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.
That’s the tagline used by State Street in announcing, on the eve of International Women’s Day, that it has placed a temporary statute right near Wall Street of a girl with her arms crossed facing the Wall Street bull, to represent the future. On the same day, State Street called on the 3,500 companies it holds to take concrete steps to increase the number of women on their boards, as a governance issue of critical importance to boards and investors in 2017.
In 145 pages, IRRC Institute and ISS teamed up on a study of board refreshment trends at S&P 1500 companies from 2008 to 2016.
Boardroom Demographics. The study examines the composition of boards in terms of tenure, age, diversity and experience as board members.
- Director Tenure. Average boardroom tenure rose from 8.4 years in 2008 to nine years in 2013 before leveling at 8.7 years. Surprisingly, the average tenure for women directors of 6.4 years is identical to the level in 2008, while male directors currently have average tenures of 9.2 years.
- Director Age. The typical director is 62.5
A group of major investors has endorsed a corporate governance framework to go into effect on January 1, 2018. The Investor Stewardship Group (ISG) currently comprises BlackRock, CalSTRS, Florida State Board of Administration (SBA), GIC Private Limited (Singapore’s Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada (Asset Management), State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, Inc., ValueAct Capital, Vanguard, Washington State Investment Board, and Wellington Management.
The ISG was formed to enable investors who sign on to “speak with one voice,” resulting in a framework consisting of a set of six corporate governance principles and six stewardship principles for institutional investors.
The Council of Institutional Investors has published an FAQ on majority voting for directors in which it advocates for “consequential majority voting,” a form of majority voting in director elections that essentially removes board discretion if a director receives less than majority support.
90% of S&P 500 companies have a traditional form of majority voting, compared to only 29% of Russell 3000 companies. Most mid-cap and small-cap companies elect directors under a plurality vote system, where the nominees who receive the most “for” votes are elected until all board seats are filled. In an uncontested election, given that the number of nominees is equal to the number of board seats available, a nominee can be elected with one vote.
The Delaware Court of Chancery recently ruled that a form of fee-shifting bylaw linked to exclusive forum provisions is invalid.
Six months after Delaware adopted DGCL Section 109(b) to restrict fee-shifting bylaws, by providing that the bylaws of Delaware corporations may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim, Paylocity Holding Corporation adopted two new bylaws.
The company adopted an exclusive forum bylaw that requires internal corporate claims to be filed in a state or federal court located in Delaware.
The composition of boards continues to be a focus for investors, and companies are responding by paying increased attention both to who sits on their boards and to enhancing their disclosure and engagement with investors. The data reported in the 2016 Spencer Stuart Board Index on S&P 500 boards highlights emerging practices, compiled from proxy disclosure and a related survey. Overall, the trends have stayed steady from last year but represent a meaningful departure from 10 years ago.
Composition of new directors. 345 new directors joined 233 boards, with 87 boards adding more than one new director. Nearly one-third of the independent directors are serving on their first outside corporate boards, compared to 26% last year.
A group of twelve CEOs, including JPM, Berkshire Hathaway, GE, GM, Verizon and those from major institutional investors such as Capital Group, BlackRock, Vanguard, StateStreet, T. Rowe Price and ValueAct, have developed a set of “Commonsense Corporate Governance Principles.” Their open letter states that the purpose of the group was to try to reach consensus on what “good corporate governance” means in the real world. While the group recognizes that there is significant variation among public companies, they want the principles to serve as a catalyst for discussion.
Some of the recommendations regarding governance practices include:
Composition of boards of directors.
A recent case interprets and demonstrates the importance of the requirements in advance notice bylaws.
The U.S. District Court in the Northern District of Texas granted a preliminary injunction to Ashford Hospitality Prime that invalidated Sessa Capital’s slate of candidates for Ashford’s annual meeting. Sessa owns more than 8% of Ashford’s stock and notified the company that it intended to nominate five candidates to Ashford’s seven-member board.
Ashford’s bylaws require nominees to fill out a questionnaire, and include all information relating to the nominee that must be disclosed in connection with the solicitation of proxies in a contested election under SEC rules.
Our client memorandum on the civil action brought against ValueAct by the Department of Justice for failing to comply with antitrust waiting period examines the implications for other investors that engage with companies across a range of issues.
On April 21, we are hosting a webcast on the global trends and strategies for responding to shareholder activism, including trends in Hong Kong, the U.K. and the U.S. Register for the webcast here.
CII issued a recent policy statement focused on newly public companies, prompted by concerns about high-profile IPOs using dual-class shares. In 2015, dual-class IPOs raised twice as much capital compared to the prior year.
Companies going public are urged to avoid the following structures, either at the outset or by changing them over a period of time through the use of a “sunset” mechanism:
- Multi-class equity structure with unequal voting rights;
- Plurality vote requirement for uncontested director elections;
- Lack of independent board leadership, whether the chair or lead director;
- Classified board structure; and
- Super-majority vote requirements for bylaw amendments and other proposals.
Investors have expressed concerns about the length of director tenure for several years, pushing companies to focus on board succession planning and board refreshment processes. There has been, however, a reluctance to draw a hard line in the sand as to how many years of service is too long, until now.
Legal & General Investment Management (LGIM), a European institutional asset manager, developed a new policy that targets specific years of service. Beginning in 2017, it will vote against the chair of the nominating and governance committee if the average board tenure is 15 years or higher or if no new directors have joined the board in at least five years.
According to an analysis by Bloomberg, since 2011, 5 of the biggest U.S. activist funds have nominated women just 7 times in seeking 174 board seats. Bloomberg examined Elliot Management, Icahn Associates, Pershing Square, Third Point and Value Act.
Not one of Icahn Associates’ 42 nominees to fill 94 board seats in the past five years was a woman. Pershing Square nominated more women than any of the other funds, in recommending 3 women for 23 directorships. At companies in the S&P 500 index, 26% of seats were filled by women over the same period.
Some members of Congress are urging the SEC to push companies to go further through public disclosure.
Strong independent leadership will be a key focus of State Street’s 2016 corporate governance engagement program, according to a letter that the investor sent to board members.
All companies do not need to divide the CEO and Chair roles to obtain independent board leadership, State Street noted, since separating the positions does not always guarantee independence but rather, “[a]s is often the case with simple solutions, it may make some investors feel better.”
But the investor is concerned that 23% of S&P 500 companies and 34% of the Russell 3000 do not have either an independent chair or an independent lead director.
Chair White covered a wide array of topics recently at a securities regulation conference, though the press immediately focused on her comments about the possibility of new rules for disclosing board diversity. Her comments on that and other governance issues follow.
Additional board diversity disclosures being studied. Chair White believes that diversity adds value to boards and makes them function better, and is troubled by the dearth of diversity on boards currently. Speaking personally, she disputes notions that there is a supply problem. In terms of the SEC’s regulatory mandate, the SEC does not require disclosure about board qualifications other than with respect to disclosure rules on director experience, backgrounds and diversity policies.
When companies engage with BlackRock’s corporate governance team, they may be asked about the company’s “strategic framework for long-term value creation,” according to the letter sent to 500 CEOs from Larry Fink, co-founder and CEO of BlackRock. The framework should focus on the future and provide perspective on how a company is navigating competition and innovation, adapting to technology and geopolitical events, and where it is investing and developing talents.
Companies are expected to explicitly affirm to shareholders that their boards have reviewed their strategic plans. Environmental, social and governmental (ESG) issues, which are integrated into BlackRock’s investment framework, should also be recognized as central to companies’ businesses, in light of increasing attention to those matters.
Facebook has announced its settlement of a lawsuit filed in June 2014, alleging that its board of directors breached their fiduciary duties and unjustly enriched themselves and wasted corporate assets through the compensation paid to the non-employee directors. To date, we have discussed this case here, here and here.
As a refresher of the background facts, in 2013, Facebook’s Compensation & Governance Committee recommended that the board approve non-employee director compensation that the plaintiff alleged in the complaint was higher than that of its peers.
The board’s decision to approve the compensation of the non-employee directors was governed by the entire fairness review as a self-dealing transaction.
The WJS’s interactive graph on the 4,500 directors in the S&P 500 provides an interesting compilation of the hot topics of the day, including the number of women on boards, director independence, director age and tenure and pay. It also allows for those metrics to be view on a company or industry-specific basis or by topic category.
The data is based on information as of October 30th and covers companies with market capitalization ranging from $1.5 billion to over $600 billion. For the S&P 500, nearly three-quarters of boards have at least two women directors. At three companies, women make up half of the board.
The U.S. Government Accountability Office (GAO) estimated in a recent report that even if equal proportions of women and men joined boards each year beginning in 2015, it could take more than 40 years for the representation of women directors to equal that of men. The report is in response to a request from Carolyn Maloney, the ranking member of the Subcommittee on Capital Markets and Government Sponsored Enterprises Committee on Financial Services in the House of Representatives.
The GAO found some progress. In 2014, women made up 16% of board seats in the S&P 1500, up from 8% in 1997.
In charging senior leaders of a failed bank with fraud, the SEC also held two outside directors responsible.
Eleven executives and board members of the bank were charged by the SEC, which claimed that they improperly extended, renewed and rolled over bad loans in order to avoid impairment charges and reporting increased losses for loans and leases in its financial accounting. This contributed to the bank’s failure in 2011 and the bank became the 26th largest bank by asset size to fail during the financial crisis.
The SEC complaint cites numerous specific loans and credit situations involving the bank’s management. One of the directors was implicated in a particular restructuring when he agreed to assume some of the payments, but in fact was not personally liable due to other extensions of credit by the bank.
The Cybersecurity Disclosure Act of 2015 sponsored by Senators Jack Reed (D-RI) and Susan Collins (R-ME) on December 17 is similar in concept to the audit committee financial expert provision under the Sarbanes-Oxley Act.
Under the bill, the SEC must enact rules requiring all reporting companies to disclose whether any board member has expertise or experience in cybersecurity and the nature of that expertise or experience. If no director qualifies, then the company must describe “what other cybersecurity steps taken by the reporting company were taken into account by such persons responsible for identifying and evaluating nominees for any member of the governing body, such as a nominating committee.”
Boards and investors continue to be deeply interested in board composition, a central topic in the 2015 Spencer Stuart US Board Index for S&P 500 companies.
At the largest companies, the average director tenure is 8.5 years. 62% of boards have average tenure of between 6 and 10 years, compared to 21% with averages of over 11 years. The average director age has been increasing in the last 10 years. At 45% of companies, that age is 64, compared with 16% of boards 10 years ago. Back then, a third of directors were under age 59, which has now shrunk to about 15% of companies.
Ethan Allen’s seven nominees for the company’s board received overwhelming support in the recent proxy contest against the six candidates proposed by Sandell Asset Management.
The contest received some unusual attention, as noted in this WSJ article, after ISS criticized the company for using majority voting for the election of directors as a “potential entrenchment device.” Over 40% of the Russell 3000 companies require directors to be elected by a majority of the votes cast. However, in a contested election, most often the standard reverts back to plurality, meaning that nominees who receive the most number of votes are elected regardless of whether they obtained a majority.
CalPERS is considering changing its proxy voting policies to account for issues of director tenure. New language in its governance principles could state that director independence may be “compromised” at 10 years of service. If implicated, companies are expected to “carry out rigorous evaluations to either classify the director as non-independent or provide detailed annual explanation why the director can continue to be classified as independent.” In addition, boards should fully evaluate their succession planning process surrounding director refreshment to maintain the necessary mix of skills, diversity and experience.