Modern-day shareholders influence corporate America more than ever before. From demanding greater accountability of executives to lobbying for a variety of social and environmental policies, shareholders today have the power to alter how American companies are run. Indeed, much attention has been directed towards the rise of large institutional investors and their influence on corporate governance and competition. But that attention has also largely left out of public and academic debate one of the most unique corporate governance actors: “corporate gadflies.” As we document in our recent study, forthcoming in the Southern California Law Review, much of the corporate governance agenda setting in the U.S. has been, and still is, dominated by a handful of individuals with limited resources, who own tiny slivers of most large companies, rather than by the “Titans of Wall Street.”

Our study is the first to address the giant shadow that corporate gadflies cast on the corporate governance landscape in the United States. How does an economy with corporate equity in the trillions of dollars cede so much governance power to corporate gadflies? More importantly, should it? In answering these questions, we make three contributions to the literature. First, using a comprehensive dataset of all shareholder proposals submitted to the S&P 1500 companies from 2005 to 2018, our study offers a detailed empirical account of both the growing power and influence that corporate gadflies wield over major corporate issues and of their power to set governance agendas. Second, we use the context of corporate gadflies to elucidate a key governance debate over the role of large institutional investors in corporate governance. Specifically, we underscore the potential concerns raised by the activity of corporate gadflies and question the current deference of institutional investors to these gadflies regarding the submission of shareholder proposals. Finally, the study proposes policy reforms aimed at reframing the current discourse on shareholder proposals and potentially sparks a new line of inquiry regarding the role of investors in corporate governance.

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On April 2, 2021, the Securities and Exchange Commission approved, on an accelerated basis, an amended proposal by the NYSE to amend certain of its stockholder approval rules set forth in the NYSE Listed Company Manual (“NYSE Manual”). The formal approval comes after the NYSE instituted a temporary waiver of these rules due to the challenges companies faced during the COVID-19 pandemic. See our Jan. 12, 2021 Alert and Oct. 9, 2020 Alert for more detail.

Rule 312.03(b) — As amended, the Related Party Stockholder Approval Rule:

• No longer requires prior stockholder approval for issuances to the subsidiaries, affiliates or other closely related persons of directors, officers and substantial securityholders (“Related Party”) or to entities in which a Related Party has a substantial interest (except where a Related Party has a 5% or greater interest in the counterparty (as described below)).
• No longer requires stockholder approval of cash sales to a Related Party if the sale meets the NYSE minimum price requirement, even where the number of shares of common stock to be issued (or the number of shares of common stock into which the securities may be convertible or exercisable) exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance.
• Requires stockholder approval of any transaction or series of related transactions in which any Related Party has a 5% or greater interest (or collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction and the issuance of common stock, or securities convertible into common stock, could increase the outstanding common shares by 5% or more.
• Deletes now irrelevant provisions relating to (i) cash sales that meet the NYSE minimum price requirement, and where the issuance does not exceed 5% of the shares of common stock or voting power before the issuance, to a Related Party where the Related Party involved in the transaction is classified as a Related Party solely because the person is a substantial security holder; and (ii) an exemption related to early stage companies.

Rule 312.03(c) — As amended, the 20% Stockholder Approval Rule:

• Replaces the reference to “bona fide private financing” in the exception from shareholder approval for transactions relating to 20% or more of the company’s outstanding common stock or voting power with “other financing (that is not a public offering for cash) in which the company is selling securities for cash.” This would eliminate the 5% limit for any single purchaser participating in a transaction, thus permitting companies to consummate a financing to a single purchaser.
• Requires shareholder approval if the securities in a financing are issued in connection with an acquisition of the stock or assets of another company and the issuance of the securities alone or when combined with any other present or potential issuance of common stock, or securities convertible into common stock, is equal to or exceeds either 20% of the number of shares of common stock or of the voting power outstanding before the issuance.

In addition, amendments to Section 314 of the NYSE Manual requires a company’s audit committee or other independent body of the board of directors to review related party transactions prior to any transaction and prohibit the transaction if it determines the transaction is not consistent with the interests of the company and its shareholders. For purposes of Section 314, related party transactions would mean those transactions required to be disclosed pursuant to Item 404 of Regulation S-K under the Securities Exchange Act of 1934, as amended (without giving effect to the transaction value threshold of that provision).

Just as the COVID-19 pandemic has had a significant impact on society, business and public policy, it has also led to significant changes to corporate governance. Companies experienced new ways of organizing annual general meetings (“AGM”) of shareholders, in a virtual or hybrid manner. We have also seen a raft of new voting trends emerge. Concurrent to the current lockdowns and restrictions associated with the pandemic, companies are facing pressure from institutional investors who are adjusting their voting policies as part of their evolving stewardship practices which are increasingly focused on material ESG topics. Even though the definition of stewardship can vary depending on language and culture, we see common patterns around the world. For example, the International Corporate Governance Network (ICGN) has revised its Global Stewardship Principles to create an explicit link between fiduciary duty and long-term value creation and to encourage investors to disclose more about their stewardship activities. These changes have occurred in the context of wider public initiatives around what might be called “sustainable corporate governance”. Many scholars are also encouraging implementation of the Business Roundtable (BRT) statement on corporate purpose, through which CEOs of a number of large companies committed to lead their organisations for the benefit of all stakeholders, not just shareholders. In this publication, we highlight new and innovative investment stewardship practices, both from the perspective of institutional investors and proxy advisory firms. Given the importance of this topic, we have asked the global proxy advisory firm Glass Lewis to share their views on these renewed stewardship practices.

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Even just a year later, it may be difficult to remember the uncertainty and confusion of the early months of the coronavirus pandemic. Corporate boards soon realized that the crisis was far more extensive than the 2008-2009 downturn, but they scrambled to understand the implications for their industry and company. Many leadership teams were desperate as they watched their businesses decline for reasons beyond their control. They sought solutions to motivate employees in this chaotic environment, and their boards did the same. And then George Floyd’s death in May sparked an intensified corporate commitment toward diversity, equity, and inclusion. Investors upped the ante, asking for more visible responsiveness on these issues.

In setting or adjusting executive compensation for 2020, boards employed a variety of reactions and solutions. All of these were well intended, and some look to hold up well over time. Other compensation arrangements, by contrast, will look incongruous given what we know now. As of March 26 in the 2021 proxy season, 3.5% of the Russell 3000 companies had had a “no” vote in “say-on-pay” resolutions, a jump from last year’s rate of 1.4%. [1] Say on Pay failures are even higher to date among the larger S&P 500 companies including Starbucks, Walgreens Boots Alliance, and Acuity Brands.

It is still early days, but proxy advisors and investors seem to be questioning the pay-performance connection at a higher number of companies. They must decide whether each company’s compensation actions, in their unique context including the experience of employees and other stakeholders, were fair and well-constructed to ensure sustained overall performance over time.

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In 2020, we voted in over 19,000 meetings and engaged with over 2,400 companies. In all, our engagement activities encompassed companies representing 78% of our 2020 equity AUM.

In this post, we provide highlighted insights from our voting and engagement activities, as well as core campaign, sector and thematic takeaways.

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Proxy contests often focus on directorial positions, where activist shareholders nominate an alternative slate of directors in an attempt to replace incumbent board members. Given shareholders’ limited ability to vote out directors in uncontested elections (e.g., Cai, Garner, and Walkling, 2009), proxy contests remain a powerful mechanism for director removal. In recent years, activists have become increasingly successful in accessing the US boardroom. According to FactSet, activists obtained board seats in 73% of proxy contests in 2014. At the firm level, prior research shows that proxy contests create shareholder value for target firms (e.g., Dodd and Warner, 1983; Mulherin and Poulsen, 1998; Fos, 2017). At the director level, however, proxy contests can impose significant career costs on individual directors. Existing evidence suggests that, following proxy contests, directors suffer losses of board seats not only at target firms but also at nontarget firms (Fos and Tsoutsoura, 2014). Despite the adverse effects of proxy contests on directors’ careers, little is known about whether or how directors respond to proxy contests. To mitigate potential career consequences, directors may change their behavior and initiate policy changes at other firms where they also hold board seats, that is, interlocked firms.

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Good morning. As always, thank you to the Committee for your time, dedication, and thoughtfulness on important asset management issues that affect investors and market integrity. Thank you also to the staff of the Division of Investment Management.

I commend you for continuing your work on issues related to Environmental, Sustainability, Governance (ESG); private securities; and diversity and inclusion. And I look forward to today’s discussions on these important issues.

There has been a lot of discussion about ESG as of late, so today’s agenda, which includes a discussion about the ESG Subcommittee’s recommendations, is timely. [1] I’ve said this before and I’ll say it again: investors are using ESG-related information to make investment decisions and to allocate capital more than ever before. They are increasingly looking for sustainable investments, albeit investors have different thoughts about what “sustainability” means and how ESG factors inform their investment decisions. [2]

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Our new paper, The Distribution of Voting Rights to Shareholders, is the first comprehensive study of the distribution of voting rights to shareholders. Using over 100,000 distributions of voting rights to shareholders, we find a wide array of evidence that firms and stock exchanges change when they notify investors of the voting record date based on the proposals involved and that sophisticated investors are often notified before retail investors. Trading volume is higher than normal both before and immediately after the record date. Stock prices decline significantly when they go from cum vote to ex vote. These changes in notification, trading volume, and stock prices are correlated both with how controversial votes are and how they ultimately turn out.

The right to vote is one of only three distributions made to shareholders. The other two distributions, cash dividends and rights offers, have been studied for years, with well in excess of 100 papers studying ex day changes with cash dividends alone. Moreover, the most common of the three distributions for most firms is the right to vote because it must occur prior to each shareholder meeting. Finally, voting is central to how shareholders control agency costs and influence key corporate decisions. Our findings show that the distribution of votes is far from straightforward mechanical event.

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Since 2015, pay gap disclosure has been front and center on the activist shareholder proposal landscape from an employment and workforce perspective. Following closely on the heels of tragic events of last summer and the significant advancement of the Black Lives Matter movement, activist shareholder groups have pivoted away from proposals requiring disclosures of pay gap statistics and are instead focused on other dimensions of internal diversity, equity, and inclusion (“DEI”). These initiatives seek more broad-based disclosure of whether and how companies are managing gender and racial disparities in representation—including, for example, in the boardroom and at senior management levels within an organization. Combined with recent rule changes at the U.S. Securities and Exchange Commission (“SEC”) with respect to required Human Capital Management disclosures, public companies should prepare for how they will respond to proposals seeking different and new disclosures regarding steps they are taking to expand and maintain diversity within their workforces.

A Brief History Pay Gap Shareholder Proposals

Over the last five years, shareholder proposals on pay equity evolved to become an important issue at the operational and board level—particularly for companies in the technology and finance industries—with competitive, legal, and cultural implications. These proposals initially focused on undefined “pay gap” disclosures—meaning the overall percentage pay difference between male and female employees—as well as steps taken or proposed to address unexplained disparities. Over time, these proposals sought more granular gender and racial pay gap data, with an emphasis on median pay gap data—meaning a single, raw, unadjusted data point reflecting the middle compensation value among all female employees in a workforce compared to the same value for men. Critics of median pay gap disclosures point out that this measure of pay does not account for legitimate differences in compensation between employees or more nuanced information regarding a company’s highest and lowest earners.

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BlackRock Investment Stewardship (BIS) undertakes all investment stewardship engagements and proxy voting with the goal of advancing the economic interests of our clients, who have entrusted us with their assets to help them meet their long-term financial goals. Our conviction is that companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities and their shareholders. We use our voice as a shareholder to urge companies to focus on important issues, like climate change, the fair treatment of workers, and racial and gender equality, as we believe that leads to durable corporate profitability.

2021 Priorities

Engagement is core to our stewardship efforts as it enables us to provide feedback to companies and build mutual understanding about corporate governance and sustainable business practices. Each year, we set engagement priorities to focus our work on the governance and sustainability issues we consider to be top of mind for companies and our clients as shareholders. We believe an intensified focus on these issues advances practices and contributes to companies’ ability to deliver the sustainable long-term financial performance on which our clients depend.

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On February 26, 2021, the Delaware Court of Chancery (McCormick, V.C.) issued a memorandum opinion in The Williams Companies Stockholder Litigation enjoining a “poison pill” stockholder rights plan adopted by The Williams Companies, Inc. (“Williams”) in the wake of extreme stock price volatility driven by the double whammy of COVID-19 and the Russia-Saudi Arabia oil price war. While the pill adopted by the board in this case had unusual features (such as a 5% trigger and a broad “acting in concert” provision), the Court’s decision provides important reminders for boards in considering whether (and when) to adopt a poison pill in the face of a threat to the corporation. This includes the types of “threats” that will justify the adoption of a pill, and the scope of protections that will be considered a “proportionate” response to those legitimate threats.

Although the Court struck down the pill in this case, that should not prevent boards from considering adoption of a pill in a situation where they are facing an identifiable threat, whether from a potential takeover or activist shareholder, and tailoring the terms of such a pill to the threat posed.

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Good afternoon everyone, and thank you to the ICI for inviting me to speak with you today at the 2021 Mutual Funds and Investment Management Conference.

I gave my last in-person speech on March 5, 2020. It’s hard to believe that a full year has passed and we are still operating in a virtual environment. Among the many lessons this last year has taught, we’ve learned that we can still come together to exchange ideas as we do this week at the ICI’s conference. The exchange of information and ideas, the goal of any conference, relates to one of our underlying democratic norms: that knowledge is empowering. That principle is also the basis of shareholder democracy: through clear and timely disclosure, we empower investors to hold the companies they own accountable—including accountability on climate and ESG matters. But in a world where institutional investors play an unprecedented role in our economic future, the people in this virtual room are also increasingly key to making sure companies are accountable to their shareholders—on those very issues, which, it’s no secret, have long been a focus of mine in large part because it is the focus of investors representing tens of trillions of dollars.

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Our philosophy hasn’t changed

In our last Insights on compensation, we shared key considerations for well-structured executive compensation plans that could withstand the most challenging market and economic conditions, including a pandemic. Although we recognize the unprecedented challenges that companies have faced and that will continue to play out over the coming months, our philosophy on executive compensation has not changed. We look for compensation policies that incentivize long-term outperformance versus peers and drive sustainable value for a company’s investors.

Build long-term plans and stay the course

We continue to evaluate executive compensation case by case and look for a strong focus on performance and the long term. The Vanguard funds are more likely to support plans in which a majority of executive compensation remains variable, or “at risk,” with rigorous performance targets set well beyond the next quarter. Companies across all sectors have experienced varying levels of disruption from the COVID-19 pandemic, including many businesses that have had to fully or partly close following government-mandated lockdowns.

Vanguard understands that the crisis may have hurt companies’ performance. However, we remain steadfast in our view that compensation committees should not retroactively adjust performance targets or time horizons, despite the challenging environment. “At-risk” compensation should remain at risk, just as the Vanguard funds’ capital does—along with that of other shareholders. We believe that the experiences of shareholders and executives should be aligned in both good and challenging times.

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Our first Say on Pay and Proxy Results report of the 2020 proxy season included four predictions for voting trends. At that time, it was difficult to estimate the impact that COVID-19 would have on 2020 corporate performance and compensation programs (and significant uncertainty still exists). Compensation-related actions in response to COVID-19 will be a major discussion point in CD&As and proxy advisor reviews that are released in early 2021. Below are the trends we observed through the 2020 proxy season.

• We did not observe any change in the average Say on Pay vote support for Russell 3000 companies from 2019 to 2020, despite a significant number of companies disclosing mid-year pay We expect the 2021 average vote support and failure rate to reflect more of COVID-19’s impact as shareholders learn the full breadth of actions (such as discretionary bonus adjustments, modifications to outstanding equity, and other design changes) taken by companies through proxy filings covering FY20 executive compensation
• Based on the Say on Pay failure rate’s cyclical trend since 2011, we predicted the Say on Pay failure rate for Russell 3000 companies would fall below 2% after two consecutive years above 5%. The failure rate decreased to 2.3% in 2020
• We expected the standard deviation of Say on Pay voting to increase above the 13% standard deviation observed in 2019 due to differing approaches from investors measuring company’s pay-and-performance relationship; however, this shift was not as impactful as expected and the standard deviation decreased from 13% to 12.3% in 2020
• We anticipated average Director vote support would fall below 94.5% as shareholders continue to increase expectations for Average vote support in 2020 (94.9%) did not drop as drastically as predicted; however, we expect this trend will continue at the current pace in 2021 as pay-related decisions in the COVID-19 environment are assessed in next year’s proxies
• We predicted the median vote support for Environmental and Shareholder proposals would reach 30%. Overall, vote support did not increase in 2020, but the number of proposals receiving above 50% support increased significantly. Investors are tightening their expectations around ESG-related actions and are holding companies accountable to these expectations through other avenues beyond shareholder proposals

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Key Takeaways

Protests in 2020 that swept across the US have cast a spotlight on levels of racial and ethnic diversity of corporate directors, C-suite executives and corporate workforces. Progress on racial and ethnic diversity on US corporate boards has been slow, and there is even less diversity in C-suites from which many director candidates are drawn. Shareholders, politicians, stock exchanges, activists, and rank-and-file employees are expected to apply pressure for increased diversity and inclusion. A variety of shareholder proposals addressing D&I concerns have been submitted at US companies. Similarly, there is a focus in the Canadian market to improve BIPOC diversity in both the public and private domains, while disclosure and regulatory challenges hamper measuring progress in Europe. Meanwhile, in many global markets, efforts to boost gender diversity levels in boardrooms and C-suites are expected to continue.

The continuing COVID-19 pandemic will necessitate holding many shareholder meetings via electronic means. Given ongoing health and safety concerns, a majority of US and a significant number of other companies around the world are expected to continue to hold virtual-only meetings for at least the first half of 2021. The pandemic outbreak on the eve of most 2020 proxy seasons created challenges for many companies as they scrambled to switch from traditional in-person AGMs to virtual-only formats via the Internet or other electronic means. The significant short-notice changes needed left many companies ill-prepared to provide shareholders with meaningful levels of participation on a variety of technology platforms, or even in meetings held behind closed doors. Some shareholders expressed concerns regarding the inability to ask questions or to vote at virtual meetings. While a number of industry participants appear to have addressed problems in providing access to meetings, shareholders may not be as forgiving as last season if companies experience technical mishaps or hold bare-bones, audio-only meetings with limited opportunities for shareholders’ questions and dialogue.

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Environmental, Social & Governance (ESG)

Climate Change

Issues of climate change have been among the most prominent issues facing investors and companies in recent years. Emissions-intensive companies are under increasing regulatory pressure from governments seeking to curb climate impacts and mitigate climate-related risks. Moreover, with 2020 bringing an unprecedented number of storms as well as devastating fires in Australia and the West Coast of the United States, it is becoming very challenging for companies and investors to ignore the significant risks posed by the physical impacts of a changing climate.

Investors have traditionally targeted companies with the greatest exposure to issues of climate risk, such as those in the energy, materials or other extractives industries. However, we are seeing this focus grow to encompass companies that may be outside of these industries. These companies are increasingly being asked to provide, and shareholders are increasingly supporting, enhanced disclosure concerning their climate impacts and risks.

However, this has not alleviated the pressure on companies in more extractive industries, which are increasingly being asked to set Scope 3 emissions reductions targets and are facing coordinated engagements from groups like the Climate Action 100+. Accordingly, we anticipate seeing the submission of and strong investor support for resolutions on this topic.

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For the first time, six of the world’s most influential shareholder voting research and analysis firms (better known as “proxy advisors”), which help institutional investors vote shares at stock-exchange-listed companies worldwide, have each publicly released reports showing how they comply with the latest industry Best Practice Principles. [1]

Proxy advisors have been a target of corporate criticism ever since Institutional Shareholder Services (ISS) pioneered the voting-recommendation industry in 1985. Through its landmark 1988 Avon Letter, [2] the US Department of Labor first declared the share ballot an asset—making it all but mandatory that ERISA-regulated funds cast them. The rule paved the way for an expanded industry of voting research and advisory firms. But for decades many institutional investors commonly handled the responsibility as a low-status compliance exercise. In 2007 Lord Paul Myners, later UK City Minister, scathingly referred to proxy staff as the “open-toed sandal brigade” beavering in the basements of investment houses. [3]

That’s not the case today. Increasingly, investors are merging the voting responsibility with investor-corporate engagement in a new discipline that has become known as stewardship. Moreover, as asserted most prominently in annual letters from BlackRock’s Larry Fink [4] and State Street Global Advisors’ Cyrus Taraporevela, [5] stewardship is now seen as a central means for mainstream investors—not just activists—to seek and protect share value. As a result, institutions have piloted a steady drift away from routine endorsements of corporate management and toward more critical stances on executive pay, director nominations, ESG, and a host of other issues.

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In September 2018 a quota for corporate boards was passed in California (CA Senate Bill 826). It requires all publicly held firms headquartered in the state to have at least one appointed female director by the end of 2019, and two (three) female board members by the end of 2021 for boards with five (six or more) members. Following the lead of several European countries, this made California the first US state to impose a binding gender quota on boards. The stock market reacted negatively to the quota (as documented by Hwang, Shivdasani, and Simintzi, 2018; Greene, Intintoli, and Kahle, 2020), a fact which has been interpreted as evidence that shareholders oppose the mandated addition of new female directors (e.g., because of scarcity of qualified female candidates leading to higher search costs, or to suboptimal trustees being appointed, see also Ahern and Dittmar, 2012) and prefer the current composition of the board.

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At State Street Global Advisors, we believe that companies have a responsibility to effectively manage and disclose risks and opportunities related to racial and ethnic diversity. A growing body of research [1] suggests that diversity can drive returns, and that boards that neglect this topic face risks to their reputation, productivity, and overall performance. We have expanded our firm’s longstanding focus on gender diversity to include race and ethnicity, and this essential dimension of ESG risk management will be a priority for our Asset Stewardship team in 2021. What follows is an overview of what to expect from us on this topic.

Our Expectations For Enhanced Racial & Ethnic Diversity Disclosures

Investors would benefit from increased publicly-available data on diversity and inclusion at portfolio companies. As such, we are focused on increasing the availability of relevant information in the market. As articulated in our August 2020 letter to Board Chairs, we expect all companies in our portfolio to offer public disclosures in five key areas:

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Shareholder proposals serve as an important tool for investors to voice their perspectives and seek change at public companies. Vanguard index funds are practically permanent investors in approximately 13,000 public companies worldwide, and Vanguard hears from a wide range of stakeholders who want to understand our decision-making process for voting on shareholder proposals on behalf of Vanguard funds.

Many shareholder proposals address environmental or social matters such as climate risk, human rights, diversity, political spending, or data privacy. Others suggest changes to governance practices or shareholder rights. Not all shareholder proposals are created equal, though, and corporate governance is constantly evolving. The nature of shareholder proposals changes from year to year, as do the factors that inform our analysis of each one.

A framework for analysis

The funds’ voting is governed by their board-approved proxy voting guidelines, and the Vanguard Investment Stewardship team uses various inputs to inform the funds’ decisions on every shareholder proposal up for vote at a portfolio company. These inputs include disclosure by the company, third-party research, and direct engagements with the company as well as with the proposal’s proponents.

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