Shareholder proxy activism is a year-round activity now, with peak periods of communication on critical issues during the early months of the year… in the traditional proxy voting season.
The effects of spring 2017 voting could reverberate for the company long after the voting is counted. Some issues that once were tiny vote-generators are reaching majorities now in the E, S and G spaces.
Prepared August 31, 2017
Some important background for putting this narrative in context first: The U.S. stock market was a very different operating environment for U.S. listed companies and broker-dealers before the early 1970s.
Many fiduciaries were limited to investments that were “prudent,” such as U.S. Treasury issues and state and city bonds. (There were prudent an/prudent investor rules in place to assure that.) Then came ERISA in 1974 and that really changed the relationship between investors and companies over the long-term.
Today’s stock market is a result of long-wave changes that could affect every corporate manager in some way.
ERISA is the Employee Retirement Income Security Act, passed by the U.S. Congress in 1974 to protect retirees and those nearing retirement age, and putting in place sweeping legal and compliance requirements for employers with a workforce of 25 or more.
The U.S. Labor Department enforces ERISA through the Employee Benefits Security Administration.
In 1974, believe it or not, retail investors made up 75% or more of the New York Stock Exchange’s daily trading in corporate equities. Today that ratio is just about 15% or so — today, the majority of trading volume is by institutions. Consider that just the S&P 500 universe’s defined benefit pension funds had a total of US$185 billion in equity holdings in 1975; today that number is beyond $2 trillion!
When we say “investors” these days we usually mean asset owners / fiduciaries (CalSTRS and CalPERS in California, New York State Common Fund and New York City Retirement Funds) and the independent managers they hire, asset management firms (such as BlackRock, the world’s largest).
And then there are mutual fund advisory firms (Fidelity, Vanguard, American Funds); foundations; endowments (Harvard University’s holdings exceed $2 billion alone); private equity firms (think of KKR, Bain Carlyle); hedge funds; philanthropies…and on and on.
All of these players can be and many often are active in the proxy voting season with advancement and/or support of their own resolutions that are usually not held in the good graces of corporate board and management.
And for corporate managers dealing with sustainable, responsible and impact investors, the corporate proxy voting season is a time when critical issues and differences of opinions (company views, investor views on an issue) come to a head.
UPDATE: 2017 CORPORATE PROXY VOTING SEASON TO MID-YEAR
The majority of corporate proxy voting contests and annual meetings are usually in the March/April through June period. Veritas, the executive compensation consulting firm, working with intelligence provided by the Gibson Dunn & Crutcher LLP Law Firm, provided a scorecard for the 2017 season to date in Veritas’s Compensation in Context news brief. We provide various highlights for you here, with our own perspective added:
There have been 827 shareholder- sponsored resolutions submitted to U.S. public companies through July, less than the 916 filed for 2016 and 943 for 2015.
Our thinking at G&A Institute in looking at these numbers [is] that because of the growing number of successful engagements of companies with their shareholders continues, there can be fewer disagreements that investors feel can be settled only at the ballot box (with much fanfare and arousal of the larger shareholder base on the issues).
For shareholder-sponsored resolutions put before the entire body of corporate shareholders, there are four broad categories this year, according to the brief:
- Those dealing with traditional corporate governance & shareholder rights.
- Environment and Social Issues (the “E” and “S” of “ESG”).
- Executive compensation.
- Corporate civic engagement.
We are seeing “ESG” issues voting continues to rise. For “Environmental,” there were 144 proposals submitted (vs. 139 last year), mostly on climate change, where dramatic results included majority support of the shareholder base, most notably at ExxonMobil.
BlackRock, Vanguard, and Fidelity have increased their active involvement in this area — and if you check your own company’s top shareholder base you will likely find these companies in the top 10 range — despite not asking “ESG” questions on earnings calls, these firms are considering corporate ESG performance as part of their portfolio management.
- For “Social,” there have been 201 proposals to date; issues in focus include board room diversity, discrimination, and other diversity issues.
- The “Governance” activity is very broad, including demand for access to the board nomination process (more than 200 proposals in 2017).
The active players to keep in mind as you discuss proxy activism inside your firm: Jim McRitchie (California governance activist), John Chevedden, Kenneth and William Steiner — they accounted for 200-plus or almost a quarter of resolutions filed at companies.
- Trillium Asset Management (42, environmental focus);
- New York City Comptroller for the five unified city funds (almost 40, focused on shareholder rights);
- New York State Common Fund (25, mostly on political finance matters);
- As You Sow Foundation (48 proposals, mostly on “E”);
- Walden Asset Management (almost two dozen, political and environmental issues);
- NorthStar Management (“S” issues).
Depending on the industry and/or sector, the issues in focus can change year-to-year.
- In Diversity matters, some investors want companies in their portfolio to disclose more information about their policies and practices.
- Pharmaceutical Pricing is an issue (not helped by the recent antics of a few rogue players in the industry generating lots of headline heat for the industry and pricing practices).
- Religious Freedom is an issue (8 companies were in focus for this).
- Environmental Impact on the Local Community is a growth issue for some investors.
Perennial issues coming up again and again include Climate Change Disclosure; BlackRock for its 2017 and 2018 voting will ask boards of directors about how knowledgeable and involved they are in climate change risk matters. (Keep in mind: This is the world’s largest asset manager with US$5 trillion in Assets Under Management — your company’s stock may well be in the portfolio.)
CALPERS –THE LARGEST PUBLIC EMPLOYEE SYSTEM & PROXY ACTIVISM
The California Public Employees Retirement System is the largest state health and retirement benefits organization and has long been an activist in corporate governance. The system serves more than 1.8 million members in the retirement system and 1.4 members and families in the health program.
The system has US$330 billion in AUM. In recent years the governance policies and practices were expanded to include E and S (becoming “ESG”).
CalPERS invests in 10,000-plus public companies worldwide, and uses its proxy power to effect changes in line with (1) the CalPERS Global Governance Principles; (2) Pension Beliefs’ and (3) the Environmental, Social and Governance 5-Year Strategic Plan.
The main themes in the 5-year Plan include climate risk and access to proxies. This year, CalPERS ran 15 proxy resolutions, including two winning overwhelming support of the shareholder base (at Exxon Mobil and Occidental Petroleum). The CalPERS proxy at Old Republic International Corporation passed with 74% of shareowner support.
The average support for CalPERS resolutions is 45% (vs. 34% in 2016).
CalPERS also supported 17 proxy solicitation campaigns in connection with the New York City Comptrollers’ “Board Accountability Project,” aimed at broadening proxy access.
In all, 14 of these passed with more than 50% of the votes cast — a clear message sent to board room and C-suite that influential “Universal Owners” are demanding more say in the nomination of board candidates.
Heads up to companies in CalPERS portfolio: “We believe engagement is an important part of being a responsible investor. Our intent is to create long-term sustainable value that will benefit the companies and our members” — Anne Simpson, CalPERS Investment Director.
POSSIBLE REGULATORY OR OTHER WASHINGTON DC ACTIONS
With changes in Washington DC (new president, new Congress, all controlled by Republicans and a number of conservative members of both Houses) there will be changes in the way that the Securities & Exchange Commission looks at shareholder advocacy at proxy voting time.
Rule 14a-8 is the SEC regulation in focus here. The corporate community and supporters (such as the U.S. Chamber of Commerce) would like to see the volume of shareholder-submitted proxies cut back.
A “threshold” requirement may eventually emerge (owners with a certain amount or percentage of shares held for a certain number of years may submit a resolution), but there is fierce opposition to changing any rule that would seriously impact proxy activism.
Some members of Congress on the House Committee on Financial Services have a “CHOICE Act” in the works to cancel out the reforms of Dodd-Frank (passed in 2010). This could be the basis of a broad effort to roll back or replace D-F legislation and the rules passed by regulators.
The system has been: A shareholder submits a draft resolution to the company. The company may object and submit the draft to the SEC for review, and claim an exemption based on the content being “ordinary business.”
If the SEC staff agrees, a “No Action” letter will go to the five Commission members, and then to the company (usually the corporate secretary). In effect, the SEC will “take no action” if the resolution is denied (for the ballot going to all shareholders).
In 2017, the Gibson Dunn & Crutcher Law Firm and Veritas in the brief described some of the resolutions that were denied under this approach: Reporting on human lead exposure; types of pharma pricing; religious freedom proposal; and certain “E” and “S” proposals that were of the “micro-manage” type of approach.
G&A Institute recommends that staff involved in corporate responsibility, corporate sustainability, corporate citizenship and related activities pay close attention to the trends in the annual proxy season
With spirited proposals that strike a chord with the rest of the investment base, we will often see campaigning on all sides of the issues; activists and supporters of the resolution reach out to other like-minded investors to sign on and support. There are also media campaigns to increase pressure on the company.
On the lead exposure issue, the filer withdrew the proposal at the Home Depot Inc. and the SEC allowed Lowes Companies Inc. to deny the resolution. Neither came to vote – yet. This is worth following closely in collaboration with the investor relations and corporate secretary office staff, and when the opportunity presents, with C-Suite.
As Bruce Goldfarb, CEO of the proxy advisors Okapi Partners notes, Sustainability is here to stay (as an investor issue).
Hedge funds are joining the activist campaigns now because they see ESG issues as something to be addressed to improve corporate performance and rally support for the proxy campaigns.
The successful engagement of company staff with shareholder activist(s) can often open the door for greater discussion around the issue(s) and education of the asset owner or asset manager involved.
Not all issues can be resolved, but investors often will see a “breakdown of engagement / or communication” that leads the way on critical issues toward a shareholder-sponsored resolution being filed, and a campaign built around that move (to build support in the voting).
That can be a short-circuit for the company’s ongoing positive communications about its positions on critical issues — like climate change; political contributions; wage levels; diversity; “greater democracy” in corporate governance matters, and more.
The G&A team has charted corporate proxy seasons for more than two decades and has advised target companies on best practices to deal with the shareholder activist, and to address the issues in focus in the proxy voting.
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