Tag: ISS


Is Proxy Access Inevitable?

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update by Ms. Gregory, John P. Kelsh, Thomas J. Kim, Rebecca Grapsas, and Claire H. Holland. The complete publication, including footnotes, is available here. Related research from the Program on Corporate Governance about proxy access include Lucian Bebchuk’s The Case for Shareholder Access to the Ballot and The Myth of the Shareholder Franchise (discussed on the Forum here), and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Efforts by shareholders to directly influence corporate decision-making are intensifying, as demonstrated by the significant increase over the past three years in financially focused shareholder activism and the more recent efforts by large institutional investors to encourage directors to “engage” with shareholders more directly.

Through the collective efforts of large institutional investors, including public and private pension funds, shareholders at a significant number of companies are likely within the next several years to gain the power to nominate a portion of the board without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials) activists and other shareholders will have an additional weapon in their arsenal to influence board decisions.
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2015 Proxy Season Review

Janet T. Geldzahler is of counsel and Marc Trevino is a partner at Sullivan & Cromwell LLP. This post is based on the Summary of a Sullivan & Cromwell publication; the complete publication is available here.

Our 2015 Proxy Season Review summarizes significant developments relating to shareholder proposals to date during the 2015 proxy season. Although shareholder activists pursuing strategic or management changes continue to dominate the headlines, they do not choose to wage those campaigns through shareholder proposals made under Rule 14a-8, which are addressed by the complete publication, choosing instead private or public pressure, and often a threatened or actual proxy contest. Nonetheless, the widespread governance changes brought about through successful 14a-8 proposals have played no small part in the continued growth and success of shareholder activism.

During the 2015 proxy season, proxy access has been the most significant development. Far more proposals have been made and support has been substantially stronger. There have been 82 proxy access proposals to date in 2015, as opposed to 17 in all of 2014. In 2015, shareholders have approved 48 proposals to date (as opposed to five for all of 2014), and the average votes cast in favor have risen to 55% from 33% in 2014. Perhaps most significantly, modestly more restrictive management-enacted proxy access provisions apparently did not deter shareholders from proposing, and, in many cases, winning on the now standard shareholder proposal format of 3%/3-year/25% of board.

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The Changing Dynamics of Governance and Engagement

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

As anticipated, the 2015 proxy season has been the “Season of Shareholder Engagement” for U.S. public companies. Activist attacks, high-profile battles for board seats, and shifting alliances of major investors and proxy advisors have created an environment in which shareholder engagement is near the top of every well-advised board’s to-do list. There is no shortage of advice as to how, when, and why directors should pursue this agenda item, and there is no doubt that they are highly motivated to do so. Director engagement is a powerful tool if used judiciously by companies in service of their strategic goals. As companies and their advisors study the lessons of the recent proxy season and look ahead, it is worth examining recent shifts in corporate governance dynamics. With an awareness of the general trends, and by taking specific actions as appropriate, boards can prepare and adapt effectively to position themselves as well as possible to achieve their strategic objectives.

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Some Lessons from DuPont-Trian

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here) and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

The ISS Report on the DuPont-Trian proxy contest calls attention to a number of important insights into ISS policies and practices and those of many of its institutional investor clients. Concomitantly, these policies illustrate the realities of the sharp increase in activist activity and the steps corporations can, and should, take to deal with the activist phenomena.

ISS and major institutional investors will be responsive to and support well-presented attacks on business strategy and operations by activist hedge funds on generally well managed major corporations, even those with an outstanding CEO and board of directors.

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Do Proxy Advisors Say On Pay Voting Policies Improve TSR?

The following post comes to us from Pay Governance LLC and is based on a Pay Governance memorandum by Ira Kay, Brian Johnson, Brian Lane, and Blaine Martin.

The vast majority—98%—of companies have passed their annual say on pay votes (SOP) over the past four years. Proxy advisor voting recommendations remain highly influential on these votes, and many companies, perhaps hundreds, have changed the structure of their executive pay programs to try to comply with proxy advisor policies and to obtain a “FOR” SOP vote recommendation from proxy advisors. Proxy advisors base voting recommendations on quantitative and qualitative tests that are highly tailored to their own perspective of and guidance on what comprises a successful executive pay model. [1] Are these voting recommendations correlated with long-term shareholder value creation as measured by total shareholder returns (TSR)? While correlation does not prove causation, what possible explanations may explain the correlation observed in our research?

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Proxy Advisors Clarify Proxy Access and Bylaw Amendments Voting Policies

The following post comes to us from Ariel J. Deckelbaum, partner and deputy chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum.

On the heels of SEC Chair White’s direction to the Division of Corporation Finance to review its position on proxy proposal conflicts under Exchange Act Rule 14a-8(i)(9), both Institutional Shareholder Services (“ISS”) and Glass Lewis have issued clarifying policies on proxy access, entering the fray of what is becoming the hottest debate this proxy season. The publication of ISS’s updated policy in particular means that market forces may have outpaced the SEC’s review process. In order to avoid risking a withhold or no-vote recommendation from ISS against their directors, many companies will be faced with the choice of (i) including any shareholder-submitted proxy access proposal in their proxy materials (either alone or alongside a management proposal) (ii) excluding the shareholder submitted proposal on the basis of a court ruling or no-action relief from the Division of Corporation Finance on a basis other than Rule 14a-8(i)(9) (conflict with management proposal) or (iii) obtaining withdrawal of the proposal by the shareholder proponent.

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2015 US Compensation Policies FAQ

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). This post relates to ISS compensation policy guidelines for 2015. The complete publication is available here.

US Executive Pay Overview

1. Which named executive officers’ total compensation data are shown in the Executive Pay Overview section?

The executive compensation section will generally reflect the same number of named executive officer’s total compensation as disclosed in a company’s proxy statement. However, if more than five named executive officers’ total compensation has been disclosed, only five will be represented in the section. The order will be CEO, then the second, third, fourth and fifth highest paid executive by total compensation. Current executives will be selected first, followed by terminated executives (except that a terminated CEO whose total pay is within the top five will be included, since he/she was an within the past complete fiscal year).

2. A company’s CEO has resigned and there is a new CEO in place. Which CEO is shown in the report?

Our report generally displays the CEO in office on the last day of the fiscal year; however, the longer tenured CEO may be displayed in some cases where the transition occurs very late in the year.

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Proxy Access, SEC Uncertainty and Related Issues in 2015

The following post comes to us from Bill Libit, Chief Operating Partner concentrating in corporate and securities and municipal finance at Chapman and Cutler LLP, and is based on a Chapman publication by Mr. Libit and Todd Freier; the complete publication, including footnotes, is available here.

The rise of shareholder activism in the realm of corporate governance has increasingly focused on board performance and the right of shareholders to replace those directors who are perceived to underperform. One proposed approach to facilitate the replacement of underperforming directors is to give shareholders direct access to the company’s proxy materials, including permitting the inclusion of a shareholder-proposed director nominee (or slate of nominees) and a statement in support thereof in the company’s proxy statement (which such approach is more commonly referred to as “proxy access”). Although current U.S. securities regulations do not grant shareholders access to company proxy materials, proxy access may be available to shareholders by way of a company’s organizational documents (e.g., articles of incorporation, bylaws or corporate governance guidelines), as permitted by state corporate law.

While proxy access did not garner significant attention over the past two proxy seasons, it is one of the most notable early developments of the 2015 proxy season. It has been reported that shareholders have submitted an estimated 100 proxy access proposals to U.S. companies, a considerable number of which will be voted upon by shareholders over the next several months. Proxy access will very likely be one of the most contentious corporate governance issues this proxy season.

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Understanding Director Elections

The following post comes to us from Yonca Ertimur of the Accounting Division at the University of Colorado at Boulder; Fabrizio Ferri of the Accounting Division at Columbia University; and David Oesch of the Department of Financial Accounting at the University of Zurich.

In the paper Understanding Director Elections: Determinants and Consequences, which was recently made publicly available on SSRN, we provide an in-depth examination of uncontested director elections. Using a hand-collected and comprehensive sample for director elections held at S&P 500 firms over the 2003–2010 period, we examine the factors driving shareholder votes in uncontested director elections, the effect of these votes on firms’ actions and the impact of these actions on firm value. We make three contributions.

First, it is well known that recommendations by the proxy advisory firm Institutional Shareholder Services (ISS) play a key role in determining the voting outcome. Yet, the question of what factors drive ISS recommendations and, thus, shareholder votes in uncontested director elections remains largely unanswered. To fill this gap, we use the reports ISS releases to its clients ahead of the annual meeting and identify the specific reasons underlying negative ISS recommendations. We find that 38.1% of the negative recommendations target individual directors (reflecting concerns with independence, meeting attendance and number of directorships), 28.6% target an entire committee (usually the compensation committee), and the remaining 33.3% target the entire board (mostly for lack of responsiveness to shareholder proposals receiving a majority vote in the past). A withhold recommendation by ISS is associated with about 20% more votes withheld, in line with prior research. More relevant to our study, there is substantial variation in votes withheld from directors conditional on the underlying reason. A board-level ISS withhold recommendation is associated with 25.48% more votes withheld, versus 19.73% and 16.44%, respectively, for committee- and individual-level withhold recommendations. The sensitivity of shareholder votes to ISS withhold recommendations is higher when there are multiple reasons underlying the withhold recommendation for the director (a proxy for more severe concerns) and at firms with poorer governance structures. These results suggest that shareholders do not blindly follow ISS recommendations but seem to take into account their rationale, their severity and other contextual factors (e.g. governance of the firm). However, cases of high votes withheld without a negative proxy advisor recommendation are rare, suggesting that voting shareholders only focus on the issues singled out by proxy advisors, potentially at the expense of other value-relevant factors (e.g. directors’ skill set, expertise and experience) for which proxy advisors have not (yet) developed voting guidelines (perhaps due to lack of sophistication or the inherent complexity of the issue).

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Director Tenure: A Solution in Search of a Problem

The following post comes to us from Scott C. Herlihy, partner in the Corporate Department at Latham & Watkins LLP, and is based on an article by Mr. Herlihy, Steven B. Stokdyk, and Joel H. Trotter that originally appeared in NACD’s Directorship magazine.

Director tenure continues to gain attention in corporate governance as term limits become a cause célèbre. Proponents argue directors should no longer qualify as independent after 10 years of service, even though no law, rule or regulation prescribes a maximum term for directors.

We believe director term limits would be misguided and counterproductive. Institutional Shareholder Services (ISS) has increased its focus on the issue. ISS’ governance rating system, QuickScore, views tenure of more than nine years as an “excessive” length that potentially compromises director independence. ISS’ more moderate proxy voting guidelines, while opposing proposals for director term limits and mandatory retirement ages, indicates that ISS will “scrutinize” boards whose average tenure exceeds 15 years.

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