Late last week, Insightia/Diligent released its “Proxy Voting Snapshot” (available for download), which summarizes year-over-year voting trends from the five largest institutional investors – BlackRock, Vanguard, State Street, Fidelity and JPMorgan.
This summary is the preview to Insightia’s deeper dive on voting trends that is coming later this month, based on analysis of annual N-PX filings. Here are the key takeaways:
– The five largest institutional investors decreased their support of environmental and social shareholder proposals by an average 15.1 and 13.5 percentage points, respectively, between the 2021 and 2022 proxy seasons.
– Combined, the top five investors voted the dissident card 25 times out of 83 (30.1%) in proxy contests held during the 2022 proxy season, compared to 14 times out of 58 (24.1%) one season prior.
– The top five’s alignment with Institutional Shareholder Services (ISS) and Glass Lewis recommendations declined by an average of 4.1 and 3.2 percentage points, respectively, between the 2021 and 2022 proxy seasons.
– Support for advisory “say on pay” proposals from the top five investors decreased by an average of 1.4 percentage points between the 2021 and 2022 proxy seasons.
Stewardship teams have gotten out in front of the narrative on ESG proposals, signaling for months that support for these proposals would be lower this year because many of the “asks” were too prescriptive. So, that data point is not too surprising. Plus, because proponents are likely to adapt their proposals to this feedback as we look to the 2023 proxy season – and because SEC no-action relief remains scarce – it’s unlikely that these support levels will dampen proponent enthusiasm or make proxy season any easier for companies.
In fact, the data points here suggest that proxy season could keep getting more difficult, because investor voting behavior is becoming less predictable and doesn’t reliably align with management. Here are two examples from Insightia that support that conclusion:
– The influence of ISS and Glass Lewis appears to be waning – at least with the Big 5.
– Although activists won fewer board seats this year, the Big 5 supported more dissidents, especially at smaller companies. They were in a “swing vote” position with several high-profile proxy contests, but ended up siding with management.
In other words, directors aren’t getting a free pass to reelection these days. Luckily, since you’re reading this blog, you’ll be prepared! Start thinking now about your solicitation strategies for spring – including your budget & team.
The SEC announced yesterday that the compliance date for electronic Form 144 filing requirements will be April 13, 2023. As I blogged a few weeks ago, EDGAR is already set up to accept these filings.
If you haven’t already confirmed EDGAR accounts for all of your reporting insiders, now is the time to get the ball rolling! You’ll also likely need to discuss the new Form 144 process with the brokers that handle insiders’ transactions. According to the informal “Quick Poll” that I ran a few weeks ago, most people want the brokers to keep handling this compliance step.
As we make our way through a complicated earnings season, this WSJ article says that some companies may be looking at ways to expand the range for guidance – or implement more nimble forecasting processes. One thing that companies probably won’t do – at least for now – is back away entirely from the practice of giving guidance, which serves a Reg FD purpose in addition to generally managing expectations. This CLS Blue Sky blog explains:
Headlines during earnings season often focus on the forward-looking guidance corporate managers provide. Yet, questions remain about managers’ perceptions of the guidance process and the tradeoffs they face in deciding whether and what to guide. To gain greater insight, we surveyed 357 managers at publicly listed corporations and conducted nine in-depth interviews.
Our survey sheds light on the critical role guidance plays during earnings season. Because analysts and investors dislike surprises, our respondents said guidance provides an effective channel to manage expectations. Around earnings announcements, corporate managers commonly meet privately with analysts and investors after conference calls. Our respondents said that providing guidance allows for more open and forthcoming discussions about the future in one-on-one meetings, with less concern that the conversation will run afoul of disclosure regulation (Reg FD).
Our study also highlights some downsides of issuing guidance. We find that reporting results that fall short of guidance is a primary concern because it signals a failure to understand the business or a lack of control of the company’s operating environment. The anticipated consequences of missing guidance include reduced credibility of future guidance, increased scrutiny from sell-side analysts and the board of directors, and stock price declines.
The managers said that widespread economic uncertainty would be the only circumstance that would cause them to stop providing guidance entirely. Yet, that may also be when these Reg FD-compliant private calls will be most valuable. It will be interesting to see whether there’s a drop-off in the practice of providing guidance as recession murmurs grow louder.
For more practical guidance on this topic, make sure to mark your calendar for November 16th, 2-3pm Eastern, for our webcast, “Dissecting the Quarterly Earnings Process” – with Goodwin’s Sean Donahue, O’Melveny’s Shelly Heyduk, and Cooley’s Reid Hooper. Members of this site are able to attend this critical webcast at no charge. If you’re not yet a member, try a no-risk trial now. Our “100-Day Promise” guarantees that during the first 100 days as an activated member, you may cancel for any reason and receive a full refund. The webcast cost for non-members is $595.
I blogged yesterday about the climate-related results of ISS’s recent benchmark policy survey. Another topic that we expect ISS to address in its forthcoming 2023 voting policies is which companies and directors will find themselves facing adverse voting recommendations as a result of multi-class share structures.
The survey results suggest that directors holding super-voting shares and the chair of the governance committee will be in the cross-hairs under the new policy, and that 5% may be the threshold for exceptions to this policy. Here’s more detail:
Already announced in 2021, effective as of Feb. 1, 2023, ISS plans to start recommending votes against certain directors at U.S. companies that maintain a multi-class capital structure with unequal voting rights, including companies that were previously exempted from adverse vote recommendations.
In 2022, we said that we planned to apply exceptions in cases where the capital structure is not deemed to meaningfully disenfranchise public shareholders. When asked what the appropriate threshold for exemption should be, a strong majority of investor respondents agreed that there should be an exception. They were split on exactly what that threshold should be, but “no more than five percent” was the most popular threshold chosen by investor and non-investor respondents. Almost a third of investors responded that there should be no exemptions.
When asked what the appropriate target for an adverse vote recommendation, respondents favored any director who holds super-majority shares and the chair of the governance committee. Twenty-nine percent of non-investor respondents stated that there should not be votes against directors in this situation.
In cases where shareholder do not have the ability to vote against the director who holds super-majority shares, a majority of investor respondents said that shareholders should vote against whatever director was on ballot to protest against the multi-class structure.
When asked to define the most appropriate time for a sunset to begin phasing out problematic governance structures such as a classified board, a plurality of investor respondents chose “between 3 and 7 years.”
When asked whether smaller companies should be exempted from negative vote recommendations for maintaining a classified board or supermajority voting requirement, a strong majority of investor respondents said that should
not. Nearly two-thirds of non-investor respondents, on the other hand, replied that smaller companies should be exempted from either one or both of those provisions.
Both investors and non-investors supported having a supermajority vote requirement of two-thirds of shares outstanding to amend governing documents.
One thing that we can probably all agree on, is that these survey results would be more entertaining if they were unveiled in a “Family Feud” format. We may have to host a game show next year.
The other major topic that ISS asked about in this year’s benchmark policy survey was how to handle shareholder proposals on racial equity audits/civil rights audits. As I noted last month on the Proxy Season Blog, ISS backed 77% of resolutions on this topic during the 2022 proxy season – compared to 22% in 2021. Looking ahead to 2023, here’s the feedback that will be guiding ISS’s policy development:
Discussions with clients and proponents and the survey results lead ISS to conclude that investors are roughly evenly split into two camps on this issue. Approximately 42 percent of investor respondents to the survey said most companies would benefit from an independent racial equity or civil rights audit, while a slightly larger 45 percent responded that whether a company would benefit from an independent racial equity or civil rights audit depends on company-specific factors including outcomes and programs.
A majority of non-investor respondents indicated that they believe company specific criteria are the best determinations of which companies would benefit from a racial equity audit.
When asked what factors were relevant to determine whether a company would benefit from an independent racial equity or civil rights audit, “significant diversity-related controversies” were the most popular choice – being selected by a majority of investor and non-investor respondents. This was followed by whether the company disclosed workforce diversity representation statistics, such as EEO-1 type data, and has undertaken initiatives/efforts aimed at enhancing workforce diversity and inclusion, including training, projects, and pay disclosure.
The least popular choice for investor respondents was whether the company offered products or services and/or made charitable donations with a specific focus on helping create opportunity for people and communities of color.
The question asked this year was the same as the one asked in the 2021 Benchmark Policy Survey to assess any changes in sentiment over time, especially given the strong vote support that many of these proposals received at annual meetings in 2022. The responses for investor and non-investor respondents changed only slightly from last year to this one.
Just in time for another round of polarizing mid-term elections, the Center for Political Accountability and the Zicklin Center for Governance & Business Ethics at the Wharton School have issued their annual “Index of Corporate Political Disclosure & Accountability.”
If there is one thing that has become clear over the past 11 years in which this Index has been published, it’s that companies that don’t carefully monitor “political spending” are playing with fire. And it’s important to note that – in addition to candidate donations – the term “political spending” includes contributions to trade associations, committees and lobbying organizations. In the wake of the Dobbs decision this summer, we wrote:
Carefully consider political and trade association contributions. Contributions to politicians, trade associations and other advocacy organizations are already receiving major scrutiny – and that’s only going to increase. Emily blogged recently that two lobbying-related shareholder proposals received majority support at recent meetings. Many trackers now exist that monitor the alignment of corporate political donations with stated values – with several companies already in the news for donations to anti-abortion politicians, and shareholder proponents also picking up the mantle with a new iteration of “values misalignment” shareholder proposals.
Gone are the days when a board could simply confirm that the company’s donations were striking a roughly even split between Republican and Democratic organizations. Now, management may need stricter directives to ensure that each donation aligns with overall values – and the board may need to dig deeper to ensure it’s informed of any potentially controversial activities.
When it comes to S&P 500 companies, this year’s Index finds:
– The number of S&P 500 companies with policies for general board oversight of political spending is 295, up 13.9 percent from 259 companies in 2020.
– Board committee review of direct political contributions and expenditures rose to 255 companies this year from 227 in 2020, an increase of 12.3 percent; board committee review of payments to trade associations and other tax-exempt groups rose to 228 this year from 199 in 2020, an increase of 14.6 percent.
– The number of companies that fully or partially disclosed their political spending in 2021 or that prohibited at least one type of spending is 370. This is over 75 percent of the S&P 500 companies evaluated. It is a record high since CPA and its shareholder partners launched their efforts.
– The number of companies that fully or partially disclosed their political payments to state or local candidates or committees, or that prohibited them, was 334, another record and well more than three-fifths of the S&P 500.
– The number of companies that disclosed some or all of their political spending was 293. The number of companies that prohibited direct donations to state and local candidates, political parties, and committees was 136.
For the first time this year, the Index also expanded to cover Russell 1000 companies (representing approximately 90% of the US market). It’s not a stretch to think that this move will lead to more scrutiny of spending by mid-sized and smaller companies – in the form of shareholder engagements & proposals, or questions from employees and customers. Right now, there’s a pretty big gap in transparency – and potentially, policies – between large & small companies. The Index finds:
– For all non-S&P 500 companies in the Russell 1000, the average score is 12.8 percent, on a scale of zero to 100. The overall Index score for all S&P 500 companies this year, for example, is 57.0 percent.
– There are 54 companies in the non-S&P 500 portion of the Russell 1000 with general board oversight of company political spending, compared with almost six times as many, 307 companies, in the full S&P 500 with the same oversight.
For “best practice” comparisons, take a look at the full Index – as well as the policies and disclosures of the six companies that scored a winning 100: AT&T, Becton Dickinson, Consolidated Edison, Edison International, HP Inc. and Visa. Also see the resources in our “Political Contributions” Practice Area.
According to the latest CPA-Zicklin Index, most large companies say their board oversees political spending – but few smaller companies are talking about it. PwC’s annual director survey seems to support that finding. Here’s one of the takeaways:
Only 39% of directors say their board has discussed the company’s stance on social issues in the past 12 months. Even fewer—30%—say they have discussed corporate political activity.
The survey gathered responses from 700+ directors. It has some other interesting findings as well. For example, 64% of male directors say that board diversity initiatives are driven by political correctness and that shareholders are too preoccupied with the topic. With the Supreme Court poised to overturn colleges’ ability to consider racial diversity in admissions, corporate boardrooms also seem to be growing skeptical of the near-term benefits of diversity, even while acknowledging that it brings unique perspectives to decision-making and prioritizing diversity in succession planning.
On the topic of ESG oversight, the survey notes a gap between small & large companies in board understanding of ESG data controls. Specifically, directors lack confidence in the board’s understanding of climate risk/strategy and carbon emissions, compared to human capital-type topics. And compared to a year ago, 9% fewer directors view ESG issues as impacting company financial performance. Again, the results vary based on demographics – with male directors being less likely to see ESG’s connection to strategy & performance.
Last week, ISS announced the results of its 2022 benchmark policy survey. ISS received responses to the survey from 205 investors – 29% more than last year – as well as 202 companies and corporate organizations.
The results will be used to formulate the proxy advisor’s voting policies, which will be released in draft form in November and finalized in December. Here are some key climate-related takeaways:
Board Accountability on Climate Risk: ISS asked what climate actions/non-actions from Climate Action 100+ “significant emitters” would constitute a “Material Governance Failure” that would call for an ISS recommendation against a director.
– A significant majority of both investor and non-investor categories of respondents expressed that they would consider there to be a material governance failure if a company that is considered to be a significant contributor to climate change is not providing adequate disclosure with regards to climate-related oversight, strategy, risks and targets according to a framework such the one developed by the Task Force on Climate-related Financial Disclosures (TCFD).
– Investor respondents generally agreed that the boards of companies that are large greenhouse gas (GHG) emitters are failing if they do not take steps to address emissions, but support for different actions that could be taken to address emissions varied. Besides a company failing to provide adequate disclosure according to a recognized framework, the three most common choices by investor respondents as demonstrating failures were targets-related, and were (i) a company not setting realistic medium-term targets (through 2035) for Scope 1 & 2 only (50% of investors), (ii) not declaring a net-zero by 2050 ambition (47% of investors), and (iii) not setting realistic medium-term targets (through 2035) for Scope 1, 2 & 3 if Scope 3 is relevant (45% of investors). A strong majority of investor respondents (69 percent) chose at least one of those “targets” responses, which was also the case for 43 percent of the non-investor respondents.
Management Say-on-Pay Proposals: When asked “What do you consider to be the top three priorities when determining if a company’s transition plan is adequate?”, the most popular responses among investor respondents were:
(i) whether the company has set adequately comprehensive and realistic medium-term targets for reducing operational and supply chain emissions (Scopes 1, 2 & 3) to net zero by 2050 (42 percent),
(ii) whether the company’s short- and medium-term capital expenditures align with long-term company strategy and the company has disclosed the technical and financial assumptions underpinning its strategic plans (41 percent),
(iii) and the extent to which the company’s climate-related disclosures are in line with TCFD recommendations and meet other market standards (38 percent).
The appropriateness of submitting management say-on-climate plans for shareholder approval was questioned by some investor respondents who believe these proposals improperly shift the responsibility for a company’s climate transition plan away from the board and management toward its shareholders.
Climate Risk as Critical Audit Matter: A substantial majority of investor respondents (75 percent) favored seeing commentary by auditors in the audit report on climate-related risks for significant emitters. A smaller majority (64 percent) of investor respondents supported climate-related risks being included by auditors in Critical Audit Matters / Key Audit Matters (CAMs).
– A majority of investor respondents (52 percent) would favor supporting a related shareholder proposal on this issue. Voting against the re-election of audit committee members and voting against the re-appointment of auditors got somewhat lower support (42 percent and 35 percent respectively).
– In comments, several respondents – including both those who favored and opposed the inclusion of climate risks – raised the question of whether auditors currently have the expertise to accurately gauge these risks. Others wrote that this issue is currently not a market norm but may develop quickly due to regulatory requirements that are being finalized in the U.S. and EU and as the International Sustainability Standards Board (ISSB) develops its sustainability standards. Non-investor respondents tended to not support seeing auditors comment on climate-related risk.
Financed Emissions: During the 2022 proxy season, a number of shareholder proposals were filed that asked companies to restrict their financing or underwriting for new oil and gas development in line with the assumptions in the International Energy Administration’s Net Zero 2050 Scenario, which prompted us to ask a question about expectations on climate-related disclosure and performance of financial institutions.
– Around half of investor respondents said that in 2023 large companies in the banking and insurance sectors should fully disclose their financed emissions (54 percent), have clear long-term and intermediary financed emissions reduction targets for high emitting sectors (51 percent), have a net-zero by 2050 ambition including financed portfolio emissions (49 percent), or should publicly commit to disclose financed emissions at some point in the future by joining a collaborative group such as the Partnership for Carbon Accounting Financials (PCAF) and/or the Glasgow Financial Alliance for Net Zero (GFANZ) (45 percent).
– Around 30 percent of investor respondents voiced support for these companies committing to cease financing for new fossil fuel projects.
Most survey respondents also predict that investors’ expectations for climate disclosure and performance will increase over time – with heightened focus on net-zero targets, comparable climate disclosures, greater Scope 3 disclosures and more interest in corporate investment in low-carbon products and strategies.
Today is our “19th Annual Executive Compensation Conference” – Wednesday & Thursday were our “2022 Proxy Disclosure Conference.” Both conferences are paired together and they’ll also be archived for attendees until next August. If you missed these conferences or our “1st Annual Practical ESG Conference” but want to purchase access to the archives, email sales@ccrcorp.com – and we’ll also have a link available soon on this page to do that. Here’s more info for people who are attending:
– How to Attend: We have emailed a direct access link for the Conference to all registered attendees, from info@ccrcorp.com. Use that link to go to the Conference platform, then follow the “Proxy Disclosure/Exec Comp” tab to see the agenda for today, enter sessions, and add them to your calendar. All sessions are shown in Eastern Time – so you will need to adjust accordingly if you’re in a different time zone. Here’s today’s agenda.
If you are experiencing a technical issue on our conference platform and need assistance, please email Evan Blake (eblake@markeys.com) with our Event Manager Victoria Newton (vnewton@ccrcorp.com) on copy, and they will reply to you asap. If you have any other questions about accessing the conference, please email our Event Manager, Victoria Newton (vnewton@ccrcorp.com).
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– Thanks To Our Sponsors! Our sponsors have helped make this event possible, and we are proud and grateful to have their support. Our Platinum Sponsor for the Proxy Disclosure & 19th Annual Executive Compensation Conference is Morrison Foerster, and our Silver Sponsor is Argyle, who also sponsored our 1st Annual Practical ESG Conference this week. Please visit their pages!
You can still register to view today’s event and get on-demand archive access to all of the Proxy Disclosure and Executive Compensation Conference from this week! Email sales@ccrcorp.com or call 1-800-737-1271, Option 1. Archives and transcripts will be available on-demand until July 31, 2023, to help you navigate challenging proxy season issues.
Investor activist Jim McRitchie recently filed a breach of fiduciary lawsuit against Meta in which he contends that in a system that emphasizes stockholder primacy, the directors’ fiduciary duties must consider the impact of the company’s actions on the diversified portfolios of its investors. As the complaint puts it, “if the decisions that maximize the Company’s long-term cash flows also imperil the rule of law or public health, the portfolios of its diversified stockholders are likely to be financially harmed by those decisions.” This excerpt from the complaint summarizes the theory of the case:
For a corporation whose impact is so widespread, the well-established doctrine of stockholder primacy cannot be rationally applied on behalf of investors without recognizing the impact of portfolio theory, which inextricably links common stock ownership to broad portfolio diversification. The economic benefits from—indeed the viability of—a system of corporate law rooted in maximizing financial value for stockholders would vanish if it forced directors to make decisions that increased corporate value but depressed portfolio values for most of its stockholders. But this is precisely how the Company has operated: Defendants have ignored the interests of all of its diversified stockholders, making decisions as if the costs that Meta imposes on such portfolios were not meaningful to stockholder
I can’t imagine that this argument is going to get any traction with the Delaware Chancery Court – and as UCLA’s Stephen Bainbridge has pointed out, it isn’t the first time someone has made this kind of argument. Bainbridge also notes the fundamental problems with the workability of such a standard:
I am dubious about whether managers have the training or expertise to manage a company in the interests of diversified investors at large. Suppose managers have come up with an idea for a new product. Do we really think they can–or should–evaluate whether selling the new product would injure competitors and thus be adverse to the interests of diversified investors?
My guess is that proponents of this fiduciary duty theory would likely respond that the BJR would continue to apply to the board’s ordinary course business decisions. As illustrated by Sarah Murphy’s comments in an interesting exchange with Doug Chia on LinkedIn, they appear to be making a more broadly focused argument:
The board’s job is to optimize value for the benefit of shareholders, but if most shareholders are diversified (as they are in public markets), then a value-maximization strategy that relies on externalizing costs that diversified portfolios internalize is clearly not “for the benefit” of those shareholders. As the plaintiff’s lawyer says, “Investment theory and the law governing investment fiduciaries is built around the importance of diversification, and we think it essential that the law governing corporate fiduciaries acknowledge that reality.”
For a more in-depth explication of this argument, check out Jim McRitchie’s blog. Anyway, “externalized costs” are those that are generated by a particular enterprise but carried by society as a whole, and to me, that makes corporate law the wrong mechanism to use in sorting them out. It seems to me that issues about how to handle the social costs associated with business are best addressed through the political and regulatory process, not through corporate law concepts of fiduciary duty.
