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E-MailAmy Freedman is Chief Executive Officer, Michael Fein is Executive Vice President, Head of US Operations, and Ian Robertson is Executive Vice President, Communication Strategy at Kingsdale Advisors. This post is based on a their Kingsdale memorandum.
When designing proposals and considering governance topics such as board composition and tenure, it’s surprising how many issuers leave a key box unchecked when deciding on what they put forward. Working with their counsel and bankers, boards work hard to ensure a proposal aligns with the expectations of the regulators and conforms to market standards, and even gets a thumbs-up from ISS and Glass Lewis. However, in the process, they often forget to ask what their unique shareholder base wants.
With an increase in both the number and size of internal governance teams at institutional investors, more prescriptive policies being developed—such as those on ESG issues and diversity—and a decreasing willingness to farm out vote decisions to the proxy advisors, it is incumbent on issuers to ensure they not only understand, but also take into consideration, the voting policies of their shareholders to ensure vote success.
In practical terms, nothing could be worse than designing a shareholder proposal on gender diversity, for example, that would gain the support of ISS and Glass Lewis, only to realize that a significant shareholder like BlackRock Inc. has a different policy calling for at least two female directors and the flexibility to diverge from the proxy advisors, which could result in a failed proposal.
Why the Traditional Approach to Proposal Design Is Becoming Obsolete
Historically, public companies have devoted attention and resources, to not only ensuring regulatory compliance in designing proposals but also structuring them in such a way that they win the endorsement of ISS and Glass Lewis. Today, institutional shareholders are taking back some of the decision-making, with the proxy advisors now playing the role of data aggregators and “recommenders”, not “vote deciders”.
Furthermore, many institutional investors lead ISS and Glass Lewis on certain policies, raising the bar for issuers a year or two before the same or similar policies are reflected in the proxy advisors’ recommendations. Why? Some large funds have identified a competitive advantage to developing and evolving their own custom policies ahead of others—even those of the proxy advisors.
Passive investors have also differentiated between active ownership and passive investing, meaning that exercising votes, especially for companies that funds might be required to own, can serve to mitigate risk and lead to increased long-term performance.
For example, some investors may have policies that are more rigid or have significantly different thresholds than ISS and Glass Lewis. For example, State Street Global Advisors expanded its board gender diversity voting guidelines to further encourage companies to diversify their boards. Starting in the U.S., U.K., and Australian markets in 2020, followed by Japan, Canada, and continental Europe in 2021, it will vote against the entire nominating committee if a company does not have at least one woman on its board, and has not engaged in successful dialogue on State Street Global Advisors’ board gender diversity program for three consecutive years.
These harder-line policies may even be product features for underlying client appetites, and voting in line with them and disclosing those votes can demonstrate the stewardship required by a fund’s stakeholders, especially on environmental and social issues. By being more lenient on some matters and stricter on others, investors can signal to the marketplace their beliefs on governance issues and set their engagement agenda to promote changes.
