Paul Hodgson: 2016 US Proxy Season (Part 1): Another Year of Proxy Access?

Most activist investors, most proxy advisory firms and most corporate side law firms in the US believe that 2016 will be another big year for proxy access (the right of shareholders to nominate directors). The law firms have been warning clients to be prepared for resolutions, not just wait for them to happen, since September last year. In 2015, there were approximately 100 proposals submitted to shareholders and approximately 58 per cent of those proposals were approved. In addition to that, some companies voluntarily introduced proxy access absent a shareholder proposal. With a record like that, it is unlikely that shareholders will let go of this issue.
And if 2015 success if anything to go by, the following issues will also be prominent in shareholders’ and companies’ minds. Board declassification, calls for the introduction of majority voting in uncontested director elections, and elimination or reduction of supermajority vote requirements (votes in excess of 75 per cent needed to pass any change to bylaws, for example) each received average support of between 60 and 70 per cent and passed at most of the companies where there were resolutions. It has also been predicted by the corporate law firms that companies are less likely to be able to successfully block shareholder resolutions – the proportion fell in 2015. Shareholders’ success in filing resolutions is attributed to their increasing sophistication as well as to a shift in the SEC’s attitude towards No Action letters, as companies’ requests to deflect a resolution are called.
Other shareholder proposals that received significant levels of shareholder support were the ability to call special meetings, sustainability reporting and political lobbying disclosures. All these are expected to be prominent in 2016. Indeed, a coalition of investors including public, private, trades union and religious institution shareholders, has just announced the filing of resolutions at 11 oil and gas companies calling for the disclosure of lobbying expenditures and/or a review of the company’s position related to “public policy advocacy on energy policy and climate change.”
It is unlikely that this year’s proxy season will bring any more of the pay-related Dodd-Frank requirements that the SEC was tasked to implement. The disclosure of CEO/worker pay ratios is scheduled for 2017 so there will be none this year unless voluntarily offered up by companies – most likely by companies that don’t have pay ratios to be ashamed of. The other outstanding regulations are: disclosures showing the link between pay and performance, policies for clawing back incorrectly paid incentives, and policies on directors and executives hedging stock. Comment periods on these rules closed in September last year, so it is not impossible that we will see requirements for this season, though the SEC has not signaled any so far.A continued increase in shareholder engagement, particularly surrounding executive pay, will also likely be a feature of 2016. According to US research firm Equilar, the percentage of S&P 500 companies that disclosed direct shareholder engagement has almost doubled from 16.2 per cent to 32.3 per cent over the last five years.

Tim Smith of Walden Asset Management, the coordinator of the shareholder coalition noted above, said that while there are fewer companies receiving shareholder resolutions on board diversity, there is a great deal of successful engagement on the issue. “Water risk is also a prominent issue,” he added. “A new issue that is noteworthy,” he continued, “is proxy voting on E&S issues (or lack of it) by some investment firms, some of them prominent PRI signatories. Both Franklin Resources and T. Rowe Price are facing resolutions about their record of proxy voting on climate issues. And Vanguard faces a public campaign by NGOs on their voting record.”
Many hedge funds lost money last year, despite winning some notable victories in the boardroom, so it is also probable that 2016 will see a continued rise in shareholder activism from this quarter.
A list of 121 shareholder resolutions already filed for 2016 can be seen on Ceres’ website. Of these, only 12 are unrelated to the environment. These 12 include nine resolutions already filed by the NYC Office of the Comptroller on proxy access, largely at oil and gas companies.
In an interview with RI, Robert McCormick, chief policy officer at Glass Lewis, said that he was surprised how quickly the campaign for proxy access had galvanised shareholders and achieved success, as well as a quicker uptake by companies. “Quicker than majority voting, and quicker by far than the campaign for declassifying boards.” Glass Lewis will be making recommendations on, for example, voting for or against nominating or governance committee chairmen depending on the companies’ reaction to a successful proxy access vote last year. If, for example, a company introduces a proxy access rule that is too restrictive – GL will recommend against the responsible committee chairman. McCormick added that given 2016 is an election year, he expects resolutions on political spending, which have shifted their focus towards lobbying disclosures especially those to trade associations, to be very common.

Part 2 will include plans from CalPERS, the NYC Comptroller, and Glass Lewis’ and ISS’ policy changes.