In this article, the authors, from advisor PJT CamberView, talk about their takeaways from the 2019 proxy season, which they expect to see as part of the conversation in the fall.
Overboarding
Overboarding policies reflect the concern that directors who sit on too many boards will not be able to devote adequate time to their duties to the company. This year, the authors indicate, more rigorous overboarding policies from large asset managers, such as BlackRock and Vanguard, led to “significant opposition to directors of Russell 3000 companies,” the highest level since 2011. In particular, the focus was on public company executives sitting on more than two boards. In addition, the authors report, “a number of directors saw their support drop 25 or more percentage points on a year-over-year basis.”
Environmental and Social Risks
The authors cited the ISS report that, for the third year in a row, the number of E&S shareholder proposals exceeded governance proposals, with nearly half receiving over 30% of votes in favor, almost a 10 percentage point increase over the prior year. In addition, they highlight the prominent role of investor coalitions, such as the $33 trillion Climate Action 100, which was involved in negotiating the settlement and withdrawal of climate-related shareholder proposals at several companies. The authors expect this collective action to continue on climate risk and preferred frameworks for E&S disclosure.
The authors also identify another trend in the growth of investor-developed “sustainability data screens for investment and stewardship purposes. These systems are built upon proprietary analysis as well as various reporting frameworks and sustainability ratings providers and are intended to evaluate and incorporate environmental and social factors throughout the investment cycle.” These include, for example, State Street Global Advisors’ R-Factor system, which “leverages ESG materiality frameworks to create a unique company score that is used to help its clients make investment decisions and is integrated into the firm’s stewardship program,” as well as new rating and screening frameworks from T. Rowe Price and Columbia Threadneedle, which use ESG data to help in investment decision-making.
Say on Pay
The authors cite data from Semler Brossy showing that average support for say on pay among Russell 3000 companies rose slightly to 91%, but among the same group, failures also rose to slightly over 2.2%; data from ISS showed that 13.5% of say-on-pay proposals received less than 80% support. The authors report that shareholders identified a focus on “one-time or supplemental awards and a desire for plan design that is tightly linked to challenging strategic and financial measures.” However, investors are no longer wedded to traditional metrics like TSR and, so long as the disclosure is clear, will support metrics that are more “specific to company circumstances and strategy.”
In assessing the alignment between pay and performance, the authors observe that some investors have “created proprietary quantitative pay screens to flag potential disconnects that can prompt an engagement request to understand the underlying causes. Companies that faced investor challenges this spring on compensation can expect further discussion this fall into the rationale behind the compensation committee’s decision-making and how investor feedback has informed potential changes to plan design.”
Activists
While the number of activist attacks in the U.S. declined in the first half of the year relative to last year, activists “have continued to target high-profile friendly and hostile M&A deals in the U.S. and abroad, introducing complex dynamics into already complicated dealmaking. According to Activist Insight, just six activism contests went the distance in the first six months of 2019, a substantial drop off from prior years as settlements reached before proxy votes remain a common tactic to defuse activist pressure.”
However, other market constituents, including active fund managers and employees, seem to be feeling their oats, initiating activist campaigns or taking public stances in M&A transactions that had an impact on deal dynamics. The authors report that active fund managers have recently been “adopting activist stances and overlaying a governance focus to help differentiate themselves in a market that continues to see outflows to passive funds.” The authors characterize the growth in employee activism (not through organized labor) as “the most prominent new trend in ‘activism.’” This trend, which presented a new challenge for managements and boards, was manifested in employee walkouts or employee-sponsored shareholder proposals addressing issues such as climate risk and NDAs relating to discrimination or harassment. What’s especially novel, say the authors, is “the ability of employees to find common cause with certain investors, and effectuate sophisticated campaigns via traditional and social media.”
Expectations
The authors suggest that there is increasing “competition to demonstrate superior investment stewardship,” which has led investors to “become more proactive and assertive than ever.” This trend is reflected in “greater accountability for directors across their board service.” In addition, some major asset managers have begun to initiate engagement with companies on specified agenda topics, with the result that securing meetings has become “both more difficult and also more important to get right. Management teams and boards should take an investor-by-investor approach, including identifying the correct opportunities to deploy a director, building off of prior conversations and understanding their investors’ key focus areas and preferences.”
