Paul Hodgson: Looking ahead to this year’s US proxy season (Part II): FAQs and Policy Updates

Is another year of shareholder triumph in the offing?

There was consternation among both corporates and shareholders when ISS posted, in December last year, almost 200 FAQs on its governance, executive pay and stock plan voting policies. It seemed a little overwhelming. The actual policy updates for the 2016 proxy season, released at the end of November last year, were a little easier to digest.
Changes were made to its director overboarding policy, lowering the maximum number of public company boards that a director can sit on before being considered “overboarded” from six to five. A nuanced distinction between different board actions that significantly reduce shareholder rights without approval by shareholders (so-called unilateral board action) to distinguish between actions taken pre and post-IPO. Finally on governance, it expanded its approach to assessing dissident directors to include those directors nominated through the proxy access.
There are a number of firms in the US – many of them publicly traded hedge funds or property companies – who employ external management and disclose little or nothing about what or how they are paid. ISS has decided that this is a “Problematic Pay Practice” and will recommend votes accordingly. It has also made more stringent its tests of companies where animal rights, drug pricing or climate change/greenhouse gas emissions shareholder proposal have been filed.
Glass Lewis’ guidelines, also issued in late November last year, also reduced director overboarding to five public company boards. It also refined its approach to making recommendations on conflicting management and shareholder proposals. Its policy for recommending against directors responsible for environmental and social risk was codified, so expect recommendations against directors who failed to oversee issues that resulted in significant shareholder value damage as a result of these risks. Similar “no recommendations” can be expected by nominating committee chairmen if poor boards lead to poor performance.
CalSTRS’ engagement plan also includes a commitment to coordinate with the New York funds and CalPERS on proxy access. On majority voting for directors, the fund is focused on engaging approximately 100 small to mid-cap companies which tend to go unnoticed. It expects only 10 to 15 of the proposals will go to a vote. There are also plans for engagement on energy efficiency and methane emissions.CalSTRS is the leading investor involved in the Thirty Percent Coalition, a coalition of investors promoting diversity on boards. It initiated a letter campaign in 2014 to 100 companies in the Russell 1000, 41 have responded to date and 26 have added at least one woman to their board. Another letter is to be sent out to the 44 companies that have neither responded nor placed a woman on their board.

Beyond this initiative, diversity proposals are likely to be filed at least some of the 10 energy companies being engaged with which have no women on their boards. The fund tends not to file shareholder proposals about compensation because of the complexity of the issue, and finds it has more success writing to companies about concerns and initiating a dialogue.
Brian Rice, Portfolio Manager at CalSTRS, confirmed that six resolutions on methane emissions had been filed at energy companies, and noted that the fund was expecting high levels of success with its majority voting for directors campaign. “Now in its fourth year,” he said, “most companies agree to implement the policy before it goes to a vote and when it does, it gets a very high level of support.” Last year: 50 companies adopted majority vote standard without a proposal being filed, 43 majority vote proposals were filed, 33 proposals were withdrawn as companies adopted majority vote standard subsequent to filing, six proposals went to a vote and passed, one failed and three were not considered as the company merged or was acquired. These statistics indicate how successful the campaign has been and the same level of achievement is expected in 2016.
CalPERS has announced
that it will partner with NYC funds on the Board Accountability Project (BAP), including direct engagement with companies, other investors and the proxy advisors. Its own shareholder proposals will include other proxy access proposals, as well as resolutions on majority voting in director elections and climate risk reporting. In addition, the fund is conducting a review of integrating ESG (what it calls: physical, human, financial) into the investment process.
I don’t know if it’s just me, or just the fact that shareholders are sharing victories more often, but I don’t remember any time before this when engagements and resolutions have been so successful. From the confidence of most of the funds I spoke to, it would seem that the 2016 proxy season looks set to be another year of shareholder triumph.