Proxy Advisors and Investors Prep for 2017 Proxy Season

Shirley Westcott is a Senior Vice President at Alliance Advisors LLC. This post is based on an Alliance Advisors publication. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

As 2016 draws to a close, shareholder proponents and proxy advisors have begun laying the groundwork for the 2017 proxy season. Institutional Shareholder Services (ISS) and Glass Lewis recently released their U.S. voting policy updates which address a range of issues including directors’ outside board service, restrictions on the submission of binding shareholder proposals, governance provisions at newly public companies, and gender pay parity. [1] Although the revisions are marginal for most companies, ISS has also made some technical changes to its approach to executive and director compensation, which will be detailed in an upcoming FAQ.

Among shareholder campaigns, proxy access once again is shaping up to be the preeminent issue next year, though the focus of many proposals has shifted to secondary provisions. To date, 331 companies, including 47% of S&P 500 firms, have adopted proxy access, with 75% of their bylaws conforming to the popular “3/3/20/20” standard, whereby an aggregate of 20 shareholders owning at least three percent of the shares for three years may nominate up to 20% of the board, often with a two-director minimum.

Shareholder proponents are also teeing up a record volume of resolutions on climate change, along with another wave of requests for lobbying and political spending disclosure. Other emerging areas of focus include workplace diversity, prescription drug pricing, mutual fund voting practices, and various issues related to factory farms. These and other upcoming proxy season issues are summarized below.

Proxy Advisor Policy Changes

In mid-November, ISS and Glass Lewis issued their policy updates for the 2017 proxy season, which will be effective for annual meetings on or after February 1, 2017 (ISS) and January 1, 2017 (Glass Lewis). Overall, the key changes, which are discussed below, will impact only a limited number of U.S. companies.

Overboarded Directors (ISS and Glass Lewis)

ISS’s and Glass Lewis’s new policies on overboarded directors, which were announced last year, will take effect in 2017. ISS will recommend against directors who are not public company CEOs if they serve on more than five public company boards (the current limit is six), and against public company CEOs if they serve on more than three public company boards (the current limit). Glass Lewis will generally recommend against directors who are executive officers of public companies if they sit on more than two public company boards (the current limit is three), and against other directors who sit on more than five public company boards (the current limit is six). In applying their policies, the proxy advisors will not oppose overcommitted CEOs (ISS) or executives (Glass Lewis) at their home company boards.

In determining if a director’s service is excessive, Glass Lewis will consider other relevant factors:

  • The size and location of the companies,
  • The director’s board duties,
  • Whether the director serves on the board of any large privately-held companies,
  • The director’s tenure, and
  • The director’s attendance record.

Glass Lewis will also take into account whether the company provides sufficient rationale for an overextended director’s continued board service, including the scope of his commitments and his contributions to the board.

Impact on issuers: During 2016, ISS and Glass Lewis included cautionary language in their proxy reports of companies that would be impacted by this policy change. Therefore, affected directors have had a one-year grace period to make any adjustments to their board commitments. According to ISS QualityScore data, only 26 directors currently serve on more than five public company boards where at least one board is an S&P 1500 firm.

Issuers should, in any case, review their top holders’ policies regarding the optimal number of directorships, which may deviate from the views of the proxy advisors. Relatively few directors receive high opposition votes solely for being overboarded. According to ISS’s 2016 post-season report, only one director at a Russell 3000 company received less than majority support for holding too many board seats.

Unilateral Board Actions—Initial Public Offerings (ISS and Glass Lewis)

ISS is expanding its policy on adverse governance provisions at newly public companies to include multi-class capital structures with unequal voting rights. If adopted prior to or in connection with an initial public offering (IPO), ISS will recommend against individual directors, committee members, or the full board (except new nominees)—potentially on a continued basis— unless there is a “reasonable” sunset on the provision or until the provision is unwound. ISS will no longer accept a commitment by the company to seek shareholder approval of the provision within three years of the IPO.

In applying the policy, ISS will consider additional factors as follows:

  • The level of impairment of shareholders’ rights caused by the provision,
  • The disclosed rationale for adopting the provision,
  • Shareholders’ ability to change the governance structure in the future (e.g., supermajority requirements or other limitations on amending the charter/bylaws)
  • Shareholders’ ability to hold directors accountable through annual director elections, and
  • Other relevant factors.

Glass Lewis has clarified its approach to corporate governance at newly public entities by delineating the provisions it believes severely curtail shareholder rights:

  • Anti-takeover provisions such as a classified board or poison pill
  • Supermajority vote requirement to amend the charter/bylaws
  • Exclusive forum or fee-shifting provisions
  • No shareholder right to call special meetings or act by written consent
  • Plurality voting in director elections
  • No shareholder ability to remove directors without cause
  • Evergreen provisions in equity compensation plans

Pre-IPO boards that adopt any of these measures may face an adverse recommendation from Glass Lewis at their first annual meeting—either against the governance committee members or the directors who served at the time adoption, depending on the severity of the concern. Glass Lewis will make exceptions for companies that provide a sound rationale for adopting the measure or that commit to phasing out the provision or putting it to a shareholder vote at the first post-IPO annual meeting.

Impact on issuers: ISS’s policy change was prompted by the increase in companies going public with a multi-class capital structure. However, it will affect a relatively small number of firms. According to ISS, only 17 companies holding their first annual meeting in 2016 would have fallen into this category.

The revision also reflects more stringent approaches being taken by some institutional investors in regards to multi-class stock. For example, T. Rowe Price amended its voting policies in 2016 to oppose the lead director or independent board chair, as well as members of the governance committee, at any company that has dual-class stock with unequal voting rights. The Council of Institutional Investors (CII) also adopted a statement of investor expectations for IPOs that advocates sunsetting problematic governance features, such as multi-class capital structures with differential voting rights.

Restrictions on Binding Shareholder Proposals (ISS)

ISS will recommend against governance committee members at companies that have placed “undue” restrictions on shareholders’ ability to submit resolutions to amend the bylaws. These include an outright prohibition on the submission of binding shareholder proposals or imposing stock ownership and holding requirements beyond Rule 14a-8 requirements ($2,000 of stock held for one year) to submit such proposals. The negative recommendations will be ongoing until the restrictions are repealed.

Impact on issuers: The revision will largely be felt by Maryland-incorporated real estate investment trusts (REITs). Maryland law permits REITs to vest the right to amend the bylaws solely in the board and not shareholders. According to ISS, two-thirds of Maryland REITs take advantage of this provision. In recent years, labor activists such as UNITE HERE have launched campaigns at REITs that do not provide shareholders with the right to amend the bylaws. Some companies have responded by offering alternative management proposals that would require higher stock ownership and/or holding periods for shareholders to submit a binding resolution. [2]

Gender Pay Equity (Glass Lewis)

Glass Lewis has codified its policy on shareholder resolutions calling for increased disclosure of company efforts to reduce gender pay gaps. Glass Lewis will evaluate these proposals on a case-by-case basis, taking into account the following factors:

  • The company’s current policies, efforts and disclosure with regard to gender pay equity,
  • The practices and disclosures of company peers, and
  • Any relevant legal and regulatory actions at the company.

Glass Lewis will consider supporting well-crafted shareholder resolutions requesting more disclosure if the company has not adequately addressed gender pay disparities and there is credible evidence that such inattention poses a risk to the company and its shareholders.

Impact on issuers: Gender pay equity is expected to be an ongoing focus of environmental and social (E&S) investors. During 2016, Arjuna Capital and Pax World Management targeted nine Silicon Valley firms with proposals to report on company policies and goals to reduce gender pay disparities. Seven of the firms agreed to make their pay gap public and take steps to close it, including eBay, where the proposal received majority support. Building off this year’s successful engagements, the proponents are refiling their resolutions at the two tech sector holdouts—Alphabet and Facebook—and expanding their campaign to banks, financial services firms, and retailers.

Board Evaluation and Refreshment (Glass Lewis)

In a guideline clarification, Glass Lewis states its preference for a robust board evaluation process rather than age or tenure limits for promoting board refreshment. Per its current policy, Glass Lewis may recommend against the nominating and/or governance committee members for waiving any term or age limits in effect without sufficient explanation.

Capital Authorizations (ISS)

ISS clarified the wording of its capital authorization policy. ISS will generally support increases in authorized common shares for stock splits and stock dividends as long as the “effective increase” in authorized shares (rather than the “increase”) is within the allowable cap under ISS’s common stock authorization policy.

Pay-for-Performance Methodology (ISS)

ISS will continue to evaluate misalignments between CEO pay and performance using total shareholder return (TSR). However, it will supplement this with six additional financial metrics: return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow from operations growth. Beginning February 1, 2017, ISS’s U.S. proxy research reports will contain a standardized table comparing a company’s three-year CEO pay and financial performance ranking, based on a weighted average of the six metrics, to its ISS-defined peer group.

Impact on issuers: The new financial metric comparisons will be referenced in ISS’s qualitative PFP review, but will not affect its quantitative screening results, at least during the 2017 proxy season. In ISS’s recent policy survey, investors and issuers expressed strong support for using metrics beyond TSR in PFP evaluations.

Director Compensation (ISS)

ISS is expanding its framework for evaluating non-employee director (NED) compensation to include eight qualitative factors, listed below. These will apply to management proposals to ratify NED compensation and to NED-specific equity plans that exceed the applicable shareholder value transfer (SVT) or burn rate benchmarks.

  • The relative magnitude of director compensation as compared to companies of similar profile,
  • The presence of problematic pay practices relating to director compensation,
  • Director stock ownership guidelines and holding requirements,
  • Equity award vesting schedules,
  • The mix of cash and equity-based compensation,
  • Meaningful limits on director compensation,
  • The availability of retirement benefits or perquisites, and
  • The quality of disclosure surrounding director compensation.

Impact on issuers: The change was prompted by the growing number of companies that are seeking shareholder ratification of NED pay programs to avoid potential lawsuits alleging excessive director pay. The qualitative factors are largely consistent with those currently used by ISS in evaluating NED equity plans.

Cash and Equity Plan Amendments (ISS)

ISS is clarifying its policy on amendments to cash and equity incentive plans. ISS will generally support amendments to administrative features of the plan, as well as plan amendments that require shareholder approval under Section 162(m) of the Internal Revenue Code, as long as the administrating committee consists entirely of independent directors.

ISS will review plan amendments on a case-by-case basis if they bundle material amendments with those for 162(m) purposes, or if the plan is being presented to shareholders for the first time since the company’s IPO. Equity plan amendments that increase the transfer of shareholder value to employees will be assessed using both the Equity Plan Scorecard (EPSC) approach and an analysis of the overall impact of the amendments.

Equity Incentive Compensation Plans (ISS)

ISS made several adjustments to its EPSC factors for evaluating equity-based compensation plans:

  • Dividends payable prior to award vesting is being added as a new factor under plan features. Full points will be earned if the plan expressly prohibits the payment of dividends on unvested awards (accrual of dividends payable upon vesting is acceptable). No points will be given if the plan is silent on the matter or incomplete (i.e., the prohibition is not applicable to all award types).
  • Modifications were made to the minimum vesting factor. ISS will only give full credit on this factor if the plan contains a one-year minimum vesting period on all award types and cannot be overridden in individual award agreements.

Shareholder Proposals

Proxy Access

In an effort to curb “lite” versions of proxy access and avoid substantial implementation challenges, James McRitchie, John Chevedden, Kenneth Steiner, and Myra Young introduced two new proposal variations this fall. The first type of resolution seeks specific amendments to existing proxy access bylaws. [3] The second requests companies to adopt a proxy access bylaw with certain “essential elements for substantial implementation.” [4] All of the proposals call for some combination of the following: a 3%/3-year ownership threshold, unlimited group aggregations, a 25% board seat cap with a two-director minimum, no post-meeting shareholding requirement, counting recallable loaned shares in the ownership threshold, and no restrictions on the renomination of access candidates based on voting support.

Notwithstanding the new proposal language, recent SEC no-action letters confirm that companies may exclude resolutions to adopt proxy access as substantially implemented if they subsequently institute a proxy access bylaw that meets the proposal’s essential objective—namely, a 3%/3-year eligibility requirement. During the 2016 proxy season, nearly 22% of proxy access proposals were omitted on this basis.

In contrast, to date only one issuer—Oshkosh—has been allowed to omit a retail investor resolution under Rule 14a-8(i)(10) seeking to amendthe terms of a previously adopted proxy access bylaw. [5] In response to the filing, Oshkosh implemented half of the requested changes, including reducing the ownership threshold from 5% to 3%, eliminating the one-year post-meeting shareholding period, and rescinding the 25% support threshold for renomination of access candidates. However, the company did not comply with the proponent’s request to permit unlimited group aggregations, remove the power-to-recall requirement for loaned shares, and raise the board seat cap from 20% to 25% with a two-director minimum. The SEC concluded that Oshkosh’s revised bylaw compared favorably with the guidelines of the shareholder proposal, though it is unclear which of the changes were essential to that decision. [6]

In view of these no-action responses, companies that already have proxy access in place should expect a surge of resolutions in 2017 from retail investors to make amendments to their bylaws. Because of the uncertainty surrounding exclusion, companies that receive “fix-it” proposals should consult their major shareholders before modifying any provisions. Those that go to a vote will in all likelihood fare poorly. During the 2016 proxy season, proposals with similarly prescriptive features sponsored by corporate gadflies failed at every company that had adopted a 3/3/20/20 bylaw. “Fix-it” proposals at H&R Block, Microsoft, and Reed’s received only 29.9%, 26.8%, and 33% to avoid negative recommendations against directors. [7]

According to an August report, ISS opposed the governance committee members at two companies this year—CBL & Associates and Cheniere Energy—for not adequately responding to a 2015 resolution that received majority support. [8] Although the firms had adopted bylaws conforming to the standard 3/3/20/20 formulation, ISS took issue with restrictive secondary provisions without any rationale or disclosure of shareholder engagement efforts, coupled with a supermajority requirement for shareholders to amend the bylaws.

Finally, the first occurrence of a proxy access nominee materialized in November at National Fuel Gas. The board ultimately rejected the nomination after concluding that the nominator—GAMCO Asset Management—possessed an intent to change or influence control of the company, contrary to the terms of the proxy access bylaw. The nominee was subsequently withdrawn. Nevertheless, this serves as a reminder that issuers that have proxy access in place will need to be vigilant of their shareholder base and any serious investor concerns. support, respectively, notwithstanding the endorsement of ISS (Glass Lewis opposed them). Companies responding to majority votes on proxy access should be mindful of ISS’s guidelines, in order

Other Shareholder Initiatives

Climate change will headline next year’s E&S campaigns, spurred by the prospect of a rollback in environmental regulations by President-elect Donald Trump. According to Ceres, U.S. companies will face a record 200 resolutions on climate matters in 2017, compared to 174 such resolutions during 2016.

Mutual funds are among those being challenged this year, specifically over incongruities between their voting records and their stated positions on climate change. E&S investors have submitted proxy voting review resolutions at five financial firms—Bank of New York Mellon, BlackRock, Franklin Resources, JPMorgan Chase, and T. Rowe Price Group—while McRitchie has begun investing in various fund companies in order to file similar resolutions in the future. [9] In view of these pressures, issuers should be attentive to any changes to their investors’ voting policies and practices. For example, Fund Votes reported that State Street backed 51% of shareholder resolutions on climate change this year at S&P 500 companies, compared to only 14% in 2015.

Agribusinesses are facing greater scrutiny as well over environmental and public health risks. This year, E&S proponents are reprising resolutions on water stewardship, food waste, deforestation, and antibiotic resistance, and have launched a new initiative calling on global food corporations to cut their reliance on meat and diversify into plant-based sources of protein.

E&S activists are also expanding their diversity agendas in 2017 from the boardroom to the workplace and suppliers. Trillium Asset Management has filed proposals at nine financial and technology companies to issue workforce diversity reports, which would include a breakdown of employees by race and gender across 10 employment categories and disclosure of company policies for increasing diversity in the workplace.

Trillium has additionally targeted BlackRock with a new proposal to explain its lack of support for resolutions to protect LGBT employees from workplace discrimination. Separately, the New York City Pension Funds sent letters this fall to 16 portfolio companies to establish and disclose supplier diversity goals to include businesses owned by minorities, women, LGBT individuals, veterans, and disabled individuals. [10] A similar letter-writing campaign in 2014 resulted in over half of the 20 recipients increasing disclosure of their supplier diversity programs and progress.

Also on the horizon is a revival of proposals on prescription drug pricing—last seen on proxy ballots in 2015—and on reinstating in-person annual meetings— last submitted in 2014. Additional shareholder resolutions in the pipeline are noted in the accompanying table.

Other reforms are being pursued off-ballot. Through letters, the Council of Institutional Investors (CII) and California Public Employees’ Retirement System (CalPERS) are continuing their advocacy of majority voting in director elections at mid- and small-cap companies, while the United Brotherhood of Carpenters’ Pension Fund is in its fifth year of promoting enhanced disclosures on auditor independence. [11] Various investors are also urging more engagement with issuers on capital allocation strategies—particularly stock buybacks—and on proxy fight settlements in order to preserve long-term value. [12]

Looking Ahead

Aside from annual meeting matters, the incoming Trump Administration hopes to dismantle much of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Coupled with the imminent departure of SEC Chair Mary Jo White, further rulemaking on executive pay mandates will grind to a standstill. Proposed rules on mandatory clawbacks, PFP disclosures, hedging policies, and, more recently, universal proxy ballots could ultimately be modified or eliminated, along with the controversial CEO pay ratio rule, which is scheduled to take effect in 2018. In all, 2017 will usher in an array of changes and challenges, and Alliance Advisors will keep issuers apprised of developments as they unfold.


1ISS’s 2017 policy updates at See Glass Lewis’s 2017 policy updates at back)

2For example, in 2016, Chesapeake Lodging Trust countered a UNITE HERE proposal with a management resolution to allow holders of 0.015% of the stock for one year to submit proposals to adopt, amend or repeal bylaws. The company proposal was defeated.(go back)

3To date, these have been filed at Apple, H&R Block, Microsoft, Oshkosh, United Natural Foods, Walgreens Boots Alliance, Walt Disney, and Whole Foods Market. The resolutions typically call for the adoption of a “proxy access enhancement package” of amendments to existing bylaws with “essential elements for substantial implementation.”(go back)

4To date, these have been filed at Berry Plastics Group, Cisco Systems, Costco Wholesale, Reed’s, and WD-40.(go back)

5 The SEC denied H&R Block, Microsoft, Walgreens Boots Alliance, Walt Disney, and Whole Foods Market no-action relief under Rule 14a-8(i)(10) on the basis that their existing 3/3/20/20 bylaws did not compare favorably with the guidelines of the shareholder proposal. Walgreens, Walt Disney, and Whole Foods were also unsuccessful in omitting the proposals under Rule 14a-8(c)—namely, that the filings constituted separate proposals with no single well-defined unifying concept.(go back)

6During the 2016 proxy season, NVR was granted no-action relief under Rule 14a-8(i)(10) after it made changes to its proxy access bylaw sought by the New York City Comptroller. These included reducing the ownership threshold from 5% to 3% and increasing the timeframe for recalling loaned shares in order to count as owned. However, NVR did not implement the proposal’s other provisions—eliminating the group aggregation limit or the one-year post-meeting shareholding requirement.(go back)

7See ISS’s March 14, 2016 FAQ at To date, 21 out of 42 companies have implemented 2016 proxy access proposals that received majority support. Only one firm—Old Republic International—has declined to adopt proxy access despite the majority vote. The company believes its current system of corporate governance has effectively served the long-term interests of shareholders.(go back)

8ISS reversed its negative recommendation on Cloud Peak Energy’s governance committee members after the company amended its proxy access bylaw to increase the board seat cap from 20% to 25%, eliminated the 20-shareholder aggregation limit, and removed other secondary provisions that ISS considered to be overly restrictive. See and here. ISS also opposed the full boards at Nabors Industries and Netflix for not taking steps to implement a 2015 majority vote on proxy access.(go back)

9See McRitchie filed and ultimately withdrew a proxy voting review resolution at BlackRock in 2016.(go back)

10See here.(go back)

11See more on the CII, CalPERS, and Carpenters initiatives herehere, and back)

12See more on the “Share Buybacks Disclosure Initiative”  here. See State Street Global Advisors’ framework on settlement agreements at back)

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