MSCI to Retain Existing Indexes Unchanged for Voting Structures but Also Launch New Index Series

Unlike S&P and FTSE, after an 18-month consultation period, MSCI has announced that equity securities with unequal voting structures will continue to be included in the MSCI Global Investable Market Indexes at their free float market capitalization weight.

MSCI will instead launch a new index series to reflect the desire of some investors to take into account unequal voting structures in the indexes that they use.

The company’s press release states that it “supports fully” the one share, one vote principle, and that having equal voting rights should be a key consideration in equity investing.  However, the role of the indexes in this governance debate and how they should treat companies with unequal voting structures have divided international institutional investors.
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Director Survey Reflects Tension and Skepticism of Investor Priorities

PwC’s annual corporate directors survey concludes that boards are evolving and seeking change, rather than primarily valuing collegiality and consensus.  The survey also shows some discontent among directors with their fellow members, and that they remain unconvinced about the importance of some key investor prerogatives.

About 45% of directors think that a member of their board should be replaced, with 21% of them indicating that two or more directors are underperforming.  The types of issues that directors cite as indicators of poor behavior include both too much as well as too little involvement; 18% believe that fellow directors overstep the boundaries of his or her oversight role, while 16% point to other directors’ reluctance to challenge management as a significant issue.
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New Glass Lewis Policies Announce Negative Recommendations for Directors in Some Instances When Companies Exclude Special Meeting and Other Shareholder Proposals through SEC Process

Under its 2019 updated guidelines, Glass Lewis will typically recommend against the members of the nominating and governance committee when a company is able to exclude a shareholder proposal on the right to call special meetings by presenting the ratification of an existing provision through a management proposal.  That happened several times last season, with some controversy, when companies asked shareholders to ratify existing special meeting rights that had a higher ownership threshold than the shareholders had proposed.

The updated guidelines also warn that in the event Glass Lewis believes that the exclusion of any shareholder proposal that is permitted by the SEC is “detrimental to shareholders,” it may, “in very limited circumstances,” recommend against the members of a governance committee.  
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In New Legal Bulletin, SEC Staff Clarifies Last Season’s Shareholder Proposal Controversies

The SEC Division of Corporation Finance has issued a new Staff Legal Bulletin 14J to provide guidance on some of the issues that bedeviled us earlier this year as to when the staff would, or would not, permit companies to exclude proposals through the no-action letter process.

Discussion of Board’s Analysis in No-Action Letters.  Last November, the Division issued SLB 14I, which indicated that companies could include, in their no-action letter requests arguing the “economic relevance” exception under Rule 14a-8(i)(5) and the “ordinary business” exception under Rule 14a-8 (i)(7), a discussion reflecting the board’s analysis of the particular policy issue raised by the proposal and its significance in relation to the company. 
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Part I of the Key Components in the Commonsense Principles 2.0 – Issuer Responsibilities

The Business Roundtable (BRT) and the Council of Institutional Investors (CII) have found common ground in supporting the revised Commonsense Principles 2.0, updated from 2016 and led once again by Warren Buffett and Jamie Dimon, along with several new CEO signatories, including some of the largest asset managers.

The open letter accompanying the principles acknowledges similar works by other groups, including the investor-led Investor Stewardship Group, the BRT’s Principles of Corporate Governance and The New Paradigm from the International Business Council of the World Economic Forum.  All those frameworks are endorsed, although the letter hopes that the many sets of principles can be harmonized and consolidated.
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ISS Proposes Limited Policy Updates for 2019 Related to Board Gender Diversity and Say-on-Pay Secondary Screens

Two key, but limited, policy changes for U.S. companies have been proposed by ISS.  The open comment period will run through 5:00 p.m. ET on November 1.

Board Gender Diversity. Beginning with meetings on or after February 1, 2020 (providing a year grace period), ISS may issue adverse voting recommendations against nominating committee chairs at boards with no gender diversity.  In special circumstances, the policy would allow the absence of board gender diversity to be temporarily explained and excused.

The mitigating factors that may be considered include: (a) a firm commitment, as stated in the proxy statement and/or other SEC filings to appoint at least one female director to the board in the near term (before the next annual general meeting); (b) the presence of at least one female director on the board at the immediately preceding annual meeting; and/or (c) any other compelling factors considered relevant on a case-by-case basis. 
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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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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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