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Major Institutional Investors Comment on, and Disagree About, the Proxy Process

The SEC’s solicitation of comments on the proxy process has led to more than 150 public letters.  While almost no companies sent in letters under their own names, investors have submitted the bulk of the commentary, including nearly all of the familiar groups of shareholder proponents.  Insight from a few major institutional investors follows, with diverging views about shareholder proposals and oversight of proxy advisory firms.

Don’t change, or do change, ownership or resubmission thresholds for shareholder proposals, and related rules.

“As such, we would view any action to limit some shareholders’ rights to file proposals as an action to limit all shareholders’ ability to fully consider all risks and opportunities of their investment.
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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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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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The New York City Comptroller’s Office Continues Focus on Board Matrices and Enhanced Disclosures on Board Recruitment and Board Evaluations

The Office of the New York City Comptroller Scott M. Stringer (NYC Comptroller), as part of the Boardroom Accountability Project 2.0 initiative, has published examples of “best practices” in board matrices.  The matrices include companies that have disclosed, in chart form, individual director qualifications and either (a) individual self-identification of director gender and race/ethnicity or (b) aggregate board self-identification of director gender and race/ethnicity.

These matrices were the outcome of letters sent in September 2017 to more than 150 companies that are part of the “focus list.”  NYC Comptroller sought to have companies provide, in a snapshot, not only the skills and attributes of each director, but also information about the board’s gender and racial/ethnic diversity, so that investors would not have to “make assumptions about how their directors self-identify based on photographs or the spelling of their names.” 
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Vanguard Investment Stewardship Report Highlights the Investor’s Focus on the Major Components of ESG

Vanguard’s Investment Stewardship Report for the year ended June 2018 reinforces its commitment to the four pillars: board composition, executive compensation, risk and oversight, and governance structures.

First, the data.  Vanguard engaged with 721 companies, a 63% increase from 2014.  These companies represented $1.6 trillion, or 47%, of total fund equity assets under management.   The fund voted on 168,786 proposals at 19,357 company meetings across the world.  76% of its equity fund assets under management are invested in the US, and 86% of the assets with which it engaged were US-based.

Independent directors were included in 40% of its engagements, and board composition and compensation were part of the discussions half the time. 
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State Street Stewardship Report Focuses on Key Themes

In July, State Street released its 2017 global stewardship report.  North America makes up 30% of its proxy voting but 67% of its engagements.  All voting and engagement activities are centralized within the stewardship team.  About 85% of engagements are classified as active, where the investor seeks direct dialogue with companies.  Factors used in identifying target companies for active engagement include: the size of State Street’s holdings, companies with poor long-term financial performance, companies identified as lagging in ESG standards, priority themes and sectors based on State Street’s assessment of emerging ESG risks and any outstanding concerns from prior engagements.
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Top Ten Human Capital Topics of Interest to Investors

Management of human capital is an increasing area of focus for investors as part of their ESG assessments. But what exactly falls under the “human capital” rubric, as the term seems at once both familiar and obscure, remains largely unsettled.

After some fairly unscientific research, including reading what various institutional investors and the standard setters that promote corporate disclosures say about the types of information they want companies to provide, the SEC rulemaking petition by the Human Capital Management Coalition, which we previously discussed here, and the analysis undertaken by the entities known as ESG “raters” who evaluate not only company statements but also third-party data, set forth below (in no particular order) is a list of ten items that appear to broadly fall within “human capital” discussions.
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Comptroller’s Office Details Results of Its Boardroom Accountability Project 2.0 on Board Diversity

Eighty percent of the companies targeted by the New York City Comptroller responded, according to a press release announcing the results of its Boardroom Accountability Project 2.0.

The Comptroller’s office wrote to 151 companies back in September, focusing on greater board diversity and transparency.  They asked companies to disclose a board skills matrix that would include not only the typical information in such matrices about qualifications and experience but also the directors’ gender, race and ethnicity.

Representatives of the Comptroller’s office ended up engaging with management at a little more than half of the companies that they approached, or 85 companies. 
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T. Rowe’s Statement on Shareholder Activism – We Speak for Ourselves

T. Rowe wants to make clear that activists and other investors do not speak for them, in its June ESG Spotlight, as they share their investment philosophy on shareholder activism.  Activism is defined as proxy contests, campaigns to influence management and boards on strategy, capital allocation and/or governance and unsolicited hostile bids.

While the investor believes that companies tend to be better informed about their businesses and will afford management a certain amount of deference, they also stress that management and their boards should “exhibit openness, curiosity, and intellectual honesty” regarding serious and sustained ideas from outsiders.

T. Rowe’s internal policies prohibit their investment professionals from initiating activism campaigns indirectly, such as discussing or pitching ideas to activist investors or other third parties. 
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What We Learn from State Street’s Q1 Stewardship Activity Report

State Street released a report on their Q1 focus and activities related to the companies where they vote.  What we learned:

  • They’ve been busy.  State Street voted at 2,596 meetings in 60 countries, weighing in on 18,105 management proposals and 382 shareholder proposals.  They favored management proposals 83% of the time and shareholder proposals about 13% of the time.
  • North America dominates engagement.  Fifteen percent of the voting decisions were made at North American companies, but more than half of engagement discussions took place with companies in this region.  A specific list of the companies that they engaged with are included in the report.

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What You Should Know About Engaging with BlackRock on Human Capital Management

BlackRock has recently elaborated on what companies can expect when engaging with them on human capital management (HCM) matters, which BlackRock defines as including “employee development, diversity and a commitment to equal employment opportunity, health and safety, labor relations, and supply chain labor-standards, amongst other things.”

For industries and markets where talent is limited or constrained, BlackRock believes corporate strategies must address topics such as “how [companies] are establishing themselves as the employer of choice for the workers on whom they depend.” In these types of business environments, strong HCM can be viewed as a competitive advantage and a contributing factor to a company’s business continuity and success.
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More Investors to Vote Against Directors for Lack of Board Diversity, and Specialty ISS Policies Push for 30% Diverse Representation

Certain investors are expected to hold governance committees, and in some cases the entire board, accountable through director elections this proxy season for perceived lack of board diversity.

ISS has updated its Socially Responsible Investing (SRI) and Catholic Faith-Based policies so that the proxy advisor will recommend against incumbent governance committee members under the SRI policy, and all incumbent board members under the Catholic Faith-Based policy, at boards that are not at least 30% diverse and include at least one woman and one ethnic minority.  Given that only 24% of Russell 3000 boards have such composition, the policies are expected to result in a “substantial increase” in the number of negative recommendations for directors. 
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State Street Screens S&P 500 Companies for Non-Compliance with Investor Stewardship Group Governance Principles

The Chief Investment Officer of State Street Global Advisor (SSGA) has sent letters to board chairs and lead directors at S&P 500 companies requesting that they report on their compliance with the principles outlined by the Investor Stewardship Group (ISG).  We previously discussed the ISG Corporate Governance Principles here.

Starting this month, SSGA will review governance practices at those companies and seek to “proactively engage with companies to better understand the reasons for non-compliance.”  If SSGA believes that companies are not adequately explaining their governance approaches, either publicly or through engagement, SSGA may hold the board accountable by voting against the independent chair, lead independent director or most senior independent director up for election.
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What You Should Know About BlackRock’s Updated Voting Guidelines

BlackRock updated its proxy voting guidelines, and some of the key highlights since its last update include:

Two women on boards.  In its discussion of the importance of boards comprising a diverse selection of individuals bringing to bear a range of experiences and competing views and opinions, BlackRock emphasized that in addition to other elements of diversity, the investor would “normally expect to see at least two women directors on every board.”

Overboarding limits.  BlackRock’s views that outside directors should only sit on four boards have long been more restrictive than the proxy advisors.  Now BlackRock also indicates that CEOs should just serve on one other board besides their own (for a total of two boards).
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BlackRock’s Annual Letter to CEOs Focuses on Doing Good and Continues to Emphasize Governance and Strategy

Reports of BlackRock’s annual letter to CEOs have largely focused on Larry Fink’s exhortation that companies must serve a social purpose and “make a positive contribution to society” in addition to delivering on financial performance.

The letter also focused on “a new model for corporate governance,” since index investors who cannot walk away from companies that they disapprove of must be active and engaged agents for their clients.  Shareholder engagement, Fink states, have been too focused on annual meetings and proxy votes, rather than a year-round conversation about long-term value.  The firm intends to double the size of its investment stewardship team over the next three years, to more than 60 people, so that discussions with companies can be “deeper, more frequent and more productive.”
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BlackRock Wants Equal Voting Rights but Opposes Exclusion from Indexes

BlockRock has made clear that it disagrees with recent decisions by index providers to exclude companies based on governance issues. Although not mentioned by BlackRock specifically, this likely refers to actions by S&P and FTSE Russell to require some levels of public voting rights or the complete elimination of multi-class shares before companies can be included in certain of their indexes. We previously discussed those announcements here.

BlackRock believes that these actions limit access to the universe of public companies for their index-based clients, depriving them of opportunities for returns. Policymakers should set corporate governance standards through regulation. Index providers should reflect the “investable marketplace” in diverse and expansive benchmark indices, in order to facilitate investors’ use of those indicies and align them with the objectives of public equity investors.
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Board Gender Diversity and Climate Risk Inform Vanguard’s Investor Stewardship

Vanguard cast more than 171,000 individual votes at nearly 13,000 companies in 68 countries for the 12-month period ending June 30th, making the firm one of the most influential investors in public companies.  Its recent Investor Stewardship Report and letter to CEOs highlights two key governance priorities. 

Engagement is a vital component of Vanguard’s approach, as it held 954 engagements with 680 companies.  Companies should be aware when talking with Vanguard that the topics discussed more than half of those times include the composition of boards, governance structures and executive compensation.  While board diversity has long been an important focus, the report states that companies should be prepared to discuss, in their public disclosure as well, their plans to incorporate diversity over time into their board composition. 
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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.
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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.
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State Street Advises Boards to Focus on Environment and Social Sustainability

State Street’s letter to board members emphasizes the importance of sustainability in long-term corporate strategy. As they have previously focused at length on the importance of independent board leadership, which we discussed here in 2017 the investor will shift its attention to board oversight of environmental and social sustainability in areas such as climate change, water management, supply chain management, safety issues, workplace diversity and talent development. State Street believes that while each company is different, these areas can pose both risks and opportunities that affect financial returns, citing notable examples from recent scandals related to automotive emissions, food safety and labor issues.
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State Street Warns Companies Against Settlement Agreements with Activists that Focus on Short-Term Goals

Activist campaigns targeting companies with market capitalizations above $500 million have resulted in approximately 13% of total new board appointments in 2016 so far. As of August 2016, 49 companies have settled with activists by conceding 104 board seats, which is nearly the same number as during all of 2015. Less than 10% of board seats gained by activists in 2015 and 2016 were through a proxy contest, compared with 34% in 2014.

The increasing number of settlements in activist situations has led to a report by State Street Global Advisors (SSGA). The investor is concerned that the rapid rise in settlement agreements may represent a focus on short-term priorities at the expense of “near-permanent” index investors.
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State Street Stewardship Report Highlights the Investor’s Approach to Targeted Engagement

In its annual stewardship report covering 2015, State Street Global Advisors (SSGA) indicated that it had voted at 15,471 meetings in 81 countries.  The investor voted against management proposals 12% of the time and in favor of shareholder proposals 14% of the time.

In light of the difficulty for passive index managers that are invested in thousands of companies globally to actively oversee their holdings, SSGA develops an annual stewardship program based on its strategic priorities by focusing on specific sectors and environmental, social and governance (ESG) themes.  For 2015, SSGA’s sector focus led them to engage with 48 pharmaceuticals and 95 consumer discretionary companies. 
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