With 70% of the annual meetings for the Russell 3000 having now taken place (1,812 companies), in this article, ISS takes an early look at the 2019 proxy season. In brief, ISS found increases in opposition to director elections and to say-on-pay proposals, as well as increases in the number of, and withdrawal rates for, environmental and social (E&S) proposals relative to governance (the “G” in ESG) proposals. In addition, the disparity in the levels of support for E&S proposals relative to the historically more popular governance proposals has narrowed dramatically.
Increase in opposition in director elections
Although it’s nothing compared to the 9.4% level of opposition recorded in 2009 after the 2008 financial crisis, ISS reports that, so far in 2019, 4.9% of director elections received less than 80% support, reflecting a “steady increase” in opposition since the historical low of 2.9 percent recorded in 2015. According to ISS, the 2019 level of opposition is the highest “since the advent of say-on-pay proposals in 2011.” ISS also notes that the trend does not track negative ISS recommendations, which declined in 2019 to 8.1% from 8.9% in 2018.
ISS attributes the rise in opposition to an evolution in investor views and processes on various social and governance issues, as “[m]any investors add new factors to their analysis or refine existing criteria of their board evaluation policies. In addition to board accountability, factors such as board diversity, board refreshment, director overboarding, and board leadership appear to be taking a larger role in investors’ director election assessment process. And while director election policies become more involved, for each of the factors under assessment, investors have a diverse set of viewpoints based on their own unique preferences and policies.”
Increase in opposition to say-on-pay proposals
ISS observes that opposition to say-on-pay proposals continues to increase, citing, for 2019, 13.5% of proposals receiving less than 80% approval, 8% below 70% approval and 2% below 50% approval. ISS characterizes that data as “almost historical records, after reaching its lowest point in 2017. While 2018 was a year of negative returns for U.S. stocks, based on our early estimates, executive compensation levels are reaching new record highs,” with the median CEO pay increase at 6% for the S&P 500, primarily driven by big stock grants. ISS reports that the proportion of performance-based comp increased to 58% for the S&P 500 CEOs. As with director elections, investors may be applying more sophisticated analyses to performance metrics and incentive targets and their alignment with strategy, as well as to issues such as mega-grants, “excessive emphasis on TSR, complicating the compensation program with too many metrics, or disclosing retentive pay (compensation that the executive expects to receive regardless of performance) in the guise of performance pay.”
Major shifts in number of and support for E&S shareholder proposals
ISS reports that there were more—and more types of—E&S shareholder proposals (454) submitted so far this year than governance proposals (367), as has been the case for the two preceding years. According to ISS, the proposal filed most often was for an independent board chair (66 filings), followed by political contributions disclosure (62 filings) and board diversity (45 filings). It is important to note that, historically, while governance proposals have often garnered significant support, E&S proposals have not. Remarkably, so far in 2019, the levels of shareholder support for E&S proposals (30%) are only nine percentage points lower than for governance proposals (39%), the lowest spread on record. Using 30% as a threshold for significant support, ISS found that, in 2019, 48% of E&S proposals received shareholder support over 30%. Notably, however, until 2010, no more than 10% of E&S proposals achieved that level of support. To illustrate this trend, ISS observes that proposals for political contributions disclosure received higher support rates in 2019 than proposals for independent chairs. ISS maintains that the data suggests that E&S and governance proposals are no longer compartmentalized as separate concepts.
Record levels of E&S proposals withdrawn
ISS reports that the percentage of E&S proposals withdrawn to date in 2019 is at record levels—almost half of proposals—reflecting an increased willingness by companies to engage with proponents and reach a resolution of their demands, leading to withdrawal of the proposals. ISS cites as factors contributing to the rising rate of withdrawals of E&S proposals “[c]hanging investor expectations on key issues such as diversity and climate change (see this PubCo post), public pressure on high-profile issues like the opioid crisis and gun safety (see this PubCo post), and companies’ own more pro-active approach to managing social and environmental risks.” Interestingly, withdrawal rates for governance proposals are unusually low, reflecting, ISS suggests, the absence of market consensus and related lower shareholder voting support rates for many of the current governance proposals, such as independent board chairs. By comparison, past prevalent topics such as adoption of a majority vote standard generally received higher support levels. ISS also noted a slight increase in grants by Corp Fin of no-action relief related to E&S proposals, primarily as a result of withdrawal of the underlying proposals.