The 2014 proxy season—now in its final weeks—is shaping up to be a relatively quiet one, as investor gadflies and proposals on social issues gained little support from fellow shareholders. Companies also generally fared better on “say-on-pay” votes.
Some governance watchers attribute the lack of friction during this proxy season to the dialogue many companies had begun with shareholders long before the annual meeting. “The contention is coming down,” says Charles Elson, professor of finance and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Management is much more in tune to what shareholders are saying compared to five years ago; they're more sensitive to these issues.” While the two sides may not be completely in sync, they're closer, Elson adds.
There were also fewer proposals to clash over. Companies faced a lower number of shareholder proposals this year than last, continuing a decline that began in 2010, according to the 2014 Proxy Season Midterm Report by the Manhattan Institute for Policy. The report, which contains results through May 30, also finds that fewer proposals gained majority support.
In 2014, companies faced an average of 1.18 proposals each, according to the Manhattan Institute report, compared with an average of 1.50 annually between 2006 and in 2010. Just 5 percent of the 2014 proposals gained majority support, a drop from 13 percent in 2010.
The declining numbers also reflect the fact that many companies have implemented the governance changes addressed by past proposals by, for instance, eliminating staggered board terms, says Jim Copland, director with the Manhattan Institute's Center for Legal Policy, and overseer of the Institute's Website, ProxyMonitor.org. “Even for activists focused on these issues, there aren't as many.”
That's not to say that public companies can rest easy. “No company is safe,” says David Lynn, partner with Morrison Foerster and former chief counsel with the Security and Exchange Commission's Division of Corporation Finance. “It used to be that if you were a big company, you could be comfortable that activist funds wouldn't come after you.” That's no longer true, he says.
One reason for the declining numbers of both proposals and the proportion gaining majority support is that it's been several years since the SEC has issued any significant new proxy statement disclosure rulemaking, says Bob Wild, an attorney with Krieg DeVault in Chicago. While the pay-ratio rules are still proposed and the final compensation committee listing standards dictated some modest disclosures, the last significant change was say-on-pay, which became final in 2011. “That's really the most significant post Dodd-Frank rule affecting proxy statement disclosure,” he says.
Companies have also gotten more proactive. A growing number of them are making disclosures in advance of SEC rulemaking, “just to show they're following good governance practices,” Lynn says. While the SEC has yet to issue specific rules addressing the clawback provision of Dodd-Frank, for example, 89 percent of Fortune 100 companies had publicly disclosed clawback policies by 2013, according to the Equilar 2013 Clawback Policy Report.
The upshot? Issuers are acting more strategically, Copland says. And they are reaching agreements with shareholders before the first shareholder votes are cast.
That requires, first, knowing who their larger shareholders are, and whether any significant changes in their shareholder base occurred in the past year. “Look at the shareholder profile,” says Joe Contorno, senior managing director with Eagle Rock Proxy Advisors. For instance, how have different investors voted on issues like say-on-pay in the past, or what guidelines do they use when voting? This will give “the issuer a heads up on what they expect” going forward, he adds.
Armed with this information, companies are ready to meet with investors, even before their annual meetings. In at least some cases, initiating a dialogue early on may convince investors to withdraw any planned proposals, Copland says.
More Social, Political Proposals
Of the proposals that did make it to the annual meetings, nearly half (48 percent) fell within the “social policy” category, ProxyMonitor reports, up from 41 percent in 2013. The increase likely reflects a jump in the percentage of proponents that are religious-affiliated or focused on social investing and public policy. They accounted for 29 percent of shareholder proposals so far in 2014, compared to 25 percent in 2013.
“No company is safe. It used to be that if you were a big company, you could be comfortable that activist funds wouldn't come after you. That's no longer true.”
While the volume of social policy proposals increased, fellow shareholders were not inclined to back them. Just one of the proposals garnered majority support. It was a “laudatory resolution” sponsored by the Humane Society and asking Kraft Foods to work toward higher animal welfare standards within its pork supply chain.
Firms with large consumer markets—like Kraft—tend to be sensitive to social policy proposals, Copland notes. “Companies are image conscious.” As a result, they may accept a proposal, particularly if it concerns issues they've already started to address, he adds.
On the other hand, many institutional investors outside the social responsibility sphere tend to either vote against or abstain from voting on social proposals, Copland adds. “They have a fiduciary duty to ask if it the proposal is in the shareholders' interest. In general, the answer is often ‘no.'”
A more granular breakdown of shareholder proposals by type reveals that the largest group addressed political spending or lobbying. None passed, Copland says.
Few investors have supported the proposals, believing the associations generally help the business community. They also may be concerned that the proposals are, at their heart, a way to “demagogue” an issue, especially if the company belongs to a group that has itself taken a position on an issue that can be controversial, such as gay rights, Copland says. Investors often decide management is in the best position to handle these concerns.
So-called “investor gadflies” brought forth one-third of proposals this proxy season, versus 28 percent in 2013. The most prolific sponsors, activist investors John Chevedden, and the duo of Kenneth and William Steiner, each sponsored 28 proposals. By comparison, the AFL-CIO sponsored five, while AFSCME sponsored seven.
Many companies that struggled through say-on-pay votes in previous proxy seasons have since made changes that garnered greater investor support, Lynn says. More are using charts, graphs, and other communication devices to quickly show, for instance, what their executives actually earned and how their compensation relates to the company's stock price. “We really started seeing this two years ago, and it's continued to grow,” he says.
The following graph from the Manhattan Institute shows the percentage of shareholder proposals by sub-type of Fortune 250 companies for 2014.
Source: Manhattan Institute.
The result? “We saw fewer total failures versus past seasons,” Lynn says.
While the tension between management and investors on compensation seems to have eased a little, no executive team can feel that it now is able to rest easy. The progress made so far can easily be reversed, Lynn adds. “To the extent people have performance issues or outsized pay packages that can easily swing the sentiment.” Moreover, a poor showing on say-on-pay votes can become a catalyst for intensified media and shareholder scrutiny on a firm's overall corporate governance, he adds. “It's kind of taken on the mantle of being a referendum on oversight within a company.”
Another area of focus at many companies is the disclosure documents themselves. A number consultants and financial firms are trying to improve the readability of overall proxy statements, Wild says. Given that large institutional investors may read thousands of these documents each year, any efforts to enhance readability have to be appreciated, he says.
At the same time, many companies have to balance two potentially conflicting goals. While investors often value conformity in the disclosures—for instance, knowing that a certain section will always contain the information on directors' qualifications or attendance at board meetings—companies often want to be creative in the disclosure presentations. “The premium on clear and concise disclosure may not be consistent with creativity,” Wild says. Although the graphic designers may not want to hear it, many companies probably can most effectively reach their investor audience by making their proxy statements as “straightforward and simple as possible,” he says.
Because many investors review the statements electronically, rather than on paper, efforts to improve navigation within the document are also important—including a hyperlinked table of contents, for example. “It facilitates readability,” Wild says.
The overall goal is to understand and respond to investors' concerns, Elson says. “This isn't about giving in, but about coming up with ways to work together to create better organizations.”