The Corporate Governance Intelligence Council Blog

End of Shareholder Proposal Process as We Know It?

Part of the Financial CHOICE Act 2.0 would change the shareholder submission process significantly.

In February, Jeb Hensarling, Chair of the House Financial Services Committee, submitted a memo to the Committee’s Leadership Team outlining the proposed changes from the original Financial CHOICE Act.  One of the provisions sought to dramatically change the shareholder proposal and resubmission process.  Little details were provided at the time.  We now have clarity.

2.0 would require the SEC to revise the eligibility requirements for shareholder proposals to eliminate the dollar threshold and provide eligibility only where the shareholder holds 1% of company’s voting shares, or a higher threshold at the SEC’s determination.  The draft also seeks to increase the required eligibility holding period for shares from one year to three years.

CHOICE 2.0 would also require the SEC to raise the resubmission thresholds:

  • if proposed once in the last five years, the proposal could be excluded if the vote in favor was less than 6%;
  • if proposed twice and the vote in favor on the last submission was less than 15%; and
  • if proposed three times or more and the vote in favor on the last submission was less than 30%.

In a third major provision, that would appear to target frequent submitters such as John Chevedden, the Act would prohibit an issuer from including in its proxy materials a proposal submitted by an individual acting on behalf of another shareholder(s).

Here is where we have to factor in the law of unintended consequences.

Be careful what you wish for!

This draft would dramatically reduce the number of shareholder proposals as the higher thresholds would block the majority of proponents – corporate gadflies, faith-based investors, SRI-investors, many public pentino funds – as even 1 percent of stock would equate to billions of dollars.  This would mean that only the likes of BlackRock, Vanguard, SSgA etc. would meet the criteria.  Although these larger funds have traditionally not shown a tremendous appetite for submitting, or even supporting, a vast number fo these proposals, we have seen attitudes change over the past few years.  Recently we have seen public statements regarding emerging trends (such as CSR, diversity, cyber security, board evaluations, director elections) and the need for greater engagement, action and disclosure from companies on these issues at the risk of loosing support on the ballot.  Would these dramatic changes finally motive thsee larger players to start submitting proposals and forcing the issue?  The prssure has been steadily mounting for years, it is conceivable that this would be the catalyst to force just one of these funds to take direct action and it will take just one to start to move the group.

Be careful what you wish for.  Dealing with the gadflies and smaller investors is a manageable process for most companies.  Dealing with a larger investor, often in the top-10, is an entirely different proposition.

Stay tuned as this develops over the coming months as there are sure to be plenty of heated conversations on this topic.

Deep Concern over Consensus Earnings and Short-term Volatility

Rivel Releases Unprecedented International Study on Guidance Showing Deep Concern over Consensus Earnings and Short-term Volatility

Public Management Teams Fear Clout Wielded by Data Aggregators; Board Has More Influence on Guidance in Europe vs. North America; Majority of IROs Have Strong Influence on Setting Guidance.

Rivel Research Group, a global leader in investor market research and analytics, yesterday revealed key findings from the largest global study of its kind on guidance. Between February and March 2017, Rivel conducted the guidance study among 976 North American and European companies, encompassing all market caps from small to mega cap.

A major finding is that when it comes to consensus data established by data aggregators, fully 76% of management teams in North America (and even 53% in Europe) are “somewhat” to “very concerned” about meeting quarterly consensus earnings and revenues established by data aggregators. Management teams are equally concerned about the short-term volatility that can occur when results do not align with consensus.

The study also found that Investor Relations Officers (IROs) have clout in this domain. The great majority in North America and Europe has modest to substantial influence on guidance-setting practices. The board has significantly more influence on guidance in Europe vs. North America; 82% have substantial to modest influence in Europe whereas only 46% have substantial to modest influence in North America.


Verbatim comments from IROs and corporate management:

“We are always conscious of consensus, and know that our investors use it to benchmark earnings.”

“By giving guidance on the revenue margin it enables the analyst community to model more accurately their forecast numbers and this helps to prevent having real outliers in the consensus numbers.”

“Several years ago, the company missed revenue estimates and guidance multiple times. The guidance policies since that time have been conservative (under-promise and over-deliver) based on many conversations with the buy-side.”

“We moved to full-year EPS guidance as a means of narrowing the range of estimates on our stock and keeping sell-side engaged to update their models when necessary.”

“We try to make sure on certain industry-wide metrics (capital efficiency, production growth %, etc.) that we keep up to the top players according to analysts’ estimates.”

“Where they were having difficulty making estimates, we provided additional guidance points to improve their ability to forecast as well as enhanced the actual detail we report quarterly.”

“We provide more guidance now than we used to in order to reduce the range of estimates.”

“As the current environment punishes companies for missing earnings estimates in both the media and investor perception, we have felt the need to provide guidance to level set on expectations. In addition, our company is going through substantive change in the business that is very challenging to model in the near to medium term. This volatility exacerbates the issue with missing expectations.”

Rivel concludes that, while we know that meeting consensus is important, the study results really demonstrate the necessity of managing expectations directly with your shareholder base, managing all sell-side expectations and making sure that sell-side/data aggregator projections are correct and in-line with the company’s guidance.

I would add that to maintain good communications with analysts and investors, beyond (or instead) of issuing an earnings guidance number, IROs explore alternate methods to communicate that will not sacrifice transparency. Rather than providing raw quantitative quarterly earnings guidance, companies can highlight more qualitative information regarding business fundamentals, the drivers affecting those fundamentals, results, trends, market forces, the general business climate and the company’s intermediate and long-term goals. Remember, SEC rules and regulations require that management discuss in its filings the known trends and uncertainties that have impacted historical results and are likely to impact future periods. Provided properly, this enhanced qualitative disclosure should increase transparency and provide analysts and investors with the mosaic they need without placing undo emphasis to make forecasts and then meet these short-term estimates and goals… conceivably at the expense of long-term goals or creating exasperating and fluctuating short-term environment.

“We are extremely pleased and proud to contribute greater insight to the understanding and practice of guidance around the world,” said Brian Rivel, President of Rivel Research Group.  “Given the engagement of such a large number of management teams at global public companies who contributed to this study, these are the most representative and reliable guidance data yet published. While we know that meeting consensus is important, the study results really demonstrate the necessity of managing expectations directly with your shareholder base, managing all sell-side expectations and making sure that sell-side/data aggregator projections are correct and in-line with the company’s guidance.”

Blackrock’s Strong Statement to Boards

Blackrock have made a strong statement to boards of portfolio companies: we expect you to act on climate change risk & gender diversity, and if you don’t, you may not be able to count on our vote.

In their recently published engagement priorities they cite board diversity, climate and social issues at the top of the list.

Board diversity:

Over the coming year, we will engage companies to better understand their progress on improving gender balance in the boardroom. Diverse boards, including but not limited to diversity of expertise, experience, age, race and gender, make better decisions.  If there is no progress within a reasonable time frame, we will hold nominating and/or governance committees accountable for an apparent lack of commitment to board effectiveness.

Climate change:

For directors of companies in sectors that are significantly exposed to climate risk, BlackRock expects the whole board to have demonstrable fluency in how climate risk affects the business and management’s approach to adapting and mitigating the risk. We have the same expectation of boards wherever a company faces a material, business-specific risk. We would assess this both through corporate disclosures and direct engagement with independent board members, if necessary.

Continuing the theme from recent years, Blackrock is one of many investors calling for better and more transparent disclosure of climate risks, the correlation to and impact upon strategy and the process of risk mitigation and management.  Direct engagement can be expected for companies where BlackRock has concerns, potentially leading negative voting on the re-election of directors deemed responsible for failure to address these concerns in a timely fashion.

Many climate and sustainability related proposals receive low single digit support, are we about to see many get a significant bump?

New CGIC Study – Board Evaluations

The latest Corporate Governance Intelligence Council study has been released to council members. This two-part study focuses on investors views of board evaluations, and crucially the role they play in evaluating board credibility for voting and investing decisions.

In the first report, “Evaluating Board Effectiveness”, North American and European proxy voters are big advocates of board evaluations.  They believe that sound board evaluations:

  1. Confer credibility and strategic value to a company’s stewardship.
  2. Enhance board effectiveness and better align directors with shareholder interests.
  3. Should play a key role in board refreshment and renewal.

Board evaluations are clearly considered an important tool, providing both strategic value and credibility to a company’s stewardship.board eval post 1

“If it’s truly objective it can [provide strategic value] because every officer of a company is subject to these evaluations and if it’s done in an objective, critical way it helps to address weaknesses and to raise the bar and the performance of all officers and I would say the same for all directors as well.” Large U.S. investor.

With 76% of proxy voters believing in the importance of a “good” board evaluation, the following question is an obvious one.

board eval post 3

“An evaluation program is probably one of the most important things a board can do. It’s continuous improvement from inside.” Mid-size Canadian investor.

To learn more about the perceptions and expectations of North American and European proxy voters concerning board evaluations, including their definition of a “good” evaluation, the role in valuation and voting decisions and how to effectively realize both board and investor expectations on this crucial process, please contact David Bobker.


SEC Board Diversity Recommendation – Item 407(c)(2) of Reg S-K

As its meeting last week, the SEC Advisory Committee on Small & Emerging Companies discussed and approved board diversity recommendation.

Under current regulation – Reg S-K, item 407(c)(2)(vi) – companies are required to disclose whether, and if so how, a nominating committee considers diversity. The concern is that this rule fails to generate useful information and that further disclosure is warranted.  Several shareholder groups have been vocal about this for some years and engaged many companies to voluntary enhance disclosure on this issue.

The committee has drafted an amendment stating that:

The Commission amend Item 407(c)(2) of Regulation S -K to require issuers to describe, in addition to their policy with respect to diversity, if any, the extent to which their boards are diverse. While, generally, the definition of diversity should be up to each issuer, issuers should include disclosure regarding race, gender, and ethnicity of each member/nominee as self-identified by the individual. While disclosure should be the default, issuers should have the option to opt-out. 

There is further debate on the last sentence, providing issuers with the ability to opt-out, as this would allow companies to withhold information that the committee has previously determined was relevant to, and required by, investors.  It was commented on that there is already sufficient flexibility by allowing companies to define diversity.

The committee voted to remove the last sentence from the regulation and appropriate regulation will be written accordingly.

Additional clarity on this disclosure will surely be welcomed by investors, although many will continue to push for greater disclosure of diversity in its many iterations and, crucially, the process through which a company evaluates and considers this in evaluating the board and seeking suitable board candidates.