Financial CHOICE Act Imposes Sweeping Shareholder Proposal Reforms

The modified version of the legislation, CHOICE Act 2.0, released by House Financial Services Committee Chairman Jeb Hensarling (R-TX), is mostly known for proposing major financial regulatory reforms. Tucked into the lengthy bill, however, are several significant changes that would completely overhaul the shareholder proposal process. Some are similar to proposals by the Business Roundtable, which we previously discussed here.

Ownership Threshold.  Currently, Rule 14a-8 allows any shareholder who owns at least $2,000, or 1%, of a company’s stock to offer a proposal for inclusion in the company’s proxy statement for the annual meeting. The CHOICE Act changes that ownership and holding requirement to permit submission of proposals by only a shareholder owning 1% of the company’s securities entitled to vote on the proposal, or such greater percentage as determined by the SEC, so long as the shareholder has held the stock for a minimum of three years. Continue Reading

Vanguard Explains Updates to Its Voting Policies on Environmental and Social Proposals

Vanguard has updated its proxy voting guidelines. Previously, the policy for how the investor will vote on environmental and social proposals indicated that, absent a compelling economic impact on shareholder value, the fund will typically abstain from voting on these proposals. This reflected the belief that these decisions should be the province of company management unless they have a significant, tangible impact on the value of a fund’s investment and management is not responsive to the matter.

The revised guidelines state that the fund will evaluate each proposal on its merits and may support those where the investor believes there is a “logically demonstrable linkage” between the proposal and long-term shareholder value. Continue Reading

Board Trends at the S&P 1500 Companies

ISS Board Practices show the continuing strength of key governance trends and the differences in practices between large- and mid-cap companies. Directors elected annually and by majority vote has become the norm at about 90% of large-caps, compared to around 60% of mid-caps. The adoption of both practices continues to rise each year.

Large-caps tend to be much less inclined to separate CEO and chair roles, however, especially as more investors accept lead directors with robust responsibilities as demonstrating appropriate independent leadership. 35% of mid-cap companies, but only 26% of large-caps, have independent chairmen. More than half of the large-caps continue to combine the CEO and chair roles, a trend that has actually increased from last year when it was only 43%. Continue Reading

Virtual-Only Annual Meetings Come Under Criticism

The growth of holding annual meetings online (virtual-only meetings) by more than 150 companies last year, up from 21 five years ago, has agitated some investors. The New York City Comptroller has announced that this month its pension funds will decide on proposed changes to its guidelines to vote against directors on governance committees where companies host virtual-only meetings. If approved, the policy would apply to S&P 500 companies in 2017, unless companies agree to change their practices at the next meeting, and all portfolio companies in 2018. The Comptroller wants to encourage in-person or hybrid (both in-person and webcast) meetings instead. Continue Reading

After Slight Text Changes, the SEC Staff Decides Proposal Governing Company Access to Vote Tallies Cannot Be Excluded

Several companies excluded proposals this season related to their receipt of periodic vote tallies from Broadridge after receiving no-action letter decisions similar to the SEC staff’s views from two years ago. The proposals asked boards to adopt bylaws so that the running tally of votes cast for matters on the proxy card would not be made available to management or the board, and cannot be used to solicit votes.

The proponent of the proposal proclaims that the objective is “confidential voting,” although the real purpose seems to be curtailing corporate solicitation. The version of the proposal that the SEC staff decided could be excluded asked for the bylaws to govern the tallies related to the “outcome of votes cast by proxy on uncontested matters,” and included all management proposals seeking approval of executive pay, proposals required by law to be subject to shareholder vote and shareholder proposals. Continue Reading

Mr. Clayton Goes to Washington

SEC Chair nominee Jay Clayton’s March 23rd hearing before the Senate Banking Committee covered much of the expected ground. In a series of responses designed to avoid controversy, Clayton repeatedly returned to the three core mandates of the SEC – capital formation, investor protection and efficient markets – as touchstones for his future leadership of the Commission, should he be confirmed. Beyond these general areas, Clayton offered few specifics or signals as to how he might steer the Commission during his term as Chair. He did, however, discuss concerns about growing companies finding the U.S. public markets unattractive due to the burdens of being a public company. Continue Reading

Davis Polk Submits Comment Letter to the SEC on Implementation of Pay Ratio Rule

Davis Polk has submitted a comment letter on the SEC’s implementation of the pay ratio rule. We previously summarized the final rule here.

Our comment letter focuses on implementation challenges and the significant administrative and financial burdens facing companies in connection with compliance with the pay ratio rule.

Law Clerk Charlotte Fabiani contributed to the drafting of this letter. Continue Reading

Senators Object to Any Delays in Pay Ratio Disclosure Requirements

A group of senators have written to SEC Acting Chair Piwowar opposing any delay in the implementation of the pay ratio rules. The senators are “extremely troubled” by Commissioner Piwowar’s decision to seek additional comments on the rule, and his directive to the staff to reconsider the rule’s implementation, which we previously discussed here.

The senators note that the statute requiring the rule was passed nearly seven years ago, and during the proposal stage the SEC received more than 270,000 letters, including many from investors in support of having the information as a way to assess companies’ approaches to executive compensation and human capital. Continue Reading

CII and Others Defend Shareholder Proposal Process to the White House

A group of investor organizations sent a letter to Gary Cohn, the Director of the National Economic Council, disputing the Business Roundtable’s assertion that the shareholder proposal process under Rule 14a-8 is among the list of unduly burdensome regulations. A prior discussion of the October 2016 Business Roundtable report on possible Rule 14a-8 reforms is here.

CII, the Principles for Responsible Investment, the Interfaith Center on Corporate Responsibility, the Investor Network on Climate Risk and the Forum for Sustainable and Responsible Investment support the current SEC rule. The group argues that the shareholder proposal process is “well functioning” and does not need to be amended or repealed. Continue Reading

BlackRock Issues Engagement Priorities for the Coming Year

BlackRock’s Investment Stewardship team of over 30 specialists globally is responsible for engagement with portfolio companies, viewing engagement as an important way to provide feedback and note concerns about factors that affect company performance. The investor emphasizes that they intend to engage “in a constructive manner” by asking questions, not telling companies what to do. If they have concerns, they will explain them and provide companies with time to respond. However, BlackRock also declares that “our patience is not infinite” and they will make voting decisions against companies if they do not see any progress after ongoing engagement.

For 2017 to 2018, BlackRock has issued its priority themes to help company boards and management prepare for engagement with the investor. Continue Reading

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