3000 companies received more than 90% shareholder approval for their executive compensation plans, representing an increase of about 1% per year since the mandatory say-on-pay rules became effective. For S&P 500 companies, “that upward trajectory is even more pronounced; whereas only 64.6% of S&P 500 companies received levels of support greater than 90% in 2011, 80.2% of companies received those levels of support through the beginning of June. The average level of support at Russell 3000 companies has also increased slightly, from 91% in 2013 to nearly 92% so far in 2014, while the percentage of failed say-on-pay votes has been declining steadily, from 2.6% in 2012, to 1.5% in 2013, to only 1.1% so far in 2014.] Nevertheless, although tensions between management and investors may have finally eased somewhat, there is no rest for the weary: progress can easily be reversed to the extent that there are significant increases in compensation or problems with company performance.” According to one commentator, “a poor showing on say-on-pay votes can become a catalyst for intensified media and shareholder scrutiny on a firm’s overall corporate governance…. ‘It’s kind of taken on the mantle of being a referendum on oversight within a company.’”
Companies are also making an effort to improve the readability of proxy statement. That effort must, however, be balanced against the value of consistency and conformity, which may not always be compatible with fancy graphics. One area that commentators noted was the need to improve navigation within the document, including, for example, a hyperlinked table of contents