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Our Predictions on the 2018 Meeting Season Were Squarely On The Money


Our 2017 prediction that 2018 would indeed turn out to be “the year of the women” - at long last - was happily proven true, at least in the USA:

By mid-year, the percentage of new directors who are female reached a record high of 35% in the Russell 3000 and close to 39% in the S&P 500, according to ISS Analytics, which also reported that by mid-year, approximately 90% of the S&P 500 and 58% of Russell 3000 companies have at least two female directors.

“As expected, board gender diversity practices differ significantly by company size” the report noted, “with smaller companies having fewer women on their boards despite recent improvements.” But any way you slice it, 2018 was truly a major turning point where gender diversity is concerned…and there’s a lot more action still to come, for sure.

At typically all-old-boy REIT boards there were truly astonishing changes to in 2018 - “which named a record number of women to board positions in 2018” according to a 6/26 WSJ story…“a sign that this mostly male-dominated industry is reacting to pressure on American corporations to diversify. Of the 94 REIT directors newly elected during the spring proxy season, 49 - or 52% - are women, according to a study by Ferguson Partners, a professional services firm specializing in executive and board recruitment. It was the first time ever that men comprised less than the majority of the new directors [at REITS] Ferguson Partners said.”

Board gender diversity was also a focal point in a proxy battle this season, as an excellent 6/25 report from Alliance Advisors noted, in one of the best of many summaries to cross our desk: At Destination Maternity, “for the first time in recent years a majority-female dissident slate prevailed.”

Most interesting to note, for those of you who wrongly think that ISS and Glass Lewis call the shots on proxy voting…“The dissident slate at Destination Maternity prevailed, despite the fact that neither proxy advisor supported the dissident candidates, which ISS faulted for their lack of public company board experience. In response [the insurgents] pointed out that if such experience is pre-determinant to board membership, the gap between the number of male to female directors will never close.”

Some sobering news on gender diversity, however, According to Equilar, [only] 16.9% of Russell 3000 board seats were occupied by women at the end of Q1 2018 and are not expected to reach gender parity until 2048.” [This is a mighty long way off and, of course, presumes that current gains will continue at the same rate…But we are certain that the trend will continue to accelerate in 2019 and beyond.]

Sexual misconduct scandals also spurred shareholder action - and lots of board action too this year: “The ongoing fallout at Wynn Resorts over allegations of sexual improprieties against founder and former Chairman/CEO Steve Wynn has exposed the considerable financial and reputational risks that can arise from toxic corporate cultures” the Alliance report noted. “The company’s damage control—which included adding three women to the board in April—failed to placate the proxy advisors who sided with Elaine Wynn’s “vote no” campaign against legacy director John Hagenbuch, a close friend of Steve Wynn who also served on the special committee investigating the complaints against him. Avoiding a showdown with investors, Hagenbuch withdrew his name from reelection two days before the annual meeting and another longtime director—Robert Miller—resigned.” A recent report on 2018 CEO turnover revealed that 10% was driven by #MeToo issues!

OUR ADVICE TO ISSUERS:  The gender-genie is finally out of the bottle and flying high and wide. It can’t be pushed back in or ignored by public companies and their current boards.

Expect even more pushback, a lot less patience and a lot more action from institutional investors than they exhibited in 2017 - or in 2018 for that matter. If you are one of those smaller companies - with no women - or only one on your board - you will be under the microscope in 2019.

Readers, we urge you to take another look at the article in our 2017 Special Supplement - “Board Diversity: What Are You Waiting For?” by Patricia Lenkov, founder and principal at Agility Executive Search. (It’s not indexed separately yet, so please go to www,optimizeronline.com, click on the 2017 Special Supplement cover and scroll down to read this compelling wake-up call.

Please note too that while the push for more ethnic diversity sort of took a back seat to gender diversity this year, the ethnic-genie is out of the bottle as well - as well it should be.

Surely, you don’t want to end up as Amazon did this year…when, after it had its face slapped by the Congressional Black Caucus - and discovered that many employees were also angered by its stance on an ethnic diversity proposal - they announced to the Caucus, and in a supplemental SEC filing, that the company would adopt a policy whereby women and people of color are included in the pool of candidates for all board openings - essentially agreeing with a shareholder proposal it had initially opposed…just nine days before the meeting. As they wrote to the Caucus, in what seemed like a very candid statement: “We reached this decision after listening to your feedback as well as that from Amazon employees, shareholders, and other stakeholders about the Board diversity proposal. These conversations led us to reconsider both our decision on the shareholder proposal and how we explained our initial recommendation.” Amazon’s 10 board members are all white, although three of the 10 are women. And OUCH! …Amazon got slapped yet again in the press, following their comment in the SEC filing that “This policy formalizes a practice already in place”…despite the fact they’d formally opposed it and the fact that if there was such a “policy” it has produced zero ethnic diversity to date!

OUR ADVICE: You need to get ahead and stay ahead of the curve here: You sure don’t want to be targeted with a shareholder resolution asking your company to formally adopt more inclusive and more aggressive policies and procedures for recruiting board members and “refreshing” and making your board more ethnically diverse.

And you sure don’t want to see directors on the governance and nominating committees targeted for massive Votes-No because of weak board diversity.

As the OPTIMIZER also predicted last year, Environmental and Social proposals scored a record number of majority and high-double-digit votes - nine majority votes and 18 others got support in the 40% range - and lots of others scored approvals in the 30%+ range.

Very important to note, we’d say, as Alliance also noted, “On the heels of three successful proposals last year, companies have been more willing to reach agreements with proponents on climate risk reporting, resulting in two-thirds of this year’s 2DS resolutions being withdrawn.”

Topping the majority vote list on E&S proposals, as Alliance reported, “were resolutions at Kinder Morgan (59.7%) and Anadarko Petroleum (53%) to report on how they are preparing for a 2° Celsius limit on global warming pursuant to the 2015 Paris Accord (aka the “2-degree scenario” or “2DS”).”

Five majority votes have been recorded on other environmental proposals, including reporting on coal ash risk (53.2% at Ameren), reporting on methane emissions management (50.3% at Range Resources), reporting on sustainability (60.4% at Kinder Morgan and 57.2% at Middleby), and setting goals for reducing greenhouse gas (GHG) emissions (57.2% at Genessee & Wyoming, where the board made no recommendation).

E&S proposals are continuing to gain traction FAST - not just with “professional investors” - who see clearly that “sustainability” and “good corporate citizenship/stewardship” DO create economic value - while mitigating operational and reputational risks, but… hello…most of the very best public companies get it too. And so do ordinary “retail voters” these days - who are wisely concerned about the environment - and about the “political climate” as well.

As Morgan Stanley’s Institute for Sustainable Investing pointed out in February, 2016 • 71% of individual investors are interested in sustainable investing • Millennial investors are nearly 2x more likely to invest in companies or funds that target specific social or environmental outcomes • Female investors are nearly 2x as likely as male investors to consider both rate of return and positive impact when making an investment • 65% of individual investors expect sustainable investing to become more prevalent in the next five years 75% of Americans feel that climate change and “sustainability issues” are highly important issues. 

OUR ADVICE TO ISSUERS: Pay attention to the big new trend in support of E&S proposals. Read the articles about best practices and procedures on easy-to-understand and compelling ESG disclosures in our last issue. Get hard copies, if you can, of the BofA and Pepsico 2018 proxy packages to see for yourselves the many things that made them among the very best ‘explainers’ of their positions on ES&G matters…and plan to adopt them as appropriate in your own 2019 materials. (While the web versions are OK in a pinch, the “look and feel” of the hard copy originals adds a lot of value for readers, we think.)

As we had predicted, the publication of this season’s new comparisons of CEO pay to that of the median employee had no discernable impact on Say-On-Pay votes, since they were impossible to compare - even among companies in the same businesses - and thus, conveyed mostly meaningless information as far as ratifying a pay plan is concerned.

But “Watch Out Below, Issuers”…Say-On-Pay (SOP) failures were on the rise:

Through May, average SOP support—at 91.2%—fell well behind the 2017 level for the same period (92.6%), while the failure rate more than doubled to 2%. Notably, there was a pronounced upswing in failures at S&P 500 firms, in most cases for the first time” the Alliance Advisors report noted. 

“These included Ameriprise Financial, Chesapeake Energy, Halliburton, Mattel, Mondelez International, Walt Disney and Wynn Resorts. In contrast, investors rejected SOP proposals at only one S&P 500 company (ConocoPhillips) during the first five months of 2017.”

OUR ADVICE TO READERS: Most of the S-O-P issues in 2018 revolved around insufficient “linkage” that large investors found between pay-programs and performance hurdles. Smart companies headed these off at the pass via their early outreach efforts, and those with failed SOPs had to capitulate fast - after suffering public embarrassment.

There were a few instances where the sheer magnitude of the 2018 pay numbers prompted a rebuke to the comp committee, but the biggest worry for companies in 2019 should be instances where CEO pay is markedly higher than CEO pay at better-performing peer companies.

As the OPTIMIZER has been noting for more than 10 years, thanks to basically off-the-shelf databases and screening techniques, it’s easier every year for investors to sort out and ID all of the outliers where

The bottom line: Early engagement actions - and early, math-oriented engagement on pay plans - and on gender and ethnic diversity - and on corporate culture and “workplace issues” - and on E&S issues too - should be the watchwords for 2019 - starting right now, we say.