Hot Issues for 2018 Proxy Season Preparation
Ron Schneider, Director of Corporate Governance Services, Donnelley Financial Solutions
Some emerging issues and accelerating trends in 2017 point the way for how the 2018 proxy season may go, and how companies should be preparing for what lies ahead.
While investors continue to be interested in company governance structures, shareholder rights and executive compensation, there is an intensifying focus on board diversity in many areas, gender among them, and on corporate sustainability and the potential impact of climate change on shareholder value.
The charge for greater transparency is being led not just by traditional activist investors, but by more mainstream, long-term indexed investors, including BlackRock, Vanguard and State Street Global. Known as “passive” investors (because of how they structure their portfolios) and generally not considered “activists,” they nevertheless do practice a brand of active oversight of their portfolio companies under the umbrella of investment stewardship. As investors continue to pour more money into low-cost indexed funds and ETFs, their clout continues to grow. Large institutional investors have many arrows in the stewardship quiver and have demonstrated a willingness to use them all. These arrows include:
• Writing letters to CEOs. BlackRock Founder, Chairman, and CEO Larry Fink’s recent letter to company CEOs, urging them to consider their impact on society, as well as their ability to maximize profits, is an excellent example.
• Assembling engagement teams that seek conversations with company managements and boards, • Sponsoring shareholder proposals,
• Supporting the proposals of others,
• Critically evaluating management proposals, and
• Participating in well-thought-out activist campaigns.
What they will NOT do and what their investment discipline does NOT allow is simply selling a stock because of displeasure over how a company is run.
Companies, in turn, are doing the following:
• Maintaining dialogue and relationships with major investors. Those companies that have not yet spoken with institutional investors should consider initiating contact soon, rather than waiting until an activist is knocking at their door.
• Improving the transparency of their strategies, corporate governance, board, executive compensation and ESG profile, through all relevant channels and documents.
• Treating the proxy as a one-stop shop for much of this contextual information, as they hear investors say: “If you want us to consider something when voting, make sure it’s in the proxy.”
One new item worth noting is that in their 2018 proxies, most established companies will include their first CEO-tomedian-employee-pay-ratio disclosure. While it is not yet clear how investors and proxy advisors will react to, and utilize, this information, these disclosures are expected to gain significant attention from organized labor, from media seeking story ideas, and from general employees (half of whom will, by definition, realize that they are paid less than their company’s median employee). How this Year One experience goes will indicate what path companies should take with these disclosures in Year Two.
Each year at Donnelley, we are seeing more companies that treat the proxy as an investor-focused communications piece, rather than an SEC-focused disclosure document. These companies are incorporating more business context into the proxy, including a rationale for why their board has the right mix of skills and why their compensation program is designed to support achievement of company strategies. In addition, companies are adding more branding, visual elements, and navigational tools.
Leading companies also are focusing on the mix of their investor base and fine-tuning how they distribute governance and other critical messages. Most major institutional investors prefer to view the proxy on line and treat it more as a reference than a reading document. For this reason, some companies have begun to create enhanced, interactive, online versions of their printed/filed proxies. Bear in mind that institutional investors vote the vast majority of their shares on every proposal, at every meeting -- the question is not whether they will vote, but how they will vote.
For individual investors, the dynamic is largely reversed, with many perusing the proxy and annual report from front to back. This group is highly likely to support the companies that they own. The question is: Will they vote at all?
On this point, whatever preference individual investors may express for how they wish to receive proxies, annual reports, and other shareholder materials, statistics consistently show that the typical retail investor is much more likely to vote when he or she receives hard-copy proxy materials rather than notices of internet availability.
For this reason, many companies that could use notice and access do not choose to do so in proxy fights simply because the stakes are too high. Increasingly, the same can be said for director elections and Say-on-Pay proposals. Some companies, recognizing that activism could strike at any time, seek to build and maintain a “culture of retail voting,” trying to cultivate strong retail voting returns every year so that they are more likely to maintain high levels of investor support if and when challenges arise.
Many companies are not yet confronted by these issues, and are thus far successfully flying beneath the radar. And these companies may succeed at this for the near future, but it’s important to remember that “hope is not a strategy.”
In the end, even companies that have seemed immune to contentious issues and controversial shareholder proposals should at least take initial steps at engaging with investors. By learning their investors’ informational needs and seeking to improve the clarity and digestibility of their proxy and other shareholder materials, companies move towards more positive engagement and building lasting relationships that may prove critical over time.