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Proxy Solicitation

2018 Proxy Voting Policy Updates

State Street Global Advisors, T. Rowe Price and Goldman Sachs have all updated their 2018 proxy voting policies.

The updated policy documents are available on the Governance Gateway to all CGIC members.  A few of the amendments are noted below.

State Street Global Advisors reiterated their backing of ISG’s six corporate governance principles and expects that issuers comply or explain any deviations via direct engagement. They will evaluate poison pill proposals at Canadian companies on a case-by-case basis, looking at whether it conforms to a “new generation” rights plan. They will rely on engagement to examine Canadian companies’ compensation plans.

T. Rowe Price (which has switched from using Glass Lewis to ISS as their proxy advisor) stated they intend to focus on board diversity during engagement but will hold out (for now) on releasing new voting guidelines based on ethnic and gender board diversity. Their policy is to always vote against shareholders’ right to act by written consent, and “other business” proposals that lack specificity. When analysing pay-for-performance, T. Rowe Price nixed the use of Glass Lewis and Equilar’s outside research for assessing linkage between compensation and companies’ three-, four- and five-year incremental TSR.

GSAM’s updated US proxy voting guidelines included an amendment to vote against or withhold on certain directors or the lead director/chairman when average board tenure exceeds 15 years and there has not been a new nominee over the last five years.

DFA Updates 2018 Proxy Voting Policies

Dimensional Fund Advisors (DFA) has released updated proxy voting guidelines for US companies for 2018.  The updated policy document is available in the policies section on the Governance Gateway.

There are minimal changes from 2017, including:

Executive Compensation Practices: DFA will no longer leverage ISS pay-for-performance analysis and will evaluate CEO peer group pay rank with the company’s “different time horizon” annualized TSR, effectively scrapping the three-year time horizon.

Overboarding Limits:  Removed the section considering overboarding to be six or more boards (two if a current CEO).

E&S Issues: DFA will seek direct communications with a company when it believes a social or environmental issue may have material economic ramifications for shareholders.  If the company is unresponsive to the concerns raised, they may vote against or withhold from individual directors, committee members or the entire board.

The amendments to compensation analysis are significant as they represent a move away from a more rigid adherence to broad-based, third-party analysis in favor of a more nuanced and customized approach.  Not only does this allow DFA to fairly evaluate a company’s compensation structures on its own merits as suitable for the company, but also creates greater opportunities for direct engagement and meaningful dialogue.

BlackRock Updates 2018 Proxy Voting Policies

BlackRock has released updated proxy voting guidelines for 2018.  The updated policy document is available on the Governance Gateway to all CGIC members.

In addition to other items, in keeping with highly-publicized public commentary, some of the amended policies focus on director accountability, diversity and environmental matters.

Board diversity: continuing to emphasize the importance of boards comprising a diverse selection of individuals, bringing a range of experiences and skill sets, BlackRock reinforced that they would “normally expect to see at least two women directors on every board.”

Impact of climate risk: they encourage companies to explain how their business may be impacted by climate change and convey their “governance around this issue.” They expect the entire board to have “demonstrable fluency in how climate risk affects the business, and how management approaches adapting to, and mitigating that risk” at companies in sectors that are “significantly exposed” to this issue.  BlackRock will consider their engagements over time on the issue with the company and board members before determining support for shareholder resolutions.

Engagement on environmental and social issues: BlackRock will assess the nature of prior engagement on the issue, the action the company has already taken, whether the company is in the process of implementing a response, and the possible material economic disadvantage to the company in the near term if the issue is not addressed.

Overboarding limits: for a few years, BlackRock has believed that outside directors should only sit on four boards, one less than proxy advisors recommend.  They have now reduced the number to two boards – their own plus one other.

Flexibility on board leadership structure: BlackRock continues to support the designation of a lead independent director as sufficient when a company has a combined chair/CEO, so long as the lead independent director has served on the board for at least one year and has clearly disclosed responsibilities, including providing input on agendas, call meetings of the independent directors and presiding at meetings of independent directors. The new guidelines provide further clarity with examples of how the different structures impact the leadership responsibilities.

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.