Prior to a company’s general meeting, shareholders typically receive a variety of documents laying out the firm’s financial performance and making any important announcements about its strategy and operations.
Also included is the “proxy statement” which includes a range of proposals that shareholders are asked to vote on – either at the annual general meeting in person or via the proxy forms included – such as nominations for the board of directors, pay packages of top executives, and proposals from both managers and other shareholders for changes to how the company should be run.
Not only are these proxy statements important because they allow the owners of the company to influence how it is run but also because activists – interested in anything from reducing the company’s carbon footprint to returning more cash to shareholders – can ask for proposals to be added to the proxy statement (a minimum number of votes ensures a proposal stays on the proxy statement the following year), and that can often generate publicity.
And all this means that companies spend quite a lot of time preparing for “proxy season,” as the lead up to most companies’ April AGMs is called. Typically the corporate secretary and/or general counsel lead the preparation, but heads of investor relations increasingly supply information on investor sentiment and provide unique perspectives to the governance team.
Five Trends for the 2016 Proxy Season
Proxy contests over the shareholder proposals are expensive – the average amount spent on proxy contests by large and mid-cap companies exceeds $10 million – so heads of investor relations (IR) need to be prepared for the possible battles ahead and spend as little money as possible on doing so.
Environmental proposals are the most frequent type: The five most common types of shareholder proposals are environmental concerns, the chairman’s independence, a firm’s political spending, it’s lobbying efforts, and its equity compensation rules (see chart 1). Of these, the number of environmental proposals has almost doubled over the past four years and currently they are the most frequently received type of proposal.
However, a high number of proposals do not necessarily indicate a high level of voting support. Environmental and political spending received among the highest number of proposals but a low level of voting support. Proposals on say on pay and declassifying the board received the most voting support.
Chart 1: Number of shareholder proposals by proposal type Source: CEB analysis
Click chart to expand
Proxy access proposals experienced their largest year-over-year increase: Proxy access proposals experienced their largest year-over-year rise since 2014, and have more than tripled. One of the main causes is the Dodd-Frank Act, which affirmed the right of a shareholder, or a group of up to 20 shareholders, holding 3% of a company’s shares continuously for three years to include board nominees in the company’s annual proxy statement.
Direct proxy access gives shareholders greater clout to oust directors and influence strategy by letting them nominate board candidates on corporate ballots. Apple is among the latest to join a growing list of companies including Citi Group, Clorox, Coca-Cola, GE, and Microsoft that offer proxy access.
Golden parachutes and clawbacks still generating interest: Golden parachutes are under more and more scrutiny from investors, especially during M&A deals or takeovers, when executives can pocket years’ worth of stock options, salary and bonuses all at once. The number of shareholder proposals about golden parachutes has doubled since 2013 (see chart 2). As M&A activity rises over the next few years, companies have begun to offer shareholders a vote on executive payout packages and safety nets.
After the financial crisis, regulators forced financial services firms in particular to recover – or “clawback” – compensation such as bonuses, stock options, or other incentives that had been paid to employees. For shareholders, clawbacks help improve accountability by acting as a deterrent to insider trading and discouraging employees from excessive risk taking that contributed to the financial crisis. As a result, the number of shareholder proposals for clawbacks have tripled from 2014 to 2015 (see chart 2).
Chart 2: Number of clawback and golden parachutes shareholder proposals submitted each year Source: CEB 2015 Business Barometer Survey
Individuals and labor-related funds submitted the highest number of proposals: The four broad types of shareholder proposals are those concerning voting rules, social policy, executive compensation, and corporate governance, and those doing the proposing vary in each case. Individuals and labor-related funds submitted the highest number of proposals. Labor and social proponents submitted more social policy proposals, while individual proponents submitted more corporate governance proposals.
New York City Pensions Funds’ top focus was proxy access and New York State Common Retirement Fund’s targeted lobbying and political spending. Among individual proponents, “corporate gadflies,” such as Chevedden and Steiner, demand attention as their proposals receive relatively strong support.
Social policy proposals still well supported: Energy companies’ heads of IR will likely receive a high number of social policy proposals this season. Social policy proposals are the most common type in seven of 10 sectors (see chart 3). The New York State Common Retirement Fund, As You Sow, New York City Pension Funds, and Trillium Asset Management submitted the highest number of social proposals.
Chart 3: Proposal type by sector Source: CEB Analysis
Click chart to expand