Proxy Update – Proxy Access Review – Late February 2016 Update
Proxy access continues to be a dynamic topic in 2016.
After a breakout year in 2015, proxy access remains 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.
In addition, ISS has updated its policy on proxy access as it pertains to board responsiveness to a proxy access shareholder proposal and the features of a company-adopted proxy access bylaw.
Finally, Vanguard has changed its policy on proxy access and will now support shareholder proposals with a 3% threshold; down from 5%. Vanguard said this change was made in part because of “the critical mass of access adoption at the 3 percent ownership level by an increasingly wide range of companies.”
This newsletter provides an overview of the current state of play.
Company Adopted Bylaws
In the S&P 500, over 130 companies – representing over 27% 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 25 that have not taken any action on the matter. Of those 25companies, 14 had shareholder proposals that received majority support at the annual meeting.
Roughly 68% of the 178 companies that have adopted proxy access are large-cap companies, about 28% are mid-cap and 4% 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. 167 of the 178 companies opted for this provision; four of which initially adopted a 5% by-law but subsequently reduced the threshold to 3%. The features of proxy access adopted by the 178 companies can be broken down as follows:
- 133 limited the nominating group to 20 persons;
- 47 allow access to 20% of the Board
- 86 allow access to the greater of 20% or 2 seats
- 24 allow access to 25% of the board with varying group limits;
- 7 allow access to the greater of 20% or two seats to the board with no group limit restriction or a group limit of either 25 or 30 persons
- 3 limited the nominating group to 15 but differed in the board access of 20% or greater of 20% or two;
11 companies have adopted the more restrictive 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. As of late February, 35 of the companies on this list have adopted proxy access.
Behind Mr. Stringer are a number of other shareholder proponents advocating for proxy access. Among the largest of those is John Chevedden who, according to ISS, submitted proposals at 53 companies of which 36 are listed as pending. Also leading the charge for proxy access are familiar names from the 2015 season including Kenneth Steiner, UAW Retirees Medical Benefit Trust, James McRitchie, William Steiner, Myra Young and Marco Consulting Group Trust.
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, and received a shareholder proposal from Mr. McRitchie (which failed at the February 26 annual meeting). Mr. McRitchie’s proposal looked to eliminate 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 has said that Apple is recognized as a leader in corporate governance and he was looking to set a precedent for other companies considering proxy access. He stated, “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”.
Results to Date in 2016
Of the seven proposals that have gone to a vote so far this year, three shareholder proposals passed (at companies with no board-adopted proxy access provisions already in place), three have failed (in one case despite both ISS and GL recommending in favor of proposal; while in the other case both were against), and one management proposal passed.
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.
ISS and Glass Lewis Recommendations
We are seeing a divergence in recommendations by ISS and Glass Lewis on proxy access shareholder proposals at companies that have already adopted proxy access. So far in 2016, ISS has recommended Against on only 1 of 10 proposals. ISS is supporting shareholder proposals with more liberal provisions, such as access to 25% of the board and an unlimited number in the nominating group. In the case of the Against recommendation, ISS felt the shareholder proposal could result in proxy access nominees controlling 40% of the board at a company with only 5 board members.
Glass Lewis has recommended Against on 4 proposals. Glass Lewis has recommended against in situations where they believe companies already have appropriate forms proxy access. However, we have seen Glass Lewis recommend in favor of 3 shareholder proposal in which the company already provides proxy access; in two cases because Glass Lewis found certain provisions of the company’s by-law to be problematic – mainly, post-meeting holding requirements of one year and ineligibility for a shareholder who submitted a nominee for two years after the annual meeting, even if submitted nominee is elected. In the other case, the company had a 5% trigger while the shareholder proposal had a 3% trigger.
Vanguard Policy Change
In late February, Vanguard announced that it had made a policy change saying it will support proposals with an ownership cap of 3%, down from 5% in its previous policy. A Vanguard spokeswoman said that the change it made “was informed by our engagement with companies and other stakeholders over the past year, as well as the critical mass of access adoption at the 3 percent ownership level by an increasingly wide range of companies.” New York City Comptroller Stringer called Vanguard’s change “hugely significant”, adding “This is the last nail in the coffin for companies claiming investors don’t agree on proxy access. There’s now overwhelming consensus among investors in support of 3 percent bylaws for viable proxy access.”
Of note, Vanguard kept the “for up to 20% of the seats on the Board” language which is a different threshold than the Comptroller’s 25%.
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
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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: email@example.com.