With almost 400 of the S&P 500 having reported in, we can just about wrap up 2017 proxy season, and more importantly can assemble the lessons learned from proxy season for companies that will be speaking to their investors in summer / fall shareholder engagement season.
We’ll update our data and include some of our prior comments from this year’s Top Five Lessons from the S&P 500’s 2017 Proxy Season:
- Shareholders are starting to push issuers much harder on environmental disclosures and activity. Average support for environmental-focused shareholder proposals at S&P 500 companies jumped from 20.1% in 2016 to 29.7% in 2017, and further, abstention votes fell from 9.7% to 4.2%. 4 S&P 500 proposals received outright majority support, with another 9 receiving at least 40% of votes in favor. While we’ll see during NPX season which major investors changed tendencies, we won’t be surprised if Fidelity, Vanguard, SSGA, or Geode Capital represented the swing votes between the last two years. While these proposals were concentrated into larger energy and utilities companies, even some consumer and tech companies received greater than 20% support. Companies would do well to make sure their disclosures regarding climate change and sustainability risk are in line with industry standards to avoid attracting negative shareholder attention in the future.
- After a 3-year process, proxy access is now the standard. Companies opposing shareholder proposals to enact proxy access did so with spotty results – 8 S&P 500 companies opposed shareholders calling for proxy access and saw their opposition fall short with majorities supporting the proponents; conversely, “fix” proposals to change the terms of company proxy access bylaws still saw non-trivial support (generally 18-36%) and may lead to additional management opposition in the future. The small range of S&P 500 companies that have not enacted proxy access or are on non-standard terms (3%, 3yrs, etc.) will want to review their policies, particularly given the knowledge that no shareholder yet has successfully used proxy access to propose a director.
- Shareholders are finding less to oppose regarding say-on-pay votes. Overall average support finished the season at 91.5% for the S&P 500, up from 90.7% in 2016, with just 2 companies failing say-on-pay and another 20 lagging the 70% ISS threshold (down from 4 and 23, respectively, in 2016). Even across smaller companies, pay packages appear to be closer-aligned with shareholders – 21 of the Russell 3000 saw failed say-on-pay votes to date, compared with 35 during 2016 proxy season. That said, changes are on the horizon, as ISS and investors start to look deeper at other ways to evaluate pay and performance beyond just TSR and into other GAAP operating metrics. While investors may re-evaluate their say-on-pay policies alongside new disclosures later this year (possibly including the pay ratio metric in some cases), issuers may want to survey their investors during engagement season to see what disclosures they’ll be seeking in next year’s CD&A.
- Board structure proposals, particularly CEO / chair separation, are still a strong driver of shareholder interest. 2016 saw a surge in management support for board structure proposals, jumping from 69.3% supporting management to 78.5%. However, any issuers that thought investors had moved past this issue were sorely mistaken. 2017’s results showed 75.4% overall support for management, but included one six shareholder proposals at S&P 500 companies receiving at least 40% support. Separately, Netflix Inc., faced a board declassification proposal that received majority support (62.5% opposing management / supporting the proposal); investors are similarly becoming more forceful after the public outcry over the Snap IPO about pushing investors to adopt governance best practices (declassified board, majority voting, removing multi-class shares) on a set timeline after IPOs. Both ongoing concerns without a strong lead independent director, as well as recent flotations, will need to listen to shareholders in engagement season.
- Activism will continue, but issuers remain willing to settle before contests come to a vote. 24 Russell 3000 proxies triggered “contested” rules in 2017, down from 28 in the comparable period in 2016, with just a few high-profile situations coming to a vote (including Immunomedics, Arconic, and Buffalo Wild Wings). Further, Factset Sharkwatch notes that just 18 campaigns overall (including Russell 3000 and others) “went the distance” so far in 2017, with management winning 10, dissidents winning 7, and a split vote on the last. That said, over the comparable period in 2016, 29 contests reached the final voting stage, with management winning 21, dissidents 7, and 1 split. Activists continue to target companies at a steady clip, but the true goal of any activist investor or issuer is to create value for their respective investors, and both sides agree that the costs involved in a full proxy fight may not be the best way to generate that value. Companies that know and have the trust of their shareholders, including both the investment and voting decision makers, have a natural advantage when facing activists that may approach with their own ideas about governance at the company.