Proxy Statements

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ISS Peer Group Submission Window Is Currently Open

Each proxy season, Institutional Shareholder Services Inc. (“ISS”) constructs a peer group for each company prior to the company’s next proxy disclosure. ISS’ methodology for constructing the peer group is based in part on the company’s self-selected peer group. ISS recently invited submissions from certain U.S. and Canadian companies with annual meetings scheduled between September 16, 2020 and January 31, 2021. The submission deadline is next Friday at 8:00 PM EDT, July 17, 2020.

As one input in its peer group selection methodology, ISS will generally look to the peer group disclosed in the company’s last proxy and utilized by the company in determining CEO pay.
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NYSE Rule Temporarily Extends Deadline for Brokers to Send Physical Proxy Materials

On April 23, 2020, the New York Stock Exchange (NYSE) proposed a temporary rule change of NYSE Rule 451(b)(1) with immediate effectiveness that extends the deadline by which NYSE member organizations (typically broker/dealers) under selected circumstances must send physical copies of proxy materials to beneficial owners. In light of delays related to the novel coronavirus (COVID-19) pandemic, the NYSE designed the modification with the intention of helping issuers meet their quorum requirements at shareholder meetings and possibly alleviating the need for adjournments or postponements. The temporary rule change applies only to shareholder meetings scheduled to be held up to and including May 31, 2020.
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SEC Closely Monitors the Impact of the Coronavirus and Offers Conditional Regulatory Relief and Assistance

Yesterday, the Securities and Exchange Commission (SEC) announced that the agency was concurrently issuing an Order that provides relief, subject to certain conditions, for publicly traded companies affected by the coronavirus (COVID-19). The relief is necessitated by the fact that COVID-19 may impede certain companies’ timely communication to the trading markets, the SEC and shareholders. Chairman Clayton observed that, “The health and safety of all participants in our markets is of paramount importance. While timely public filing of Exchange Act reports is a cornerstone of well-functioning markets, [the SEC] recognize[s] that this situation may prevent certain issuers from compiling these reports within required timeframes.”
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Glass Lewis Is Currently Accepting Peer Group Submissions

Glass Lewis is currently accepting peer group submissions on its website until next Friday, January 31, 2020, from public companies making proxy filings through July 31, 2020. For all other companies making proxy filings through January 31, 2021, the deadline for submissions is July 31, 2020.

Glass Lewis utilizes its Pay-for-Performance Model with its A-F grading system (the “P4P Methodology”) to assess the degree to which a company’s executive compensation aligns with the company’s performance. In turn, these assessments inform the quantitative input for Glass Lewis’ Say-on-Pay voting recommendations. Glass Lewis advises that its new proprietary peer group methodology now drives the P4P Methodology and is critical to its Say-on-Pay recommendations.
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A Snapshot of Board-Shareholder Engagement Trends

Directors of SEC-registered public companies are increasingly taking a more active role in the shareholder engagement process given the evolving corporate governance landscape, including the increasing number of requests for their participation by some of the largest institutional investors. The Conference Board and Rutgers University’s Center for Corporate Law and Governance have recently published a report showing the emerging practices surrounding when and how corporate directors engage with shareholders based on a survey administered in 2018. Because board-shareholder engagements are often undisclosed and private, the results from this survey provide greater insight about how these communications are evolving and may help public company boards prepare for their shareholder engagements going forward.
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A Profile of Some of the Largest U.S. Tech Boards

The 2019 U.S. Technology Spencer Stuart Board Index (Tech Index) reflects the board practices and trends of 200 public tech companies with the highest revenues based on proxy statements released between July 1, 2018 and July 1, 2019.

I. Selected Spencer Stuart Perspectives

  • Like the S&P 500 companies, the largest tech companies are enhancing board diversity on multiple fronts including gender, skills and experiences as they add new independent directors.
  • The profile of the new director class is shifting, and CEO experience is required less often. While a technology background remains a priority, tech boards are also adding directors with more diverse functional and industry backgrounds.

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Spencer Stuart Shows How Boards Are Transforming

The 2019 U.S. Spencer Stuart Board Index (Index) reflects the board practices and trends of S&P 500 companies. According to the Index, boards are responding to investors’ increasing calls for greater diversity of “gender, age, race/ethnicity and professional backgrounds.” Spencer Stuart found that “boards are accelerating the addition of women and minority directors,” which in turn is driving notable changes in board composition. Spencer Stuart predicts that the biggest drivers of board refreshment will be replacing retiring directors and adding new skills to the board.

The Index covers public companies in the S&P 500 as of May 15, 2019 and the proxy statements released between May 30, 2018 and May 15, 2019.
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ISS Opens Window Today for Peer Group Submissions

Today begins the window where certain public companies in the U.S. and Canada have the option of submitting changes to their respective peer groups to Institutional Shareholder Services Inc. (“ISS”). The submission window closes next Friday at 8:00 PM EDT, July 19, 2019.

ISS’ invitation is directed to companies with annual meetings scheduled between September 16, 2019 and January 31, 2020 that have changed or anticipate changing their respective peer group from their last proxy disclosures. ISS advises that “[s]ubmissions should reflect peer companies used (or to be used) by the submitting company for pay-setting for the fiscal year ending prior to the company’s next upcoming annual meeting.”
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Two Quick Reminders for the Proxy Season

As many of you prepare to file your proxy statements this month, two quick reminders on new developments to keep in mind:

  • There is no longer a requirement to send the SEC hard copies of the company’s annual report that accompanies the proxy statement if you post the report on the company’s website, and keep the report on the website for at least a year.  See our prior post on the CDI issued in November of last year.
  • Companies including a say-on-frequency vote in their proxy statements should remember to announce publicly the board’s decision on the frequency selected after the meeting. 

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IPO Governance Practices: A Davis Polk Survey

As public company governance remains in the spotlight, we examined the governance structures of the 50 largest U.S. newly public companies at the time of their initial offerings.  Our survey of both controlled and non-controlled companies found that those companies continue to adopt various takeover defenses at the time they enter the public market, a stark contrast to the current practices of the S&P 500.
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Plurality Carve-Out in Majority Voting Standards

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.
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ISS Announces Updates to Proxy Voting Guidelines

ISS has issued its updates to its proxy voting guidelines effective for meetings on or after February 1, 2016.

The policy update is quite brief and does not address many of the questions asked in the survey period during the ISS consultation period.  Proxy access is only discussed in this update in the context of an actual contested election, while the survey questions had targeted specific bylaw terms.

For its overboarding policy, in 2016, ISS will note in its reports if a director is serving on more than five (5) public company boards.  Starting in February of 2017, ISS will recommend against directors who sit on more than five (5) public company boards. 
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CalPERS Focus on Board Tenure as Measure of Director Independence

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.

CalPERS’ presentation has several interesting data points around the topic of tenure. 
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Post-Season Review from Vanguard

In preparing for the upcoming proxy season, it is helpful to examine the information that investors provide about their most recent voting and engagement efforts.  We start with Vanguard.

In the 12 months ended June 30 of this year, Vanguard funds voted at more than 13,000 meetings covering 120,000 items.  The funds supported 93% of director nominees, voting against candidates for reasons related to attendance, independence or committee actions.  Similarly, Vanguard supported 95% of say-on-pay proposals and 88% of equity compensation plans, but did vote against nearly 350 compensation committee members.

On shareholder proposals, Vanguard tended to vote in favor of certain types of governance proposals, such as declassifying boards, while generally abstaining on environmental or social matters. 
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Audit Committees Continue to Expand Reporting in 2015 Proxy Statements

The SEC’s recent concept release on possible revisions to audit committee disclosure has ignited debate about whether additional information, and the type of information, that would be useful to investors regarding the audit committees’ oversight of external auditors. Our memo on the concept release is here, and our comment letter to the SEC is here.

Regardless of whether the SEC takes formal action, the recent review by EY’s Center for Board Matters shows a continuing increase in audit committee disclosures since EY started analyzing these findings in 2012.  After examining 76 of the Fortune 100 companies that have provided three years of consecutive disclosure, the report found that 71% of companies in 2015 proxy statements specified that the audit committee is responsible for the appointment, compensation and oversight of the auditor, compared to 66% last year and 41% in 2012.  
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Audit Committee Reporting Increased in 2014 Proxy Statements

For companies considering a review of the audit committee disclosure in proxy statements, the recent review by EY’s Center for Board Matters provides several insights on some of the additional information that Fortune 100 companies included in 2014. We previously discussed some of the background related to the increased disclosure here

The increased disclosures focus on three areas of audit-related matters: the audit committee’s evaluation of external auditors, approval of fees and auditor tenure. 15% of companies also provided a direct link to the audit committee charter. Interestingly, more than half these companies have three or more audit committee financial experts. 
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Continuing Spotlight on Audit Committee Reports and the Preponderance of Other Functional Board Committees

Six governance groups, including the National Association of Corporate Directors, Tapestry Networks and the Center for Audit Quality, have issued a “call to action” urging companies to enhance the audit committee reports in proxy statements. Many of the topics recommended are similar to our prior discussion of an E&Y survey that found large-cap companies already providing additional information beyond regulatory requirements, and indeed the report gives several helpful examples from those companies.

Some of the groups’ specific suggestions include details located in other parts of proxy statements, such as describing the scope of the audit committee’s duties as reflected in the charter and defining the committee’s composition by discussing independence determinations and qualifications.
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Expanded Disclosure of Audit Committee Information in Proxy Statements

We all know that executive compensation information in proxy statements is getting longer, as a response to the say-on-pay vote.  Recently, an E&Y report indicated that proxy statements of Fortune 100 companies in 2013 added more details about the audit committee compared to the prior year.  The report examined 78 companies that held meetings as of June 2013.

The report referenced the likely influence of letters from the United Brotherhood of Carpenters sent to a number of companies this past season, without describing the contents.  We understand, however, that the letters requested that companies provide additional disclosure about the responsibilities of the audit committee, including fee negotiations, considerations of audit firm rotations and engagement of the audit partner, as well as the number of years the same audit firm has been retained. 
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UPDATE: Broadridge Reverses Announced Change Regarding Interim Vote Tallies in Proxy Contests

Last Thursday, Broadridge announced that it will change its procedures for reporting of interim voting results for proxy contests, so that each soliciting party will only receive the results pertaining to its own solicitation. We discussed this here.

However, upon further internal review, Broadridge has now decided that it will not be implementing those changes. Both sides of a proxy contest will continue to receive interim voting updates for their own and each other’s ballot. In its notice, Broadridge indicated that these procedures have been consistently applied for decades and are understood by regulators and participants in the proxy process.
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Changes to Proxy Mechanics Could Affect Proxy Contests

Broadridge has announced a new policy that during proxy contests, each party will only receive the interim results of votes cast for its own proxy card, reports the WSJ. Companies and dissidents can share voting information if both sign confidentiality agreements. This new policy could make it more difficult for solicitations, including determining whether an investor has not voted at all, or has instead voted for the other side. 

A possible effort by the ABA to ask the SEC to shorten the period required to conduct broker search cards could also impact proxy contests. Currently, SEC Rule 14a-13 requires issuers to notify or “search” the banks and brokers at least 20 business days prior to the record date.
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Survey May Influence Efforts to Alter ERISA Rules Affecting Notice and Access

More than 18 months ago, we alerted readers about a request for information by the Department of Labor (DOL) seeking suggestions from interested parties on the possibility of using electronic media by employee benefit plan sponsors to furnish information to participants.  The current ERISA rules under the DOL prevent companies from taking full advantage of using notice and access in lieu of paper copies of proxy statements for employee benefit plan participants as a practical matter.  We wrote a comment letter to the DOL in support of moving toward easily sending plan participants electronic versions of a company’s annual proxy statement. 
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Broadridge Proxy Statistics on Billions of Shares Voted

Broadridge recently presented statistics from the 2012 proxy season, covering meetings from March 1st to June 1st. In this period of only 93 days, a staggering volume of shares, nearly 347 billion, were voted through the proxy system, representing more than half of the shares that are voted during the entire year. 

Average quorum levels stayed around 83%, with 68% of shares voted in accordance with their owners’ instructions (meaning almost 15% came from only broker votes). 95% of the voting occurs electronically, which includes telephone voting, but more than 10 billion shares are still casting ballots using paper forms. 

Technological innovation is slowly descending on proxy voting, as nearly half a million shares voted through a mobile platform.
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Glass Lewis Talks About Say-on-Pay and Updates to Voting Policies

During its 2012 North American Proxy Season review, proxy advisory services firm Glass Lewis looked back to the 2011 proxy season and also gave insights as to what we can expect from them in 2012.  Highlights included:

Say-on-Pay.  Glass Lewis recommended against 17.5% of say-on-pay proposals in 2011.  They use a proprietary model to evaluate companies and come up with “A” to “F” grades.  10% of companies that they reviewed received “F”s in 2011, with the average say-on-pay results at those companies at 73%.  While, like ISS, they cite pay for performance issues as the primary reasons for causing negative recommendations, Glass Lewis also tends to cast an unusual focus on CD&A disclosure that sometimes surprises companies. 
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Could ERISA Rules Align with Notice & Access?

It has been frustrating for companies who want to benefit from the substantial cost-savings provided by the SEC notice and access rules to discover that they must also comply with the Department of Labor (DOL) ERISA rules regarding electronic communications to employees, if for example the employee shareholders hold company stock through a 401(k) plan that is registered on a Form S-8.  As a practical matter, using notice and access for employee benefit plan participants has proved prohibitively difficult.  The ERISA rules permit electronic delivery of documents only to participants who have the ability to access them at their regular place of work, and who have access to the company’s electronic information system as an integral part of their duties. 
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