Let’s talk: governance
2014 proxy season review
Nearly 40 investor representatives shared with us their key priorities for the 2014 proxy season. We review the developments around these topics over the 2014 proxy season through shareholder proposal submissions, investor voting trends, proxy statement disclosures and behind-the-scenes company-investor engagement.
Key developments in the 2014 proxy season
Activist investors are becoming more active and influential: Nearly 150 campaigns by hedge fund activists were launched in just the first half of this year. Both companies and long-term institutional investors are learning to navigate this changing landscape.
Activists are now:
- Targeting larger companies — no company or market is immune
- Advancing efforts through dialogue and collaboration with long-term institutional investors, including identifying companies with governance concerns as potential targets
- Developing more sophisticated sector- and company-specific analysis
- Using 14a-8 shareholder proposals and other proxy mechanisms to call attention to their concerns
- Winning more board seats, in large part through reaching settlements with the companies rather than going to a shareholder vote
Attention is turning to board composition and renewal strategies: Both investors and boards are placing greater attention on whether the right directors are in the boardroom. They are also focused on whether boards are regularly refreshing and providing an exit for directors whose expertise is no longer relevant.
Company-investor dynamics are evolving as engagement becomes mainstream: Company-investor engagement on governance topics continues to grow. While executive compensation remains the primary engagement driver, a variety of other governance topics — board and executive leadership, board composition and diversity, and sustainability practices and reporting, to name a few — are increasingly part of those conversations.
Ongoing proxy season trends
- Shareholder proposal submissions remain high, with a focus on environmental and social topics: In recent years, the number of shareholder proposal submissions has been at an all-time high, with proposals on environmental and social topics accounting for the largest category of proposals submitted at 45% of the total.
- SOP support holds steady: More than 2,200 companies so far this year have gauged investor support for their compensation policies and practices through a say-on-pay (SOP) vote. This marked the second SOP vote for companies that elected triennial SOP frequencies. While most companies respond quickly to low SOP votes, a handful of companies remain unresponsive to shareholder opposition to their pay practices. Over the past four years, 23 companies have not secured majority support for their SOP votes for two or more years.
- Annual director elections by majority vote and independent board leaders increase: Many investors favor the annual election of all directors under a majority vote standard and want to see boards with a strong independent chair or lead director. Companies that do not have these practices may be the focus of shareholder engagement or recipients of shareholder proposals.
Some large asset managers are encouraging companies to adopt annual director elections and majority voting through letters to boards and engagement conversations. Most investors are unified in their beliefs — and will support proposals that implement annual elections and majority voting.
13 Year 2000 data based on Investor Responsibility Research Center, Board Practices/Board Pay 2002.
Toward more meaningful communications — and disclosure
As investors turn their focus to the boardroom and continue to use shareholder proposals to effect governance changes, it is important that company communication efforts — through direct dialogue with investors and proxy statement disclosures — become more effective. The way forward is likely more focused and purpose-driven company-investor engagements and more meaningful proxy disclosures.