The Recent Evolution of Shareholder Activism

Matteo Tonello is vice president at The Conference Board. This post relates to a report released jointly by The Conference Board and FactSet, authored by Dr. Tonello and Melissa Aguilar of The Conference Board. The Executive Summary is available here (the document is free but registration is required). For details regarding how to obtain a copy of the full report, contact [email protected].

Proxy Voting Analytics (2010-2014), a report recently released by The Conference Board in collaboration with FactSet, reviews the last five years of shareholder activism and proxy voting at Russell 3000 and S&P 500 companies.

Data analyzed in the report includes:

  • Shareholder activism, including proxy fights, exempt solicitations, and other public agitations for change.
  • Most frequent activist funds and their tactics.
  • Volume, sponsors, and subjects of shareholder proposals.
  • Voted, omitted, and withdrawn shareholder proposals.
  • Voting results of shareholder proposals.
  • Shareholder proposals on executive compensation.
  • Shareholder proposals on corporate governance.
  • Shareholder proposals on social and environmental policy.
  • Volume and subjects of management proposals.
  • Failed say-on-pay proposals among Russell 3000 companies.
  • Say-on-pay proposals that received the support of less than 70 percent of votes cast.

Additional insights (including volume by index, industry, and sponsor, most frequent sponsors, and support levels) are offered with respect to key issues from the last few proxy seasons, including: majority voting; board declassification; supermajority vote requirements; independent board chairmen; proxy access; sustainability reporting; political issues; election of dissident’s director nominee.

The report pays special attention to trends and developments that have emerged in the last few months. In fact, what started as an unremarkable proxy voting season has blossomed into a series of developments that may influence annual general meetings for years to come.

There is a clear indication that activist investors are turning their attention to new issues. For example, in the Russell 3000, five investor-sponsored proposals restricting golden parachutes received the support of a majority of shareholders. While the volume remains low, it is the highest ever recorded on this topic and it signals that voting on executive compensation issues other than say on pay can still find its way to general meetings of shareholders. Political spending and lobbying activities, a topic virtually absent from voting ballots until a few years ago, became the most frequently submitted shareholder proposal type of 2014, with 86 voted proposals and five receiving more than 40 percent of votes cast (compared to only one in 2013). Finally, support for resolutions on proxy access reached a tipping point in the first six months of the year, with five proposals approved and four receiving more than 40 percent of votes cast in favor.

The advisory vote on executive compensation was a game changer for corporate/investor relations and, in 2014, more than ever before, shareholders have been pursuing opportunities to engage with senior management and be heard ahead of a shareholder meeting. This trend was reflected in the rate of withdrawals of shareholder proposals, which doubled from a few years ago as companies chose to preempt a vote on certain investor requests by voluntarily implementing their own reforms. It was not all a product of engagement, however, and guidelines on board responsiveness from proxy advisory firm ISS also drove the surge of management proposals on issues previously raised by activists.

Increased dialogue with senior executives and board members as well as the progress made by many large companies in the adoption of baseline corporate governance practices prompted large institutional investors to reconsider their role as agents of corporate change. For example, while some public pension funds such as the California State Teachers Retirement System (CalSTRS) cut back significantly on their submissions in 2014, others such as the New York City Employees’ Retirement Systems remained prolific proponents and galvanized around proxy access requests. Similarly, the popularity of social and environmental policy issues observed this year is in part explained by the larger number of proposals filed by labor-affiliated investment funds, which, before the introduction of mandatory say on pay, had always concentrated on executive compensation issues. Despite the traditional focus of this type of fund on industrial sectors, in 2014, for the first time, more than 20 percent of the 86 proposals submitted by labor unions were directed at companies in the finance industry.

Social media and other new technologies allow a broad outreach that was unimaginable only a few years ago, and activists are perfecting their use. This year, a growing number of activist investors, especially hedge funds, have agitated for change without even filing a shareholder proposal, let alone waging a proxy fight. Despite the increase in activism campaign announcements, there was a sensible decline in the number of campaigns related to shareholder meetings held in the first six months of 2014. This decline suggests that, rather than urge other shareholders to oppose a director election or vote for a certain resolution, these activism campaign announcements now serve to publicize the investor’s view of the business strategy or organizational performance. It is a first step that may lead to the future filing of a proposal or the solicitation of proxies but that may also prove sufficient to persuade the company to seek dialogue and reach a compromise.

The following are the major findings of the report:

  • Although activism campaign announcements in the Russell 3000 were up in 2014, the number of campaigns related to a shareholder meeting declined, as some hedge funds chose to agitate for change without even filing a shareholder proposal.
  • Observations made in 2013 that hedge funds were starting to set their sights on larger companies appear disputed by numbers for 2014, when a sharp decline in activism campaign volume was recorded among S&P 500 companies.
  • Proxy contests were the only type of activist campaign related to a shareholder vote to increase among Russell 3000 companies in 2014, with a concentration in the retail trade and finance industries, and dissidents reported their highest success rates in years.
  • Engagement between corporations and investors has not curbed the most hostile forms of activism, as the volume of proposals to elect a dissident’s nominee remains fairly high.
  • Shareholder proposal volume was slightly lower this year, with a sharper decline among larger companies as investors focus on new topics and broaden their targets.
  • Excess cash on US companies’ balance sheets fueled the growth of the activist hedge fund industry, and the number of resolutions sponsored by hedge funds surpassed the record levels of 2008.
  • The 2014 proxy season marked another sharp year-over-year decline in the number of proposals submitted by multiemployer investment funds affiliated with labor unions, as those investors showed new interests, especially in social and environmental policy issues.
  • Proposals on corporate governance, once a stronghold for pension funds, were sharply reduced as more companies introduced engagement policies with large investors.
  • Shareholder resolutions on social and environmental policy rose to unprecedented levels, while some institutional investors dropped governance issues that were a staple of their past activity but never garnered widespread support.
  • The rate of withdrawals of shareholder proposals doubled from a few years ago as companies preempted some of the issues by voluntarily implementing their own reforms.
  • As large groups of institutional investors reduced their 14a-8 filings or shifted their attention to new and less popular topics, the percentage of voted proposals winning the support of a majority of shareholders reached a new low.
  • Proposals on board declassification and majority voting have become a sure bet for labor unions and public pension funds, as they are widely recognized as a baseline in corporate governance.
  • A surge in requests from corporate gadflies made the separation of CEO and chairman roles the top shareholder proposal topic by volume, but the institutional investment community remains skeptical of a one-size-fits-all approach to board leadership.
  • For the first time in the same proxy season, five investor-sponsored proposals restricting golden parachutes received majority support, signaling that voting on executive compensation issues other than say on pay may still find its way to the AGM.
  • Shareholder proposals on political spending and lobbying activities skyrocketed this year, with five receiving more than 40 percent of votes cast (compared to only one in 2013).
  • Support for shareholder proposals on proxy access rights reached a tipping point in 2014, with five proposals approved and four others receiving the support of more than 40 percent of votes cast, and a handful of companies submitted board-sponsored proposals.
  • Say-on-pay analysis confirms a significant turnover in failed votes, with several companies losing the confidence of their shareholders this year after winning the vote by a wide margin in 2013.
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