Corporate Governance

Trump Proposes Cutting Back Disclosure Rules

President Donald Trump’s proposal explores the idea of replacing public company quarterly reporting requirements with half-year ones.

Business leaders, notably PepsiCo’s chief executive Indra Nooyi, have urged Trump that such a move would lower costs to businesses, increase their flexibility, and combat investor “short-termism” by creating room for companies to elongate their business agenda horizons. Critics point to the case that quarterly disclosures are essential for providing investment information.

Vanguard Publishes 2018 Investment Stewardship Annual Report

Highlighting their active engagement with 721 companies during the past proxy season (down from the 954 engagements in the prior year), Vanguard’s primary focus was placed on companies’ boards composition – specifically director independence, diversity of skills and tenure (discussed in half of conversations with companies). The alignment of executives’ pay with performance and the magnitude of total compensation received a similar amount of consideration. Aside from these two, other emerging topics included  the annual elections for directors (discussed in approximately one-quarter of meetings) and conversations regarding risk oversight and strategy.

Vanguard has identified the significance of certain Environmental and Social matters and how they affect a companies’ long-term financial value. Citing the need for greater transparency, disclosure and dual management and board oversight surrounding these topics, Vanguard increasingly engaged with carbon intensive companies.

The passive investor acknowledges the rise in activism in recent years – and importantly, that certain activists can raise legitimate concerns about a company which can usher in necessary changes. While historically cautious to support an activist, Vanguard has shown a willingness to listen, having supported them in five out of 13 US proxy contests last year.

The full report can be found on Rivel’s Gateway in the Governance Library Reading Room.

ISS Annual Policy Survey

Last week, Institutional Shareholder Services Inc. (ISS) announced the launch of its Annual Policy Survey. The survey aims to solicit responses from investors, companies, corporate directors and other constituents to help shape the proxy voting guidelines for the year ahead. The survey consists of two parts: the “high-level ISS Governance Principles Survey,” and the “ISS Policy Application Survey.” The ISS Governance Principles Survey looks to cover a number of global high-profile governance topics, including board accountability, gender diversity and auditors. ISS also plans on examining the “one-share, one-vote” principle.

The second part of the survey will be a more detailed set of questions, broken down by region. By focusing on questions linked to specific geographic regions, ISS hopes to gain a greater understanding of voting issues on a granular level. After collecting data from these surveys, ISS will consider changes to its voting policies for the 2019 proxy season.

The high-level ISS Governance Principles Survey closes on August 24th, and the ISS Policy Application Survey will remain open until September 21st.

Sen. Warner Presses SEC

Senate Banking and Finance committee member, Sen. Mark Warner (D-VA), pressed the SEC to amend Regulation S-K and require companies to inform investors on their management of the employee workforce. Specifically, in figures scoping issuer’s workforce diversity demographics, employee turnover, employee compensation and business resource group offerings. Ushered in by a 2015 McKinsey report linking companies with more employer on-the-job learning programs to greater financial performance, these figures are argued to add another layer to the investment due diligence process (much like those from increased environmental, social and governance related disclosures). Shareholder proponents, in the past couple years, have stated these metrics could underscore a company’s edge in recruiting and retaining top talent, and provide a look into the breadth of diversity in various tranches of the workforce amid a competitive labour supply crunch.

Last proxy season, the handful of shareholder resolutions calling for reports on gender/ethnic pay gaps, disclosure of federal EEO-1 data and employee diversity reports (mainly repeat proposals) received 36% support on average. Over the last calendar year, about one-third of S&P 500 companies (36%) disclosed the percentage of women in the workforce, the average was 38%. For the fraction of the SPX (13%) that disclosed the percentage of minorities in their workforce, the average was 31%.

Season’s Meetings: Proxy Season Highlights

Management Proposals

Support for management proposals remained unchanged from last year, standing at 94.7 percent. While the overall balance seemed to stay the same, a few interesting trends emerged during the past proxy season. Executive pay, which is a hot topic on an annual basis, saw opposition rates hit a new high this proxy season. 67 US Say-on-Pay votes failed to receive a majority vote from shareholders. This number is drastically higher than last year’s final figure, which saw 38 votes fail to reach majority. While 67 proposals failed to receive a majority vote, another 141 proposals only received between 51-69% support, and 631 proposals received less than 90% support from shareholders.

Auditor ratification proposals were highlighted by a few high-profile instances this season as well, which is uncommon. These proposals have received no less than 99.7 percent support on average in each of the last three years, yet General Electric and Wells Fargo faced backlash for their proposals. General Electric’s reappointment of KPMG faced a rebellion from shareholders, receiving 35.1 percent opposition after ISS and Glass Lewis both issued their recommendations to oppose the ratification of KPMG. Glass Lewis made a similar recommendation for Wells Fargo’s proposal, but the proposal still received 91 percent support.

Shareholder Proposals

Support for shareholder proposals saw an increase to 32.9 percent, almost up a full percentage point from last year (32 percent).

Although many had high hopes for ESG issues this season, support fell after a successful 2017 campaign. Average support for two degree proposals fell from 45.4 percent to 35.7 percent. The number of resolutions also dropped from 17 to 8.

Shareholder rights seemed to be a key focus point, however. Proposals to amend the right to call a special meeting were the most popular type of shareholder resolution. 61 of these resolutions were submitted this year, up from the 20 that were introduced last year.