Clayton Cites Shareholder Proposal and Proxy Advisory Firm Reforms as Priority Items for the SEC

In a wide ranging speech yesterday on SEC rulemaking, Chairman Clayton stated that after disregarding the more “aspirational” approach of past administrations, the SEC’s changed its approach to tailoring the 2018 Regulatory Agenda to the initiatives that the agency could reasonably complete in the next 12 months.  This led to the Commission advancing 23 of the 26 rules cited in the 2018 agenda.

Among the many significant initiatives for 2019 that the Chairman listed as priority items for the Commission included the proxy process, with an indication that he is interested in reforms, as he addressed:

Reviewing the ownership and resubmission thresholds for shareholder proposals.  
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Nearly All S&P 500 Companies Provide Sustainability Reporting

With funding from the Investor Responsibility Research Institute (IRR), the Sustainable Investment Institute (Si2) reviewed the current state of companies’ sustainability reporting and found that although most S&P companies gave sustainability information, they followed a wide range of practices.  The websites of 92% of S&P 500 companies included disclosure on sustainability, but only 395 companies (78%) issued reports.  Within those reports, 357 companies provide environmental metrics and 320, social data.  Other findings include:

Most reports can be downloaded, although companies often provide dynamic website information.  Discrete reports in downloadable time-bound form were favored by 68% of companies, updated annually by 93% of those companies, while 9% of companies overall offered web-only information that could change at any time. 
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SEC to Consider Request for Comment on Earnings Releases and Quarterly Reports

The SEC issued a Sunshine Act Notice for an open meeting next Wednesday, December 5, where they will consider whether to issue a Request for Comment on the nature and content of quarterly reports and earnings releases issued by reporting companies.  The open meeting will start at 10:00 a.m. (ET) and will be webcast.

As reported by media, President Trump asked the SEC in August to study the possibility of requiring less frequent earnings reporting.  It has also been reported that Chairman Clayton may be inclined to explore reducing the demands on companies with revenues under $1 billion, as part of the SEC’s initiatives to ease burdens on smaller reporting companies.
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A Say-on-Pay Update — Plus Strategies for Responding to a Negative Recommendation by a Proxy Advisory Firm

The proxy season is just around the corner for calendar year public companies. Ahead of the season, two major proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis, recently released their 2019 policy updates to provide guidance on how they will make recommendations on companies’ “say-on-pay” vote. Although a non-binding vote, performing poorly on a say-on-pay vote is not only disheartening, but can impact shareholder votes on election of directors (particularly compensation committee members), result in greater scrutiny of CEO performance, and require management and compensation committee members to expend significant time and resources to address concerns reflected by the vote.
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SEC Enforcement Division Annual Report Reflects Areas of Focus on Public Companies

Cryptocurrency fraud and schemes against mom-and-pop retail investors may consume the limelight and make for good press, but the SEC enforcement division’s annual report also highlights continued interest in public company actions.

Individual accountability is one of the staff’s five key initiatives. In FY 2018, the Commission charged individuals in more than 70% of the enforcement actions it brought, including “numerous” CEOs and CFOs, as well as accountants, auditors and other gatekeepers.

The Division’s Cyber Unit is up and running. The Unit brought the case against Yahoo! Inc., which was the agency’s first case against a public company for failing to properly inform investors about a cyber breach.
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ISS Issues Benchmark Policies for 2019 and Bipartisan Bill to Regulate Proxy Advisory Firms is Proposed

New ISS Policies.  For meetings on or after February 1, 2019, two new and fairly minimal ISS policies will be applied.

As part of ISS’ client roundtables, one-to-one client discussions and public comment period on proposed policy changes, ISS discussed the potential use of Economic Value Added (EVA) metrics to assess company performance in executive compensation evaluations.  In its policy update, ISS explained that many institutional investors agreed with the notion of exploring the potential of EVA factors to add insight into company performance beyond total shareholder return (TSR) and GAAP measures, but that feedback received indicated that investors would like more time to understand the EVA methodology.
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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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