Paul Hodgson: ‘Tis the Season … for Proxy Advisor Policy Changes

Shareholder rights a major theme as advisory firms amend their policies for 2015

In advance of the looming U.S. proxy season, both Glass Lewis and ISS have released changes to their vote recommendation policies for 2015, with ISS additionally releasing changes to its governance scoring process – QuickScore. Protecting shareholder rights is a major theme from both sets of updates.
Glass Lewis’ changes focus largely on shareholder rights. For example, if a company reduces shareholder rights without shareholder approval, such as eliminating the ability to remove a director for cause or adopting a classified board, such a move will lead to a recommended vote against the chairman and, in some instances, the members of the governance or other relevant committee. The lack of a board response to majority-approved shareholder proposals will also lead to such a vote recommendation, even where such proposal has been implemented but in a way that “unreasonably interferes with the shareholders’ ability to exercise the right.” Shareholder rights in IPOs (initial public offerings) also receive attention. While Glass Lewis will allow companies a one-year grace period for anti-shareholder provisions adopted pre-IPO, if such provisions are not put to a shareholder vote within this time period a vote will be recommended against the board in place at the time the provisions were adopted.
Related party transactions, where non-executive directors have a relationship with the company beyond sitting on the board, are regarded as immaterial if they amount to less than $120,000 in, for example, fees to a professional services firm that employs the director. However, GL has indicated that it will disregard these if the transaction represents less than 1 per cent of annual revenues for the firm, and if the company has provided a rigourous rationale for the director’s independence.
There was only one change to remuneration policies. GL expanded requirements for the approval of one-off incentive awards, those that lie outside normal pay plans such as that at energy firm BG Group for new CEO Helge Lund, to include a more robust defence of such awards.

ISS’ policy updates are more extensive and include a range of areas. For instance, a new Equity Plan Scorecard and new rules surrounding independent chair shareholder proposals in the U.S. In Canada, changes were made to policies surrounding advance notice provisions and former CEO cooling-off periods while France’s Florange Act is addressed. Board independence requirements were normalised whereverpossible across Europe; in Japan, updates were made to factoring capital efficiency into director elections, and a warning about updates to board independence to come in 2016; approval recommendations for the share issuance limit in Singapore will be reduced to bring them more in line with other markets, regardless of the country’s listing rules, because shareholders are concerned about the potential for excessive dilution.

There are too many changes to discuss each of them I detail, so I will look at some of the highlights. In the U.S., the stock plan “scorecard” model (EPSC) considers a range of positive and negative factors within an equity incentive scheme, rather than a series of pass/fail tests. The eventual EPSC score will guide ISS’ recommendations for or against these management proposals. EPSC factors will fall under three categories: cost, features, and grant practices. More detail is available at the link given above.
In France, ISS is opposing the outcomes of the implementation of the Florange Act which gives double voting rights to shares held by the same shareholder for at least two years – loyalty shares – because this is in opposition to its “one share one vote principle”. If a company has not implemented a bylaw prohibiting double voting rights by 2016, ISS may recommend against the reelection of directors or recommend taking other preemptive action.
Beginning in 2016, ISS plans to revise its policy on board independence in Japan, and to recommend votes against top executives at companies that do not have multiple outside directors. This early notice is to allow companies to recruit additional outside directors as the advisor does not intend the change to be punitive except in the case of recalcitrance.
ISS also made a number of changes to its governance scoring process, QuickScore, relaunching it as Governance QuickScore 3.0. QuickScore 3.0 adds five new factors that, incidentally, mirror some of Glass Lewis’ policy updates, including: the disclosure of a policy requiring an annual performance evaluation of the board; failure to implement a shareholder resolution supported by a majority vote, or failure to address majority director withhold votes; board action that materially reduced shareholder rights; sunset provisions on a company’s unequal voting structure; and the presence of a controlling shareholder. It’s not difficult to imagine how these issues would affect a company’s score.

The new QuickScore 3.0 also revises a number of existing factors. For example, enforcement actions from any regulator will now be considered, rather than just the SEC. Hard lines are now placed on director votes, adversely scoring any that received below 80 per cent; run or equity grant rates will be penalised if they exceed the greater of 2 per cent and the average of industry/index peers; and Say on Pay proposals receiving less than 70 per cent support. All of these used to have vague or movable limits. Other factors which previously received no score will now have scores assigned to them, including: the number of women on the board and the number of financial experts on the audit committee.
At the other end of the U.S. proxy season, Sustainable Investments Institute (Si2) released its mid-season proxy review in August, which showed yet another marked increase in environmental and social shareholder proposals, up to 454 in 2014 at U.S. companies from 402 in 2013. This is the highest level ever, according to Si2. Support for such proposals also reached a reached a new average high of 21.7 per cent. The number of proposals omitted after company challenges at the SEC continued to fall, with only 10 per cent excluded, the lowest level in 10 years. At the same time, there were 177 withdrawn proposals where companies reached agreement with shareholders to implement the policy without a vote.
The vast majority of these proposals focus on political involvement and energy issues, with corporate governance proposals representing a declining share. While support is growing, there were only five majority votes in 2014.Three asked for more information on lobbying. Another called for more oversight and disclosure on electoral spending.

The fifth to earn a majority was not opposed by management, calling for a commendation of the company’s animal welfare policy. Around a quarter of shares were cast in favour of climate disclosure and action. Election spending resolutions earned more support than lobbying proposals—about 29 per cent versus about 26 percent. The highest scoring of other social issues were proposals asking for non-discrimination for lesbian, gay, bisexual and transgender (LGBT) workers, receiving on average 30 per cent support, with one almost a majority at engineering company Leggett & Platt. Most proposals filed on board diversity were withdrawn, with many companies willing to adopt policies committing themselves to more inclusive boards. None of the 11 proposals asking for mandatory sustainability reporting by major suppliers went to votes because of withdrawals successfully negotiated by the New York City and New York State Comptrollers’ offices.
With support growing and many large institutional shareholders or lobbying groups successfully negotiating acceptance of policies at issue – one wonders why this couldn’t have happened without the necessity of a shareholder resolution – the age of the shareholder proposal appears to have arrived.

Paul Hodgson is an independent governance analyst.