The Impact of Changing the Shareholder Proposal Resubmission Thresholds

Nearly all shareholder proposals meet the current resubmission thresholds of 3%, 6% and 10%, according to a detailed CII report on the impact of potential modifications to those thresholds.  The possibility of raising the support levels of proposals before they can be resubmitted is likely to be a topic at the SEC Proxy Process Roundtable tomorrow.

CII examined a dataset of the shareholder proposals voted on between 2011 and 2018, when 3,620 proposals went to vote at 677 Russell 3000 companies.  Only 5% of proposals became ineligible after the first attempt, and 10% after the second and third attempts.

The current resubmission thresholds were established in 1954. 
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How Funds View and Vote on Shareholder Proposals

In advance of Thursday’s SEC’s Roundtable on the Proxy Process*, it is worth considering the three-part posts by the Investment Company Institute (ICI) on funds and proxy voting, and CII’s FAQs on shareholder proposal data.

CII explains that fewer than half of proposals submitted are voted on, based on data between 2004 and 2017.  The SEC generally allows about 15% to be excluded, and then others are withdrawn.  On average, 13% of Russell 3000 companies received a proposal, and the median number was one per year.  The largest companies tend to be targeted for proposals, with the S&P 500 companies being the recipient of about 77% of them, since those companies make up a greater portion of any investment portfolio.
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ISS QualityScore Data Verification Opens; New Factors Added

ISS QualityScore Data Verification opened on Monday, November 5.  Companies should be aware of the new Board Diversity Subcategory, which consists of four new factors and five existing factors that will take effect on November 29, 2018.  The four new factors are:

  • How many women serve in leadership roles on the board?  The factor evaluates the number of women serving as board chair, chair of key committees or lead director.
  • How many women are named executive officers (NEOs) at the company?  Companies without any women as NEOs will lose credit, and credit will be capped for companies having more than two.

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Benchmarking Against the Spencer Stuart S&P 500 Board Practices Report

Spencer Stuart has released its annual report on S&P 500 board practices, a useful guide for benchmarking.  The overall trends demonstrate few changes from the prior year, leading the report to conclude that there is a “chronic low rate of director turnover,” bringing about “gradual shifts in the complexion of U.S. boards,” and a “continued incremental evolution.”  The key data is below, with the statistics largely similar to prior years.

New directors added.  On average, S&P 500 boards added .88 directors.  Slightly more than a majority (57%) added at least one new director, and 22% appointed two or more.  Women account for 40% of new directors, and 19% are minorities, a slight decline from last year.
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MSCI to Retain Existing Indexes Unchanged for Voting Structures but Also Launch New Index Series

Unlike S&P and FTSE, after an 18-month consultation period, MSCI has announced that equity securities with unequal voting structures will continue to be included in the MSCI Global Investable Market Indexes at their free float market capitalization weight.

MSCI will instead launch a new index series to reflect the desire of some investors to take into account unequal voting structures in the indexes that they use.

The company’s press release states that it “supports fully” the one share, one vote principle, and that having equal voting rights should be a key consideration in equity investing.  However, the role of the indexes in this governance debate and how they should treat companies with unequal voting structures have divided international institutional investors.
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Director Survey Reflects Tension and Skepticism of Investor Priorities

PwC’s annual corporate directors survey concludes that boards are evolving and seeking change, rather than primarily valuing collegiality and consensus.  The survey also shows some discontent among directors with their fellow members, and that they remain unconvinced about the importance of some key investor prerogatives.

About 45% of directors think that a member of their board should be replaced, with 21% of them indicating that two or more directors are underperforming.  The types of issues that directors cite as indicators of poor behavior include both too much as well as too little involvement; 18% believe that fellow directors overstep the boundaries of his or her oversight role, while 16% point to other directors’ reluctance to challenge management as a significant issue.
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New Glass Lewis Policies Announce Negative Recommendations for Directors in Some Instances When Companies Exclude Special Meeting and Other Shareholder Proposals through SEC Process

Under its 2019 updated guidelines, Glass Lewis will typically recommend against the members of the nominating and governance committee when a company is able to exclude a shareholder proposal on the right to call special meetings by presenting the ratification of an existing provision through a management proposal.  That happened several times last season, with some controversy, when companies asked shareholders to ratify existing special meeting rights that had a higher ownership threshold than the shareholders had proposed.

The updated guidelines also warn that in the event Glass Lewis believes that the exclusion of any shareholder proposal that is permitted by the SEC is “detrimental to shareholders,” it may, “in very limited circumstances,” recommend against the members of a governance committee.  
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In New Legal Bulletin, SEC Staff Clarifies Last Season’s Shareholder Proposal Controversies

The SEC Division of Corporation Finance has issued a new Staff Legal Bulletin 14J to provide guidance on some of the issues that bedeviled us earlier this year as to when the staff would, or would not, permit companies to exclude proposals through the no-action letter process.

Discussion of Board’s Analysis in No-Action Letters.  Last November, the Division issued SLB 14I, which indicated that companies could include, in their no-action letter requests arguing the “economic relevance” exception under Rule 14a-8(i)(5) and the “ordinary business” exception under Rule 14a-8 (i)(7), a discussion reflecting the board’s analysis of the particular policy issue raised by the proposal and its significance in relation to the company. 
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Part I of the Key Components in the Commonsense Principles 2.0 – Issuer Responsibilities

The Business Roundtable (BRT) and the Council of Institutional Investors (CII) have found common ground in supporting the revised Commonsense Principles 2.0, updated from 2016 and led once again by Warren Buffett and Jamie Dimon, along with several new CEO signatories, including some of the largest asset managers.

The open letter accompanying the principles acknowledges similar works by other groups, including the investor-led Investor Stewardship Group, the BRT’s Principles of Corporate Governance and The New Paradigm from the International Business Council of the World Economic Forum.  All those frameworks are endorsed, although the letter hopes that the many sets of principles can be harmonized and consolidated.
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ISS Proposes Limited Policy Updates for 2019 Related to Board Gender Diversity and Say-on-Pay Secondary Screens

Two key, but limited, policy changes for U.S. companies have been proposed by ISS.  The open comment period will run through 5:00 p.m. ET on November 1.

Board Gender Diversity. Beginning with meetings on or after February 1, 2020 (providing a year grace period), ISS may issue adverse voting recommendations against nominating committee chairs at boards with no gender diversity.  In special circumstances, the policy would allow the absence of board gender diversity to be temporarily explained and excused.

The mitigating factors that may be considered include: (a) a firm commitment, as stated in the proxy statement and/or other SEC filings to appoint at least one female director to the board in the near term (before the next annual general meeting); (b) the presence of at least one female director on the board at the immediately preceding annual meeting; and/or (c) any other compelling factors considered relevant on a case-by-case basis. 
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