Proxy Voting Analytics (2016-2019) and 2020 Season Preview

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to Proxy Voting Analytics (2016-2019) and 2020 Season Preview, an annual benchmarking report authored by Dr. Tonello and published by The Conference Board and ESGAUGE, in collaboration with Russell Reynolds Associates and Rutgers University’s Center for Corporate Law and Governance.

Proxy Voting Analytics reviews proxy voting data of business corporations registered with the U.S. Securities and Exchange Commission (SEC) that held their annual general shareholder meetings (AGMs) between January 1, 2019, and June 30, 2019, and that were in the Russell 3000 index as of January 2019. Unless specifically noted, the report examines data compiled by ESGAUGE and drawn from public disclosures as of July 10, 2019. The Russell 3000 index was chosen because it assesses the performance of the largest 3,000 US companies, representing approximately 98 percent of the investable US equity market.

The report compares findings from 2019 with figures from recent years to highlight key trends and offer insights into what companies should expect from 2020 annual general shareholder meetings (AGMs). Insights extend to evolving sponsor types, new proposal topics, and the traction that certain demands receive when put to a vote.

Insights for What’s Ahead in 2020

Looking ahead:

Companies should be prepared for investors’ increased use of exempt solicitations and other channels to ask for change in governance and organizational practices. In 2019, shareholder proposal volume continued its decline and is down about 30 percent from the level The Conference Board reported in 2010. While shareholders continue to use proposals to seek changes in areas such as social and environmental policy, they are actively pursuing alternative means of effecting change, from private engagements with boards and management to public campaigns meant to promote an alternative view of the firm’s strategy or governance. Companies should be particularly aware of the rise of exempt solicitations, especially those in the form of “just vote no” campaigns (where a shareholder solicits others to withhold their votes at a director election or to vote against a management proposal).

Companies cannot take investor confidence in their nominees for granted and need to persuasively articulate the reasons for their board composition choices, given the record-high number of board members who failed to receive majority support in 2019. Board composition is likely to continue to be a critical issue in 2020, prompting companies to evaluate existing skillsets, the overboarding of incumbents, and the diversity of new nominees. In the Russell 3000, the number of directors receiving less than 50 percent support level has climbed from 37 in 2016 to 54 in 2019. Similarly, The Conference Board counted 421 directors who received less than 70 percent of votes cast at this year’s AGMs; there were only 273 in 2016. While these remain low numbers overall (more than 16,000 directors were up for re-election in the Russell 3000 in the examined 2019 period), they are part of an upward trend that was not observed before and that is attributed to the announcements made in recent years by some large institutions that they intend to intensify their scrutiny of board composition. For example, the California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the country by volume of managed assets, recently pointed to issues of diversity and concerns about directors serving on multiple other public companies’ boards as the main factors influencing its decisions to step up its vote against certain incumbents. And, in early October 2019, New York City Comptroller Stringer announced the launch of a third phase of his office’s Boardroom Accountability Project, calling on companies to adopt the so-called “Rooney Rule” and include diversity candidates in searches for new directors.

Companies should be prepared to address the rising support for environmental and social initiatives among mainstream investors. While endowment funds of religious orders and special stakeholder groups were the first to call attention to social and environmental policies of corporations, these issues have now moved to the front and center of proxy seasons for traditional investors. The topics are wide-ranging—from political contribution disclosure to compliance with human rights in the supply chain— and from the disclosure of business risks resulting from the opioid crisis to the adoption of a climate change policy. While social and environmental shareholder proposals still tend to fail, the data show a slow but steady upward trend in terms of voting support, and abstention levels have dropped markedly in just a few years. Providing additional environmental and social disclosure can therefore be an opportunity for a company to seek constructive engagement with investors and to control its message on key stakeholder concerns. When legal considerations suggest a prudent approach to disclosure, companies should still consider mapping their disclosures to key stakeholder concerns and being prepared in situations where the concerns are publicly escalated.

In particular, companies should be prepared to consider disclosure on gender pay equity. Prominent corporations such as Amazon, American Express, Intel and Facebook were among the recipients of shareholder resolutions on gender pay equity in 2019. While none of these proposals passed, several companies that had previously been the target of similar requests preempted new investor demands by volunteering information on their compensation policies and by pledging to close the gaps. Citibank, for example, revealed that their female employees on average make 71 percent of the salary earned by their male colleagues. And a popular gender equality index, tracking the most forthcoming companies on issues of gender diversity and pay equality, has doubled in size in 2019. Whether they choose to publicize their findings or not, all organizations should consider gathering accurate internal data on this issue and drafting a plan to correct major incongruities.

Directors and executives should be aware that some investors are now targeting governance topics at smaller firms. After years of decline, the volume of shareholder resolutions on majority voting and board chair independence rose again in 2019, as institutional investors are shifting their attention to the smaller public companies outside of the S&P 500, which have so far remained immune to changes in their director election system and board leadership model. Ending a few years of hiatus, in 2019 CalPERS has been resuming its push for smaller Russell 3000 companies to also change their director election model to majority voting. Businesses that still depart from widely accepted best practices of corporate governance should consider using their proxy statement and investor engagement efforts to explain the rationale for their organizational choices.

Key Findings from the 2016-2019 Analysis

Shareholder proposal volume continued its decline this year, as investors pursue other tactics to foster corporate change and focus the use of formal voting resolutions on emerging areas such as social and environmental topics. In 2019, shareholder proposal volume decreased by 6.6 percent in the Russell 3000 and 10.5 percent in the S&P 500. The declines came on top of the 8.9 percent and 11.6 percent drops The Conference Board documented last year. In the Russell 3000, shareholders filed a total of 596 proposals at companies with AGMs during the examined 2019 period, compared to 638 during the same period in 2018 and 700 in 2017. In the S&P 500, the number of shareholder proposals decreased from 550 in 2017 to 486 in 2018 and 435 in 2019. While shareholder proposals remain more common among larger companies, the dynamics are changing. In particular, shareholders are increasingly turning their attention to social and environmental proposals across a broader spectrum of business organizations, while proponents of corporate governance resolutions are redirecting their efforts toward smaller firms, where the rate of adoption of shareholder-friendly practices remains lower. The continued decline in shareholder proposals overall confirms the reversal of the volume growth that The Conference Board had reported until the 2013 proxy season (and, in particular, in 2010-2013), when the number of shareholder proposals seemed to be heading back to the peak registered in 2008 (919 proposals at Russell 3000 companies and 714 at S&P 500 companies). Compared to the same examined period exactly ten years ago, the number of investor-sponsored resolutions submitted in 2019 is down more than 35 percent in the Russell 3000 and almost 40 percent in the S&P 500. New forms of corporate-investor engagement (especially in the area of executive compensation) and the effects of a revised ISS policy on board responsiveness also help to explain these findings. Communication services was the sector with the highest concentration of shareholder proposals (0.7 proposals per company), while real estate companies were the least exposed (0.13 proposal per company).

Hedge funds and their investment advisers have turned away from using shareholder proposals, while stakeholder organizations have become much more active in this area. The analysis of shareholder proposals by sponsor type highlights the gradual rise to prominence of a category of proponents that had traditionally played a marginal role at AGMs: that of nonfinancial firms, which try to foster corporate changes in the interest of stakeholder groups rather than mainstream institutional investors. They include organizations such as the National Center for Public Policy Research, the People for the Ethical Treatment of Animals (PETA), and the Humane Society of the United States and were the major sponsors of resolutions in the environmental and social policy area. Collectively, they submitted 89 proposals in 2019 (or 14.93 percent of the total), up from 59 proposals in 2018 (or 9.25 percent) and 74 in 2016 (10.77 percent)—a level that was unimaginable only a few years ago (for example, there were only 28 proposals from these investors in 2013), and the highest volume ever recorded by The Conference Board for this sponsor category.

Hedge fund activity by means of shareholder proposals continued to decline in 2019, as these investors have instead been stirring a public debate on their portfolio companies’ business strategy and agitating for change without making a single SEC filing.

This evolving approach is apparent in comparing the volume of hedge fund-sponsored proposals in 2019 to that recorded only a few years ago. In recent years, hedge funds used precatory resolutions as a means to publicize their views on critical issues at their target companies and to galvanize fellow shareholders around activism campaigns aimed at obtaining board representation. During the 2019 proxy season, however, hedge funds submitted only 8 proposals (a mere 1.3 percent of the total), down from 18 in 2018 (2.8 percent), 28 in 2017 (4 percent), and 39 in 2014 (5.2 percent). The financial services sector received most of the resolutions filed by these investors. The most common proposals requested that the board break up the company or divest it of specific noncore assets, engage a financial adviser to evaluate a business combination, or issue dividends to return capital to shareholders.

There continued to be less activity by investment funds affiliated with labor unions in the area of executive compensation, either because they ceased their proxy voting initiatives or demonstrated new interests, especially with respect to social and environmental policy issues. The 2019 season marked another sharp year-on-year decline in the number of shareholder resolutions submitted by multiemployer investment funds affiliated with labor unions, such as the United Brotherhood of Carpenters and Joiners of America or the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO). There were only 49 resolutions filed by this type of proponent in 2019 (8.2 percent of the total), a number that is consistent with the 45 resolutions filed in 2018 but is much lower than the 80 resolutions (11 percent) filed in 2015 and the 151 proposals that, according to an earlier edition of this report, this type of funds submitted in 2010. In total, proposal volume by labor-affiliated funds dropped 67.5 percent from 2010 levels.

Most commentators agree that the gradual, steady decline is attributable to the introduction of the say-on-pay vote and the federal regulation imposing more widespread executive compensation disclosure, which had traditionally been main topics of concern for labor unions. Some of these investment funds, including the Sheet Metal Workers’ National Pension Fund, have completely exited the shareholder proposals scene in the last few years, while others have scaled back their involvement. Labor unions filed only 12 executive compensation proposals in 2019, compared to 17 in 2018, 28 in 2014, and 57 in 2013.

The volume of their proposals on corporate governance also dropped in 2019 to 11 from 35 in 2014, while some of the labor investment funds have chosen to shift their focus to the social and environmental policy-related areas (26 filed resolutions; there were only 17 in 2018). While their proposals in the environmental and social sphere gained limited traction among fellow shareholders, funds such as the one affiliated with AFL-CIO have been using shareholder resolutions to suggest that companies should publicize studies on the impact that a new strategy or a changed business environment may have on the workforce and local communities—from the closure of factories to the rise of mega online retailers.

Once signature issues for public pension funds, matters of corporate governance are seldom the subjects of the shareholder proposals sponsored today by this investor type—a sign of the progress made by many public companies in the adoption of best practices. After a few years’ hiatus, however, in 2019 the California Public Employees’ Retirement System (CalPERS) has been resuming its push for smaller Russell 3000 companies to change their director election model to majority voting. Following a pattern that is similar to the one observed among labor union-affiliated funds for executive compensation proposals, public pension funds have progressively reduced their submissions on corporate governance issues among Russell 3000 companies. In 2019, public pension funds filed only 25 corporate governance proposals, up from 14 in 2018 but still considerably lower than the numbers that The Conference Board was recording for this category of institutional investors only a few years ago. The decline was first registered in 2014, when pension funds filed 35 corporate governance-related proposals in the Russell 3000, compared to 61 in the prior season (a 42.6 percent drop).

A confluence of other factors has contributed to this downward trend: The progress made by many companies in the adoption of governance best practices (from majority voting in director elections to board declassification, and from the independence of board leadership to the elimination of supermajority vote requirements); the effects of proxy advisory firms’ voting recommendations on board effectiveness, which penalize boards of directors that do not implement widely supported precatory proposals; interest in new social and environmental issues such as climate change risk and political contributions disclosure; and a growing propensity by corporate directors to seek input from large shareholders, which diminishes the recourse to shareholder proposals. Accompanying these trends, public pension funds have pursued more informal alternatives to the Rule 14a-8 shareholder proposal channel to engage with their portfolio companies on issues related to director election and board organization and oversight.

Although pronounced, the decline in shareholder proposal activity is irregular across the public pension fund sector. CalPERS (which, after significantly reducing the volume of its submissions in the last couple of years to a single-digit number, filed 18 resolutions in 2019) and the New York City Employees’ Retirement System, under the management of the city’s comptroller (six resolutions), were the most frequent sponsors of governance proposals. Seventeen of the 18 resolutions filed by CalPERS requested the change from plurality to majority voting for the election of directors, traditionally a key issue for that public pension fund, while all of the six corporate governance proposals by the New York City’s Comptroller’s Office were on proxy access.

While endowment funds of religious orders and stakeholder groups were the first to call attention to social and environmental policies of corporations, these issues have now moved to the front and center of proxy seasons for most investor types. In 2019, shareholders filed 229 resolutions on social and environmental policy issues (or 38.4 percent of the total number filed at Russell 3000 companies), down from the 306 of the same period in 2016 (a record year, where they were the single most frequent subject of investor activity, beating even corporate governance) but in line with the average since 2010. These proposals covered a wide range of topics, including political contribution transparency, compliance with human rights, the adoption of a climate change policy, and disclosure on how the company plans to mitigate risks resulting from the current opioids epidemics in the United States. And they were submitted by a wide variety of investors: The highest concentration of proponents is among individual investors (44 filed resolutions in the first semester of 2019, or 19.2 percent of the total in this area), religious groups (34 filed resolutions in the first semester 2019 alone), and other stakeholders like the Humane Society of the United States and the National Center for Public Policy Research (collectively, 55 sponsored resolutions, up from 44 last year).

Confirming data from prior proxy seasons, the analysis by volume shows that the most popular shareholder resolutions in this category are the requests for political contributions and lobbying disclosure (59 voted resolutions at Russell 3000 companies in the first half of 2019; they were 50 last year) as well as those for reports on the environmental impact of business activities (26 voted resolutions). The third and fourth most popular types, by number of voted proposals, were the requests for the publication of a report detailing the company’s stance on certain labor issues, including the disclosure of workforce diversity and efforts made to increase workforce diversity (14 voted resolutions in 2019) and those for corporate policy promoting compliance with human rights standards, at the company and across its supply chain (15 voted resolutions). Shareholders also filed eleven board diversity proposals requesting the disclosure to shareholders of director nominees’ required qualifications and skills; there were five last year.

As You Sow and its CEO Andrew Behar lead the list of proponents of resolutions on environmental impact, filing five such proposals in the first semester of 2019. (In most cases, this and other stakeholder groups use the shareholder resolution as an instrument to urge companies to act in concert with their policy on certain issues rather than to criticize a specific corporate practice). Labor union-affiliated fund CtW Investment Group submitted three proposals on labor issues, while investment adviser Harrington Investments and the Amalgamated Bank of New York filed three and two, respectively, on a corporate policy on human rights. Disclosure on political contributions and lobbying was sought by a diversified group of investors, including Mercy Investment Services, an asset management program of a religious group, the Sisters of Mercy of the Americas (six proposals), the fund affiliated with the labor union the International Brotherhood of Teamsters (five proposals), individual investor John Chevedden (also five) and the New York State Common Retirement Fund (also five proposals). Leading sponsors of resolutions on board diversity were stakeholder group The National Center for Public Policy Research (five submissions in the 2019 period) and the New York State Common Retirement Fund (two filings).

When voted at the AGM, social and environmental policy proposals tend to fail. However, data show a slow but steady upward trend in terms of voting support, and abstention levels have dropped markedly in just a few years. The average support level for all proposals on social and environmental policy submitted at Russell 3000 companies in 2019 was 27.3 percent of votes cast, registering a small uptick from the 25.7 percent of last year and yet on a clear upward trend from the 19.5 percent recorded, according to an earlier edition of this study, in 2014. This finding indicates that U.S. shareholders, in general, continue to believe that the board of directors and senior management are better suited to determine the business viability of certain sustainability activities, and that one-size-fits-all policies may lead to inefficiencies or capital misallocations.

Besides their increase in volume, however, two factors may be indicative of the future performance of sustainability issues at AGMs. First, even though almost all of these proposals fail to receive a majority vote, the overall upward trend regarding their average support level is undeniable: For proposals on political contribution disclosure and lobbying, the 33.6 percent for votes of 2019 compared with 28 percent recorded in 2018, 24.6 percent in 2017 and 24 percent in 2015; for those on labor issues, support rose from 26.4 percent in 2018 to 30.8 in 2019; for those on human rights, it went from 10.7 percent in 2017 to 17.5 percent in 2018 and 22.1 percent in 2019; and health issues-related resolutions received the support of 24.3 percent of votes cast in 2019, up from 21.4 percent in 2018, 18.8 percent in 2017, and only 6.1 percent in 2015.

Second, in the last few years these resolutions have been gaining wider endorsement by retail investors, as shown by The Conference Board’s data on voting abstention: The average abstention rate dropped from 10.9 percent of votes cast in 2014 to a mere 1.9 percent this year—a number fully aligned with the one seen for shareholder resolutions on executive compensation and corporate governance.

Nine of the 229 filed resolutions on social and environmental policy passed in 2019. They include: two on corporate lobbying disclosure, sponsored by the New York City Employees’ Retirement System and United Church Funds, at utilities company Alliant Energy Corp and health care business Mallinckrodt, respectively; one promoted by CorpGov.net editor James McRitchie for the publication of a report on political contributions at AI software developer Cognizant Technology; two requesting the adoption of policies to strengthen board diversity, including the commitment to include diverse candidates in management’s nominee lists and to report on the protocol adopted to seek such diverse candidates (at real estate investment company Gaming and Leisure Properties and footwear manufacturer Skechers U.S.A, brought forward by the New York State Common Retirement Fund and Amalgamated Bank of New York, respectively); and another two, for the diversity of the executive leadership (at home appliance manufacturer Newell Brands) and the workforce as a whole (at insurer Travelers Companies); one for a report on the company’s performance in human rights at the GEO Group, a provider of project financing, transportation, and other services for correctional and community reentry facilities; and one at pharmaceutical company Mallinckrodt, a seller of opioid medications, for the disclosure of governance measures implemented to mitigate the financial and reputational resulting from the opioid crisis in the United States.

Companies are preempting many investor demands by voluntarily implementing their own changes, as shown by data on the rate of withdrawals of shareholder proposals. In both indexes, the percentage of withdrawn proposals has declined in 2019—from 11.1 percent to 8.1 percent among the Russell 3000 sample, and from 11.9 to 9.7 percent in the S&P 500 sample. (Data on withdrawn proposals presented in the report are limited to publicly available information or information provided by the proponent or issuer.) This finding reflects the success of renewed corporate efforts to engage with key shareholders. More than ever before, in this proxy season activist funds and institutional investors have pursued opportunities to be heard ahead of a shareholder meeting. However, guidelines on board responsiveness from proxy advisory firm ISS are also likely to share the responsibility for the growth of withdrawn proposals. Under the guidelines, ISS recommends that institutions voting on director elections exercise close scrutiny in those situations where a company failed to implement a precatory shareholder proposal that had received majority support of votes cast at a prior AGM. In 2018, the ISS board responsiveness policy was extended to management proposals seeking to ratify an existing charter or bylaw provision that were opposed by a majority of shares cast in the previous year. Similarly, in 2018, Glass Lewis, a leading proxy advisory firm, clarified that, when making recommendations on directors based on company performance, it will consider among other factors the company’s overall corporate governance and responsiveness to shareholders. Therefore, in some cases, withdrawals may result not from dialogue but from the company’s decision to either voluntarily implement the requested change or to submit its own proposal on the same topic to mitigate the risk of wide opposition to management’s nominees to the board of directors.

Withdrawn proposals were mostly submitted by certain individual investors and the investment vehicles of stakeholder groups and religious orders—all investor types that rarely elevate these matters to an outright proxy solicitation and would rather use the precatory proposal as a tool to gain the attention of their portfolio companies on issues of concern. In 2019, in particular, 21.1 percent of the proposals submitted by investment advisers and 18.4 percent of those submitted by religious groups were reported as withdrawn. The highest proportions of withdrawn proposals were seen in the social and environmental policy category. But the numbers are declining: 16.2 percent of the total number of proposals were classified by The Conference Board as withdrawn, compared to 19.4 percent in 2018.

Across subjects, voting results for 2019 show a reversal of the declining trends on support levels observed in recent years—a possible sign that a new generation of shareholder proposal types is starting to gain broader consensus among investors. After several years of steady decline from 2010 to 2018 (from roughly 20 percent in to 10.6 percent in the Russell 3000, and from 17.3 percent to 8 percent in the S&P 500), 14.5 percent of shareholder proposals that went to a vote at Russell 3000 companies in 2019 received the for vote of a majority of shares cast; in the S&P 500 the share of proposals with majority support was substantially similar to last year (8.2 percent). The long downward trend was the result of both a decline in the volume of proposals on topics that were traditionally widely supported by shareholders (for example, majority voting and board declassification) and the limited support level received by new types of shareholder resolution (including those on environmental and political issues). The reversal of the trend recorded this year may indicate that these new types of resolutions are starting to gain broader consensus among investors and that shareholders are becoming more sophisticated in choosing the company and the topic for shareholder proposals.

In the examined 2019 period, on average, more than 70 percent of votes on shareholder proposals submitted by hedge funds, investment advisers, and other stakeholders were against the proposal. The highest level of votes for was observed for proposals by public pension funds (38.4 percent), individuals (35.6 percent), and religious groups (31.2 percent). Other stakeholders and religious groups, however, also registered the highest average levels of abstentions (2.5 and 2.1 percent of votes cast, respectively).

Only two of the executive compensation proposals (on clawback provisions) voted during the period received majority support in 2019 (there were none in 2018). The highest share of proposals that received majority support in 2019 was in the corporate governance category (22.5 percent of those went to a vote in this category, compared to 15.7 percent in 2018 and 33.2 percent in 2016). In the social and environmental proposal category, 6.7 percent received majority support in 2019, while the percentage was only 5.3 for resolutions related to executive compensation. The average vote-for percentage was highest for corporate governance proposals (37.8 percent); the same category also reported the lowest share of nonvotes (12 percent).

The demand for disclosure on gender pay gaps continued to strengthen in 2019, extending its influence well beyond the AGM vote. Adobe, Alphabet (Google’s parent company), Amazon, American Express, Bank of America, Facebook, Intel, JP Morgan Chase, and Wells Fargo were among the recipients of gender pay gap proposals in 2019. There were 13 such proposals in the Russell 3000, compared to eight in 2018, all of which advanced to a vote at the target companies’ AGMs. Socially responsible investment fund Arjuna Capital was the most frequent sponsor of this type of proposals, with three submissions in 2019 and a track record of similar demands at financial services firm such as Citibank and technology firms such as Google. While none of the 13 proposals on gender pay gap disclosure passed, at least in some cases, companies apparently decided to address the issue on their own.

In recent months, several companies that had received gender gap proposals preempted further new investor demands by volunteering information on their compensation policies and by pledging to close the gaps. For example, in January 2019 and following a filing by Arjuna in the 2018 proxy season, a Citibank blog post revealed that it discovered a 29-percent company-wide disparity between its male and female workforces (meaning: At the company, the firm’s female employees on average make only 71 percent of the salary earned by their male counterparts). Following another Arjuna proposal in 2018, Google published wage data showing a zero-percent statistically significant pay gap for 89 percent of its employees worldwide (notably, while applauding the company’s disclosure, Arjuna criticized the incompleteness of the company’s analysis and the lack of a definitive conclusion on the remaining 11 percent of the workforce). As an indicator of the importance of gender equality to investors and companies, Bloomberg’s Gender Equality Index—which tracks the financial performance and disclosures of companies committed to equality and advancing women in the workplace—almost doubled in size this year; collectively, the 230 companies in the 2019 edition of the index have a combined market capitalization of $9 trillion and employ more than 15 million people (including 7 million women) around the world.

After years of decline, the volume of shareholder resolutions on majority voting and independent board leadership rose again in 2019, as institutional investors are shifting their attention to the smaller public companies that have so far remained immune to changes in their director election system and board leadership model. The volume of resolutions requesting that companies adopt a majority voting model for the election of their board members, which had stagnated or even declined for a few years, rose to 22 in 2019 from only five in 2018. There were multiple submissions at smaller companies in the Russell 3000 index; as shown by The Conference Board in its annual review of corporate board practices, more than 50 percent of Russell 3000 companies (compared to 9.1 percent of S&P 500 companies) still use a plurality voting system of director elections.

In other governance areas, proposals on separating the CEO and board chair positions topped the 2019 list of governance-related proposals by volume. Investors voted on 54 of these resolutions at Russell 3000 companies in the first six months of the year, a number that was more than three times as large as the one seen in 2015 (17 resolutions) and 2013 (10 resolutions). Shareholders also voted on 36 requests to allow companies to (or to ease the requirement to) act by written consent (or 16.22 percent of the total number of voted resolutions in this category). Proxy access reform ranked third on the 2019 list by volume, but the number of proposals continued a decline that had been observed even last year (shareholders of Russell 3000 companies voted on 30 in 2019, down from the 30, 49 and 76 instances of 2018, 2017 and 2015, respectively).

The average support level for all corporate governance proposals in 2019 was 37.4 percent. Five proposal types received average support of more than 50 percent of votes cast: Proposals on board declassification (73.8 percent support level, on average), those invalidating (or requesting a shareholder vote on) “poison pills” (71.9 percent), those on the adoption of majority voting in director elections (73.9 percent), those to opt out of state takeover requirements (63.5 percent), those requesting the elimination of supermajority requirements (60.1 percent), and other nontakeover defense-related charter or bylaw amendments (51.7 percent). Notably, the support level of resolutions on majority voting, which are now primarily filed at smaller companies in the Russell 3000, fell from 73.9 percent in 2018 to 43.7 percent in 2019; and proposals on independent board chairs, while more numerous than in prior years, did not exceed the 30 percent average support level in 2019 and none of them passed. Even though their average support level was below the majority threshold, resolutions on the shareholders’ ability to act by written consent and to call special meetings received 39.3 percent and 43.7 percent of for votes, respectively, in 2019. Among others that passed, a proposal submitted by individual investor Myra K. Young to allow shareholders to call special meetings at Discover Financial Services received the support of 65.3 percent of votes cast. The lowest level of support was recorded for proposals to allow cumulative voting (5.5 percent) and to adopt director nominee qualifications (3.4 percent). The only voted proposal to adopt term limits for board members, which Robin S. Maynard filed at New York Community Bancorp, received 10.5 percent of votes cast.

Additional findings show how the average support levels for several proposal types in the corporate governance category have increased from a few years ago. It was the case for proposals seeking to declassify boards (73.8 percent in 2019, compared to 60.4 percent in 2017) and to eliminate supermajority requirements (60.1 percent, up from the 44.5 percent in the 2017 season). The finding confirms that the decline in volume observed over the years for these types of proposals is not due to waning support in the investment community. One of the proposals in the “other corporate governance issues” subcategory received majority support: It was submitted by Mercy Investment Services, an investment fund affiliated with a religious group, and it required disclosure of the corporate governance changes Walgreens has implemented to more effectively monitor and manage financial and reputational risks related to the opioid crisis, including whether and how the board oversees Walgreens’ opioid-related programs (59.1 percent of votes cast were in favor of the proposal).

Say-on-pay analysis confirms a significant turnover in failed votes signaling the importance of ongoing corporate-shareholder engagement on compensation matters. In recent years, the number of failed say-on-pay votes has been relatively constant in the Russell 3000. Of companies in the Russell 3000 that held meetings between January 1 and June 30, 2019, and that reported detailed say-on-pay vote results as of July 8, 2019 (a total of 2,048 companies), 48 company say-on-pay proposals (or 2.3 percent) failed to receive the majority support of shareholders. This compares with 51 companies that failed those votes during the same period in 2018 and, according to an earlier edition of this study, 51, 47 and 51 companies that failed those votes during the same period in 2014, 2013 and 2012, respectively. Nine companies that reported failed votes in 2019 also had failed votes in 2018. Their names are: Nexstar Media Group, Inc., Nabors Industries Ltd., Nuance Communications, Inc., Digimarc Corporation, IMAX Corp., Tutor Perini Corporation, Ameriprise Financial, Inc., FleetCor Technologies, Inc., and SandRidge Energy, Inc. Tutor Perini Corporation is the only company in the Russell 3000 that has failed all eight years of say-on-pay advisory votes. Nabors Industries Ltd. had four consecutive failed votes as of 2014, received 65.3 percent of for votes at its 2015 annual general meeting, then failed the advisory vote again in 2016 (with 36 percent of votes cast in favor of the compensation plan proposed by management), in 2017 (where the percentage of favorable votes cast increased only slightly, to 42.3), in 2018 (with as much as 62 percent of votes cast against the say-on-pay proposal), and in 2019 (47.3 percent of votes cast in favor and 52.5 percent against).

As noted, there is a significant year-over-year turnover in failed votes. Aside from the companies mentioned above, all companies that failed their say-on-pay votes in 2019 had successful votes in 2018, in most cases by wide margins. This is an indication that companies cannot lower their guard when it comes to compensation oversight and need to ensure ongoing transparency, not only by communicating any new compensation decision made by the board, but also by engaging with shareholders on at least an annual basis. The average support level among the companies that did not obtain majority support on their advisory vote on executive compensation was 37.5 percent of votes cast, up from 36.9 percent last year. Among companies that failed the 2019 say-on-pay vote, SandRidge Energy, Inc. reported the lowest support level (just 19.1 percent of votes cast). The incidence of nonvotes also varied sharply within the group, from a high of 35.4 percent of shares outstanding at Digimarc Corporation to a low of 0 percent at SandRidge Energy, Inc.

Another 136 companies in the Russell 3000 (6.6 percent) reported passing say-on-pay proposals with support of less than 70 percent of votes cast, the level at which proxy advisory firms may scrutinize more closely their compensation plans and evaluate issuing a future negative recommendation. This finding is higher than the 5.7 percent of companies with votes under 70 percent seen during the same period in 2018. The list includes well-known companies such as American International Group, Inc., General Electric Company, Six Flags Entertainment Corporation, Papa John’s International, Inc., Johnson & Johnson, Yelp, Vornado Realty Trust, Halliburton Corporation, Red Lion Hotels Corporation, Intel Corporation, Gap, Inc., Walt Disney Company, and Mondelez International, Inc. Moreover, 22 of the 136 companies below the 70 percent support threshold in 2019 were below that level in 2018; their names are highlighted in bold type in Exhibit 3 of the complete publication (available here). Their boards will inevitably need to reopen the discussion on pay for performance and either persuade investors that their compensation policies are sound and fit the company’s strategic needs or revisit those policies. In fact, many of the companies on this gray list have already made additional filings to integrate information on their approach to executive pay or to dispute ISS’s characterization of their compensation choices.

Although activism campaign announcements in the Russell 3000 were up in 2019, the number of campaigns related to a shareholder meetings declined, as some hedge funds choose to agitate for change without even filing a shareholder proposal. In the first half of 2019, activist investors announced 281 campaigns against Russell 3000 companies, compared to 254 in the same period in 2018 (a 10.6 percent uptick). Activism campaign announcements include proxy contests, exempt solicitations, and any other public announcement of the investor’s intention to agitate for change at a target organization—whether through a press release, an appearance on a CNBC talk show, a Twitter chat, or the filing of a lawsuit. However, only 155 of those campaigns related to a shareholder vote, up slightly from the 147 of 2018.

The discrepancy between announcements and campaigns related to a shareholder vote indicates that a growing number of activists are agitating for change without even filing a shareholder proposal. In these cases, the activist does not aim at galvanizing other shareholders around electing dissident directors or a vote on a specific resolution. Instead, the announcement serves to publicize the investor’s view of the business strategy or organizational performance. It is used as a first step that may lead to the future filing of a shareholder proposal or the solicitation of proxies, but that may as well prove sufficient to persuade the board of directors to seek dialogue and reach a compromise. For example, in March 2019, Barington Capital sent a letter and detailed presentation to the Chairman and CEO of apparel company L Brands, Inc. recommending a spinoff of Victoria’s Secret or an initial public offering of Bath & Body Works, in addition to replacing long-tenured board members. The letter was publicly disseminated through a press release, but it was not followed by an explicit threat of a proxy fight or an exempt solicitation.

Exempt solicitations and “vote no” campaigns have been surging, with investors being galvanized by initiatives to refresh board composition. The last few years have shown a surge in exempt solicitations, especially those in the form of “just vote no” campaigns (where a shareholder solicits others to withhold their votes at a director election or to vote against a management proposal or a nomination to the board of directors submitted by management, but does not circulate a dissident’s proxy card) and those to solicit votes against a say-on-pay proposal by management. In the 2019 period examined for the purpose of this report, shareholders engaged in 124 exempt solicitations against management of Russell 3000 companies, compared to 100 solicitations in the same period in 2018 and 79 in 2016. By way of comparison, there were only 47 in the corresponding 2013 period and 18 in 2010. In the S&P 500 sample, the number of exempt solicitations in 2019 was 91, up from 75 last year and the previous record of 87 of the 2017 period, and significantly higher than the 29 reported in 2014 and the 15 in 2010. The index comparison shows a concentration of notices of exempt solicitations filed against larger companies. This campaign tactic is less common among activist hedge funds, which traditionally pursue smaller targets, and is preferred by labor unions and public pension funds, which are widely invested in blue chip stocks. The category of investment funds affiliated with stakeholder groups has also risen as a major proponent of these types of activist initiatives.

Amid a general decline in the volume of proxy fights conducted this year, the success of dissident proposals reached a record low, with the majority of such contests resulting in settlements. In the 2019 period examined for the purpose of this report, shareholders engaged in 27 proxy contests against management of Russell 3000 companies, compared to 34 launched in the corresponding 2018 period, 38 in 2016, and, according to an earlier edition of this report, 49 in 2015. Companies in the information technology and consumer discretionary sectors respectively faced seven and six solicitations, and companies in the financial and health care sectors were exposed to three each. There were two contests in each of the materials and real estate industry groups, while only one in each of the other sectors.

Hedge funds have consistently been the most active in proxy fights. In 2019, they mounted 15 (or 55.6 percent of the total) of the voting fights against management, followed by other stakeholders (four proxy contests, or 14.8 percent of the total), investment advisers (three contests, or 11.1 percent), and individuals (also three contests, or 11.1 percent). The vast majority of contests were motivated by an attempt to gain a seat on the board of directors (19, or 70.4 percent of the total in 2019; 23, or 67.6 percent in 2018; 27, 71.1 percent in 2016; and, according to an earlier edition of this report, 33, or 68.8 percent in 2015). Four fights (or 14.8 percent of the total) sought to obtain control of the board to foster a broader range of strategic, organizational, and governance changes, whereas the others were waged to oppose a merger (for example at Bristol-Myers Squibb Company, by hedge fund Starboard Value), and to vote against a management proposal (at J. Alexander’s Holdings, by investment adviser Ancora MicroCap Fund).

In 2019, for the second time since The Conference Board began tracking proxy contest outcomes, the majority of initiated proxy contests resulted in a settlement between the dissident and the company, where the company made certain concessions to obtain the support of the activist investor. This came as, in 2019, the success rate at the ballot box by dissidents was the lowest recorded by The Conference Board since it began tracking proxy voting data in 2010, where dissidents won only one of the 23 proxy contests mounted then against Russell 3000 companies (or 4.3 percent). In the Russell 3000, dissidents scored an outright voting win in only one of the 27 (or a mere 3.7 percent) proxy contests where an outcome was reached in 2019, down from a percentage of 5.9 in the same period in 2018, 17.9 in 2017, and of 12.5 in 2015.

By way of comparison, according to an earlier edition of this study, dissidents succeeded in seven of the 41 (17.1 percent) of the proxy contests held during the same period in 2014 and in five out of the 35 proxy contests of 2013 (14.3 percent). In 2019, six contests (22.2 percent) were withdrawn and five (or 18.5 percent) resulted in a victory for management. Most important, the data also shows that about 52 percent of the Russell 3000 proxy contests in 2019 concluded with a settlement—the second highest share of proxy fight settlements found by this periodic study and the second time it has exceeded the majority mark (previously, the highest percentages of settlements had been found in 2018, at almost 60 percent, and in 2015, at 47.9 percent).

Constructive engagement between corporations and investors has been curbing the most hostile forms of activism, and the volume of proposals to elect a dissident’s nominee continued to drop. In the Russell 3000, in the first half of 2019, shareholders filed 20 proposals to elect a dissident’s director nominee. Volume was down from the 25 proposals documented for the same period last year and less than half of the 52 proposals that, according to an earlier edition of this report, were submitted in 2009—a record year for hostile activism. The explanation may be found in developments of the last few years, from the introduction of say-on-pay votes (which many shareholders can now use more effectively than director opposition proposals to voice their discontent) to the passage of new rules enhancing governance disclosure, and a climate favoring constructive dialogue with investors. Ten of the 20 filed proposals challenging management’s director nominees went to a vote during the first six months of the 2019 proxy season. By way of comparison, in 2014, 31 of the 35 filed proposals (88.6 percent) on the election of a dissident’s nominee were voted at Russell 3000 AGMs. Such proposals are far less frequent among S&P 500 companies, where large capitalizations make it more arduous for an activist to garner enough support from fellow investors, and ultimately reduce the likelihood of success. There were no proposals in 2019 and only two proposals submitted during the 2018 period (and neither of them went to a vote), compared with six in 2017, zero in 2016, five during the same period in 2013, and three in 2012. As usual, requests for board representation were primarily submitted by activist hedge funds and investment advisers, which are SEC-registered companies that in turn often manage assets of a portfolio of hedge fund clients.

The 2019 average support rate for this proposal topic has decreased to 27.4 percent of shares outstanding from the 43.2 percent of last year. This result was lower even than the findings in previous years (by way of comparison: 36.7 percent in 2017, 31.4 percent in 2014, and 36.3 percent in 2013), but higher than the average support reported in 2012 (18.2 percent) and in 2009, which had been a record year in terms of proxy contests (26.4 percent of shares outstanding voted in favor). The highest support level (38.9 percent of for votes as a percentage of shares outstanding) was received by a proposal filed at PDC Energy by an undisclosed shareholder. The lowest support level (18.1 percent) was at Gannett Co., Inc.

Companies cannot take investor confidence in their nominees for granted and need to persuasively articulate the reasons for their board composition choices, given the record-high number of board members who failed to receive majority support in 2019. In the Russell 3000, the number of directors receiving less than 50 percent support level has climbed from 37 in 2016 to 54 in 2019. Similarly, The Conference Board counted 421 directors who received less than 70 percent of votes cast at this year’s AGMs; there were only 273 in 2016. While these remain low numbers overall (more than 16,000 directors were up for re-election in the Russell 3000 in the examined 2019 period), they are part of an upward trend that was not observed before and that is attributed to the announced intentions of some large institutions to intensify their scrutiny of board composition. CalPERS, for example, recently pointed to issues of diversity and concerns about directors serving on multiple public company boards as the main factors influencing its decisions to step up its vote against certain incumbents, while new voting guidelines from BlackRock indicate that the world’s largest asset manager expects all boards it invests in to have at least two female directors. And, in early October, New York City Comptroller Stringer announced the launch of a third phase of the Boardroom Accountability Project, calling on companies to adopt the so-called “Rooney Rule” (a policy adopted by the National Football League requiring teams to interview at least one person of color for head coaching vacancies) and include diversity candidates in searches for new directors.

The complete publication is available here.

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