Proxy Update – Proxy Access Review
After a breakout year in 2015, proxy access continues to remain center stage in 2016. Leading the charge again on shareholder proposals is New York City Comptroller Scott Stringer, who has released his 2016 focus list of 72 companies. In addition to shareholder proposals seeking to implement proxy access, we are seeing shareholder proposals targeting companies that have already adopted proxy access. These proposals seek to remove the cap on the number of shareholders in the nominating group and raise the cap on directors from 20% to 25%.
We are also continuing to see companies adopt 3%/3-year proxy access bylaws with a limit on the number of shareholders in the nominating group and a 20% cap on the number of proxy access nominees.
This newsletter provides an overview of the types and quantities of proposals adopted to date and what we can expect in the 2016 proxy season.
Company Adopted Bylaws
In the S&P 500, over 100 companies – representing over 21% of the S&P 500 – have adopted proxy access. In 2015, over 60 companies in the S&P 500 received shareholder proposals regarding proxy access, including 28 that have not taken any action on the matter. Of those 28 companies, 16 had shareholder proposals that received majority support at the annual meeting.
Roughly 73% of the 135 companies that have adopted proxy access are large-cap companies, about 24% are mid-cap and 3% are small/micro-cap.
3-year vs. 5-year
The vast majority of the bylaws adopted by issuers have been of the 3%/3-year variety. 124 of the 135 companies opted for this provision; three of which initially adopted a 5% by-law but subsequently reduced the threshold to 3%. The features of proxy access adopted by the 135 companies can be broken down as follows:
- 104 limited the nominating group to 20 persons;
- 40 allow access to 20% of the Board
- 64 allow access to the greater of 20% or 2 seats
- 15 allow access to 25% of the board with varying group limits;
- 3 limited the nominating group to 15 but differed in the board access of 20% or greater of 20% or two;
- 2 allow access to the greater of 20% or two seats to the board with no group limit restriction or a group limit of 25 persons
11 companies have adopted the 5%/3-year provision:
- 10 companies allow access to 20% of the Board;
- 6 limited the group size to 20 persons
- 4 have a group limit of 10 persons
- 1 company allows a group of 10 access to 25% of the board
Shareholders continue to submit proxy access proposals with no cap on the number in the nominating group and a 25% cap on proxy access directors.
New York City Comptroller Scott Stringer is again a major proponent of proxy access, targeting 72 companies. The companies targeted by Mr. Stringer in 2016 are comprised of a combination of the NYC Comptroller’s largest holdings, companies with board diversity issues, companies with excessive CEO pay, coal-focused energy companies and those on the 2015 focus list that have not enacted or agreed to enact proxy access.
New this year are shareholder proposals targeting companies that have already adopted proxy access. These proposals seek to remove the cap on the number in the nominating group and raise the cap on directors from 20% to 25%. According to James McRitchie, who has been an advocate for proxy access reforms, “One director may have no impact at all because it often takes a ‘second’ to get a conversation going in the form of a motion”. Mr. McRitchie has criticized what he calls ‘proxy access lite’ and will continue to push for more robust proxy access provisions. Apple, for example, adopted a 3%/3-year by-law allowing a group of 20 access to 20% of the Board, but will face a shareholder proposal from Mr. McRitchie at its February 2016 annual meeting. Mr. McRitchie’s proposal eliminates the restriction on the size of the group and calls for access to the greater of 25% or 2 seats of the Board. Mr. McRitchie recognizes Apple as a leader in corporate governance and is looking to set a precedent for other companies considering proxy access. He says, “We need a robust proxy access as insurance, in case it is needed down the road. We also need to be able to point to Apple as a leader in corporate governance when negotiating proxy access at firms that really do need it now”.
This year we will also see how ISS views board responsiveness to a proxy access shareholder proposal that received a majority vote in 2015. ISS has issued an FAQ and noted that it will determine whether the company’s version of proxy access differs greatly from the conditions of an approved shareholder proposal. Shown below is a chart of what ISS finds to be particularly problematic and what may warrant an against recommendation on individual directors, the nominating committee or the entire board; as deemed appropriate.
|Ownership thresholds||Ownership duration||Aggregation limits||Cap on nominees|
|above 3%||longer than 3 years||below 20 shareholders||below 20% of board|
For companies that opt for different aggregation limits or nominee caps than were requested in a majority-supported shareholder proposal, ISS will look to see if the company has provided robust disclosure regarding outreach efforts and shareholder engagement that led to the companies decisions about those specific provisions.
ISS will also look to see if the management proxy access proposal includes “problematic” restrictions such as:
- Prohibitions on resubmission of failed nominees in subsequent years;
- Restrictions on third-party compensation of proxy access nominees;
- Restrictions on the use of proxy access and proxy contest procedures for the same meeting;
- How long and under what terms an elected shareholder nominee will count towards the maximum number of proxy access nominees; and
- When the right will be fully implemented and accessible to qualifying shareholders.
With two restrictions being considered especially problematic:
- Counting individual funds within a mutual fund family as separate shareholders for purposes of an aggregation limit; and
- The imposition of post-meeting shareholding requirements for nominating shareholders.
It’s still unclear what combination of these other restrictions would cause ISS to recommend against the Board. We are monitoring the issue and will keep our clients informed as we are able to determine how ISS will be applying this policy.
We will continue to monitor and report on the developments regarding proxy access as they unfold.
Please contact your Morrow & Co. representative if you have any questions.
MORROW & CO., LLC
470 West Avenue – Stamford, CT 06902
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This newsletter is provided as a service to our clients and other friends of Morrow & Co. The enclosed material is being provided for informational purposes only and is not intended to provide advice for professional, legal or other purposes. If you have any comments or questions on these subjects or wish discuss our services, please call your contact at Morrow & Co. If you wish to remove your name from mailing list or receive this newsletter via email, please send an e-mail to: firstname.lastname@example.org.