How Do Retail Shareholders Vote?

Retail shareholders own about 30% of public companies, a fairly consistent level over the past five years, but only about 28% of those shares are voted, according to the latest issue of ProxyPulse from Broadridge and PwC.  In comparison, 91% of institutional shares vote.

During the 2018 proxy season, support for the 21,855 directors up for election was 96% from institutional investors and 95% from retail investors, on average.  About 1,408 directors (6.4%) failed to receive at least 70% favorable votes, and another 416 directors (1.9%)  did not obtain support from at least a majority of shareholders. These poor results increased from prior year 2017, as 11% more directors failed to receive majority support and 14% more directors failed to surpass 70% support.
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California Imposes Climate Risk Disclosure Requirements on the U.S.’s Two Largest Pension Funds

Citing concerns of climate change’s impact on the financial sector, California passed SB 964 last week requiring the country’s two biggest pension funds to publicly disclose and analyze their climate-related investment risks. Under the new law, The California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) must review and report “climate related financial risks” that are “material” to the stability of their public market portfolios. Such “climate-related financial risks” include “intense storms, rising sea levels, higher global temperatures, economic damages from carbon emissions, and other financial and transition risks due to public policies to address climate change, shifting consumer attitudes, changing economics of traditional carbon-intense industries.” SB 964’s obligations, which will take effect on January 1, 2020 and continue every three years until 2035, also require the funds to report on their alignment to the Paris climate agreement, California climate policy goals, and any long-term climate-related financial risks.
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Investors Petition the SEC to Develop ESG Reporting Requirements

A group of investors representing more than $5 trillion in assets under management petitioned the U.S. Securities and Exchange Commission on October 1, 2018 to develop a comprehensive framework that would require public companies to disclose environmental, social and governance (ESG) aspects relating to their operations.  Petitioners include CalPERS, the New York State Comptroller and the U.N. Principles for Responsible Investment.  The 19-page petition, available here, cites increasing demands by certain investors for information to better understand the long-term performance and risk management strategies of public companies. The petition notes that the voluntary “sustainability reports” that some companies have produced in response to these demands are insufficient and instead, an SEC-mandated comprehensive framework for clearer, more consistent and more fulsome, reliable and decision-useful ESG disclosure (above and beyond existing SEC disclosure requirements) would meet this demand. 
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CII and ISS Team Up to Oppose House Legislation on Proxy Advisory Firms, Speak for “Real Main Street” Investors

Protect the Voice of Shareholders aims to oppose H.R. 4015, the Corporate Governance Reform and Transparency Act, that passed the House last October.  While not effective, the Act is perhaps best known for requiring that the SEC withdraw the no-action letters to Egan Jones and ISS, which the SEC itself undertook recently, as we previously discussed.

The site is a joint project of ISS and CII, with ISS responsible for the content with approval from CII.  The goal is to “correct the record, reveal the mistruths and double-speak of the lobbying groups trying to mislead lawmakers.”  According to the site, the Act would “allow boardrooms to inhibit” the distribution of research reports when they disagree with recommendations, arguing that it is “inappropriate to permit companies to hinder the current free flow of unbiased research and information to investors.”  The site provides news and resources as well as a way to reach Congress to oppose the Act.
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State Street to Hold Governance Committees Accountable for Lack of Gender Diversity

On the heels of California becoming the first state to impose requirements mandating gender diversity on boards, which we discussed here, State Street has announced policy changes also focused on gender diversity.

Beginning in 2020, State Street will vote against the entire nominating committee if a company does not have at least one woman on its board, and has not engaged successfully with State Street for three consecutive years.

The global policy from State Street made headlines because notwithstanding companies concerns, it remains highly unusual for the largest asset managers to vote against directors, leading to director elections resulting in average support of over 95%.
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California Enacts Law Requiring Public Company Boards to Include Women

As our client memo explains, yesterday the governor of California signed a bill that requires public companies with executive offices in the state to include a specific number of women on their boards of directors.

Governor Brown’s statement acknowledges that “serious legal concerns” have been raised about the bill, and that “flaws” in the bill may “prove fatal to its ultimate implementation.”  However, he believes that “recent events in Washington D.C. [and] beyond” make it “crystal clear that many are not getting the message.”

His letter was copied to the U.S. Senate Judiciary Committee.
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Davis Polk Submits Comment Letter on the SEC’s Concept Release on Compensatory Security Offerings Under Rule 701 and Form S-8

Davis Polk has submitted a comment letter on the SEC’s Concept Release on Compensatory Securities Offerings under Rule 701 and Form S-8. Our comment letter focuses on expanding the scope of eligibility for Rule 701 to cover “gig economy” workers and making corresponding changes to the scope of eligibility for Form S-8; streamlining Rule 701 disclosure requirements for foreign private issuers; clarifying disclosure requirements for RSU and profits interests awards made under Rule 701; and simplifying Form S-8 requirements to reduce administrative burdens on issuers.
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SEC Charges Former CEO and Company with Fraud for Denying Reputational Impact on Business

SeaWorld and two of its former executives, including the CEO, agreed to pay more than $5 million to settle fraud charges.  The SEC alleged that the company failed to inform investors about the impact of the documentary film Blackfish on the company’s reputation, and ultimately its business.

Released in July 2013, the film criticized SeaWorld’s treatment of killer whales.  In the complaint, the SEC alleged that the CEO failed numerous times to tell investors about the “Blackfish effect” on the company’s reputation, which he “should have known” by the end of the year was having a negative impact on the company’s reputation, even though revenue grew and attendance declines were modest by that point.
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SEC Schedules November 15 for Proxy Process Roundtable

The SEC announced that the staff will host a roundtable on the proxy process on November 15.  The participants, time and the formal agenda has not yet been released.

The roundtable is expected to focus on the U.S. proxy system, including proxy voting mechanics and technology, the shareholder proposal process, and the role and regulation of proxy advisory firms.

Comments may be submitted electronically or on paper (one method only).  Comments will become public and posted on the SEC’s website without change.

Use the SEC’s Internet submission form or send an email to
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EPA and BLM Easing Methane Rules for the Oil and Natural Gas Industry

The Trump Administration took two actions this month in its efforts to reverse the Obama administration’s climate change agenda: the United States Environmental Protection Agency’s (EPA) proposed amendments to scale back the 2016 New Source Performance Standards for the oil and natural gas sectors, and the Bureau of Land Management’s final rule revising the 2016 Waste Prevention, Production Subject to Royalties, and Resource Conservation Rule. Both rules targeted by these actions aimed at reducing emissions of methane, a potent greenhouse gas which traps 87 times the heat of carbon dioxide. These actions follow other EPA efforts aimed at reversing the prior administration’s regulatory initiatives targeting climate change, including less stringent greenhouse gas rules applicable to vehicles and coal- and oil-fired power plants.
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