2018 Proxy Season Review

Marc Treviño is a partner and June Hu is an associate at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Treviño and Ms. Hu.

The complete publication (available here) summarizes significant developments relating to the 2018 U.S. annual meeting proxy season, including:

Rule 14a-8 Shareholder Proposals

  • Environmental/social/political proposals gain traction. Although shareholders submitted a consistent level of environmental/social/political (“ESP”) proposals as a percentage of all shareholder proposals submitted, there was a significant increase in the percentage withdrawn (for the first time surpassing the percentage going to a vote). This development appears primarily to reflect growing engagement by companies on a number of these issues, particularly anti-discrimination policies. Moreover, those going to a vote recorded a higher average percentage of votes cast in favor (more than 25% for the first time) and, notwithstanding the decline in the number of ESP proposals voted on, there was a marked increase in the number that passed (although still a low number). As in prior years, the vast majority of ESP proposals failed.

  • Fewer gender pay equity, equal employment opportunity and board diversity proposals reach shareholder vote stage. The increase in ESP withdrawals related primarily to proposals addressing these proposals that ultimately went to a vote fell to less than half the number in 2017 (but those that went to a vote received meaningfully higher average support than they did last year). Similarly, although the total estimated number of board diversity proposals submitted this year was only slightly lower than the number in 2017, the number voted on fell below half the number in 2017. No proposal relating to anti-discrimination policies or board diversity passed in 2018.
  • Overall pass rate for governance proposals declines significantly. After a consistent and significant downward trajectory from 2015 to 2017, the number of governance proposals that came to a vote in 2018 remained at levels comparable to 2017. However, a significantly lower number of governance proposals passed this year than in 2017, due in large part to a reduction in the relative number of proposals relating to proxy access, majority voting, board declassification and removal of supermajority vote proposals, each of which received average support of about 50% or more in both 2017 and 2018.
  • Increased focus on proposals to reduce special meeting thresholds. There was a significant increase in proposals to lower the ownership percentage required for calling a special meeting, typically from 25% to 10%. These proposals almost always went to a vote and generally received substantial support from shareholders (average support of 40%). Although these proposals remained largely unsuccessful, the number that passed increased compared to 2017. The overall level of support is particularly notable in light of the lack of support from two or more of the largest institutional investors.
  • Increased focus on proposals to adopt written consent. There was also a significant increase in proposals to adopt the right to act by written consent, which also almost always went to a vote and received average support of 42%, consistent with 2017. More of these proposals passed than last year, although representing a smaller proportion of the total number submitted.
  • Substantial reduction in proxy access proposals, with few going to a vote. Proposals to adopt proxy access that came to a vote in 2018 declined to a negligible amount. Continuing a trend that began in 2017, most companies receiving such proposals opted to adopt a market-standard proxy access bylaw before a vote. Half of the proposals that did come to a vote did not pass (due to idiosyncratic reasons).
  • Attempts to amend proxy access terms continue to be unsuccessful. All proposals that were voted on in 2018 to amend previously adopted proxy access bylaws, most often to remove or loosen restrictions on group size, failed.
  • Continued focus on independent chair. Proposals for the board to have an independent chair remained common and, as in the past, generally received significant support from shareholders (25% to 40%). However, once again, none of these proposals passed, confirming that a consistent majority of shareholders generally are satisfied that a sufficiently empowered lead independent director is an appropriate alternative to mandatorily separating the CEO and chair roles.
  • Despite recent scrutiny of dual class companies, number of proposals to eliminate dual class voting remains consistent with prior years. Between 2017 and 2018, major stock index compilers, such as the S&P Dow Jones Indices and FTSE Russell, have made policy changes that impact the eligibility of dual class companies for inclusion on their indices, and policy-makers also have issued several high-profile statements on the potential harms of dual class companies and the possibility of further regulatory scrutiny. However, the number of proposals in 2018 to eliminate supervoting shares (either by adopting a recapitalization plan for all equity securities to have one vote per share or by converting the supervoting shares into lower-vote shares) remained at a similar level and received a similar level of shareholder support (average support of 34%) as in 2017. As in prior years, none of these proposals passed.
  • Compensation-related proposals remain limited. Once again, there were very few executive compensation-related shareholder proposals, continuing a trend that began once mandatory say-on-pay became the main focus of executive compensation concerns. However, this year shareholders submitted more than twice the number of proposals seeking to link compensation to social issues, with 2017 (less than 20%), and none of these proposals passed.

Analysis of ISS Negative Recommendations Against Directors

  • Lack of responsiveness” continues to be most impactful recommendation. Our analysis of negative recommendations by Institutional Shareholder Services (“ISS”) in uncontested director elections indicates that directors who were seen as insufficiently responsive to a prior shareholder vote were those that were the most likely to receive less-than-majority support (with average shareholder support of only 64%). The total number of directors who received a negative recommendation on this basis in 2018 increased substantially (by almost four times), although responsiveness did not rank among the top reasons for a negative recommendation. Lack of responsiveness to a low say-on-pay vote was the second-most impactful recommendation (with average shareholder support of 70%). In addition, poor attendance (particularly at S&P 500 companies) continued to have a significant impact.
  • Independence issues remain most common basis but had limited impact. The most common basis for a negative ISS recommendation in 2018 related to independence issues. This rationale continued to have a limited impact, however, with directors in this category receiving average shareholder support of 88%.
  • Directors at newly public companies with adverse governance provisions continue to be subject to negative recommendations. The second most common basis for a negative ISS recommendation in 2018 related to adverse governance provisions at “newly public” companies not subject to a sunset. The average support level for directors in this category was 86%, suggesting that directors at these companies do not face significant risk of less-than-majority support.
  • New poison pill policy increases negative recommendations. New ISS policies regarding poison pill issues yielded many negative recommendations (the number of directors receiving a negative recommendation on this basis quadrupled from 2017). Directors in this category received average shareholder support of 77%, but only four received less-than-majority support (less than 4%).

Compensation-Related Matters

  • Continued strength on say-on-pay. Public companies continued to perform strongly on say-on-pay, with support levels averaging over 90% and less than 3% of companies receiving less-than-majority support. Our analysis of ISS negative recommendations on say-on-pay suggests the continued importance of a pay-for-performance model, and that the most important factor under this pay-for-performance assessment is the alignment of CEO pay with Total Shareholder Return (or TSR) in relation to the ISS-determined peer group. The most important qualitative factor was performance standards that are not deemed sufficiently rigorous by ISS or clearly explained.
  • Broad shareholder support for equity compensation plans. No Russell 3000 company failed to obtain shareholder approval for an equity compensation plan, and overall support levels continued to average over 90%.

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The Rule 14a-8 shareholder proposals discussed in Section I of the complete publication are those submitted to and/or voted on at annual meetings of the U.S. members of the S&P Composite 1500, which covers over 90% of U.S. market capitalization. The data discussed in Sections II, III and IV on negative ISS recommendations against directors in uncontested elections, say-on-pay votes and equity compensation approvals, respectively, are results from annual meetings of the U.S. members of the Russell 3000, which covers over 98% of U.S. market capitalization. For a discussion of U.S. proxy contests and other shareholder activist campaigns, see our post entitled Review and Analysis of 2017 U.S. Shareholder Activism.

The complete publication is available here.

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