Annual Meetings

Perspectives on Proxy Advisors

The latest CGIC study among institutional investors and proxy voters has been released to CGIC members. This report focuses on perspectives of proxy advisory firms, such as ISS and Glass Lewis.

Overall, investors are happy with the job these rating agencies are doing, with only 17% citing a concern over their standardized, one-size-fits-all approach.

Proxy voters want three core mandates to govern proxy advisory firm analyses:

  • Protection of shareholder voting rights
  • Ensuring that executive compensation is appropriately linked to company performance
  • Close scrutiny of board structure and diversity

However, it is important to keep these advisors’ recommendations in perspective. Ultimately, investors believe proxy advisors’ recommendations provide useful guidelines, but not mandates by which they must abide.

Regardless of commentary and recommendations from rating agencies, there is still no substitute for focused and meaningful engagement with your investors on your specific issues as they pertain to your board, management, strategy and performance.

The Executive Summary of this report will be released soon. Please contact David Bobker if you would like to review the summary report and discuss the full results.

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 proposed changes from the original Financial CHOICE Act. One of the provisions sought to dramatically change the shareholder proposal and resubmission process. Few details were provided at the time. We now have clarity.

CHOICE 2.0 would require the SEC to revise the eligibility requirements for shareholder proposals to eliminate the dollar threshold and provide eligibility only when a shareholder holds at least 1% of a 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.

The revised Act 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, which 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 pension funds – since, in many cases, even 1 percent of stock could 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 traditionally have not shown a tremendous appetite for submitting (or even supporting) a vast number of these proposals, we have seen attitudes change over the past few years. Recently, we have seen public statements from investors regarding emerging trends such as CSR, diversity, cybersecurity, board evaluations and director elections. As a result, there has been a need for greater engagement, action and disclosure on these issues from companies, especially those at risk of losing support on the ballot. Would these dramatic legislative changes finally motivate larger investors to start submitting proposals and forcing the issues?  The pressure has been steadily mounting for years, so it is conceivable that this revision could be the catalyst to provoke one of these funds to take direct action, and one may prompt the whole 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, especially a top-10 holder, 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.

SEC Staff Comments on Proxy Access “Fix-It” Proposals

It is no surprise that the number one topic of discussion this proxy season so far is…proxy access. (You thought I was going to say the Trump Administration, didn’t you!)  Proponents are not just targeting companies to adopt bylaws, but are equally focused on submitting “fix-it” proposals to companies that have previously adopted bylaws considered by certain shareholders to fall short of “best” or “acceptable” standards.

SEC staff have, so far, been consistent with last year:  affirming that shareholder proposals seeking adoption of proxy access bylaws are considered substantially implemented if the company adopts terms permitting shareholders that own 3% or more for at least three years to nominate the greater of two directors, or 20%, of the board (“3-3-20″).  This holds true even in the event the company decides to adopt additional restrictions, such as aggregation limits.  It would appear that in the staff’s view substantial implementation does not mean exact implementation.

The situation surrounding “fix-it” proposals is a different story.  Aggregation limits remain an issue for many shareholders.  Earlier in the season we saw a number of proposals asking companies that had previously adopted proxy access bylaws to amend certain terms (such as the number of shareholders that can aggregate to form a group).  Previously, the SEC did not grant relief to companies in this scenario.  However, mostly due to concerns of larger shareholders, these proposals did not receive significant support: H&R Block (30%), Microsoft (27%), and Whole Foods (37%).

After this first salvo, shareholder groups changed course to adopt a more focused approach.  A number of companies with later deadlines received new proposals to amend their proxy access bylaws seeking modification of a single term:  amending the 20-shareholder aggregation limit to allow between 40 or 50 shareholders to form a group.

Last week, the SEC staff responded to a number of no-action requests on this issue with mixed results.  It appears that companies that clearly detailed the inability of the increased aggregation limit to materially enhance the ability of shareholders to use proxy access were granted relief. As any combination of shareholders possessing minimum ownership thresholds are able to form a group, this can, therefore, be viewed as having met the essential objectives of the proposal.

We will provide further details on this issue during the coming weeks.

CII Report on Proxy Access by Private Ordering

On February 2, the Council of Institutional Investors (CII) released a report on proxy access bylaw provisions adopted by 347 U.S. public companies.  The report analyzes data collected by the law firm of Covington & Burling on access bylaws, detailing the similarity of key provisions.

Ninety-seven percent of the proxy access bylaws reviewed mandate a 3% ownership threshold; a shareholder, or group of shareholders, seeking to nominate a director(s) via proxy access must own at least 3% of outstanding shares.  This has been a focus of many “fix-it” proposals, pushing for companies to lower the originally adopted threshold from 5% to 3%.

Ninety-eight percent of these companies mandate a three-year holding period:  a shareholder, or group of shareholders, seeking to nominate via proxy access must be able to demonstrate that they have met the minimum stock ownership requirement for three years preceding the nomination.

More than eighty percent of these companies cap the number of access-nominated directors at 20 percent of the board.  A majority of these, 64%, cite the greater of two directors or 20 percent.

The full CII report can be viewed here

New Prism Webinar Recording – ISS & Proxy Season Update

On January 12, 2017, we were joined by Peter Kimball, Head of Advisory and Client Services, ISS Corporate Solutions, to discuss the 2017 ISS voting policy amendments and look ahead to highlight items for the 2017 proxy season.


You can listen to the full presentation HERE.