The 2015 Proxy Season is on the doorstep. A look back at the hot topics in shareholder meetings held in the U.S. in 2014 is useful for Canadian issuers to anticipate emerging trends.
When looking at the shareholder proposals voted on at S&P 1500 companies that held their annual meetings in the first half of 2014, three themes of interest stand out.
First, corporate governance issues continue to form the bulk of shareholder proposals. Among those issues, the most common proposal involves the separation of the roles of CEO and chair. Although such resolutions gather about a third of shareholder support on average, the proposal is seldom adopted. Investors appear therefore to be satisfied with the role of the lead independent director as an alternative to an independent board chair. The U.S. position contrasts with the Canadian position where the independent chair is an accepted governance practice for the vast majority of Canadian public corporations.
While majority voting in director elections is becoming a standard practice in large U.S. corporations, it continues to form a significant portion of governance-related proposals. Most notably, majority voting proposals received on average the majority of votes cast in favour. Canada has moved ahead of the U.S. with respect to majority voting. Indeed, following the recent reform of the TSX Company Manual, listed corporations are now required to adopt majority voting for the election of directors other than at contested meetings.
Proxy access, which purports to allow shareholders to have their own director nominees included in the proxy form, remains another notable topic. It benefits from the Securities and Exchange Commission “private ordering” rule that permits shareholders to submit and vote on proxy access proposals. In 2014, support grew for the 3% / 3-year proposal discussed previously, suggesting that consensus is slowly building in favour of this model, with about 30% of the proposals voted on being adopted. Although it has been alluded to from time to time by shareholder democracy advocates, proxy access has not gained any traction so far in shareholders meetings in Canada. Still, the U.S. experience with proxy access remains relevant given that it is being debated in Canadian policy circles, namely in the context of the Industry Canada Consultation on the Canada Business Corporations Act.
Second, the number of compensation-related proposals declined in the 2014 U.S. Proxy Season, continuing a trend that began with the introduction of mandatory say-on-pay voting. The proposals tabled focus primarily on two issues: equity retention and golden parachutes. With respect to equity retention, the proposals require that senior executives retain a significant portion of their equity awards beyond retirement. While frequent, these proposals did not prove successful. The proposals that seek to prohibit single trigger vesting of equity awards marshalled greater support and passed in about 40% of the corporations targeted. From a Canadian perspective, the data suggest that the debate (which rarely translate in shareholder proposals) concerning long-term incentive vehicles and single-trigger change-in-control clauses is far from over.
Finally, it is worth noting that social and political shareholder proposals are almost as frequent as governance-related proposals. However, they are by far less successful, save for one notable exception: proposals that seek to enhance the disclosure of political and lobbying expenditures. The political contribution and lobbying proposals have generated strong support from shareholders, with a few passed in 2014. In any case, they have led corporations to expand their disclosure of such expenditures. Hitherto, political contributions have not been the subject of shareholder proposals targeting Canadian corporations. Nevertheless, political spending by corporations in Canada or abroad (in the form of direct contributions, advertisements, lobbying, or third-party memberships) is starting to attract attention. Among the issues being discussed is the opportunity for disclosure of political spending by Canadian corporations in their proxy circulars.
Say on Pay
The fourth year of mandatory say on pay in the U.S. was characterized by continuity. Indeed, the average support for S&P 1500 corporations was similar to the previous year with about 91% votes cast. There were less than 3% of failed votes and about 5% votes with less than 70% support of votes cast. The driving force behind negative votes remains the disconnection between executive pay and performance.
In Canada, say on pay is offered on a voluntary basis by corporations. Say on pay is primarily conducted at large corporations, with more than two thirds having a market capitalization over $1 billion. Average shareholder support was in line with the U.S. results at 92% of votes cast. Although a few corporations received less than 70% approval, there were no failed say on pay votes in 2014. As in the U.S., it is the misalignment between executive compensation and stock market performance that primarily determines investors’ voting decisions. Looking forward, the U.S. and Canadian say on pay experience is informative for boards preparing for the upcoming proxy season, as it emphasizes the importance of explaining thoroughly the choice of performance metrics and their relation with executive compensation.
Earlier this year, we identified shareholder engagement as one of the five developments to follow in 2014. This year’s proxy season showed that shareholder engagement with directors is undoubtedly becoming a staple of the governance landscape. Last spring, the Shareholder-Director Exchange (SDX) working group was formed by advisers to corporations to regroup leading independent directors and representatives from some of the largest and most influential long-term institutional investors. To provide a framework for shareholder-director engagements, the SDX working group created the Shareholder-Director Exchange Protocol (SDX Protocol). In July 2014, a letter written by investor members of the working group was sent to Chair, Lead Directors and Corporate Secretaries of every Russell1000 corporations. The letter suggest to these corporations that they consider formally adopting a policy on shareholder-director engagement by adopting or endorsing the SDX Protocol or otherwise.
In Canada, the demand for engagement between boards and shareholders is also a reality of this new era of governance marked by greater activism. And demand for engagement on the part of investors appears to be growing. In fact, since 2010, the Canadian Coalition for Good Governance has recommended that boards adopt its model policy on engagement with shareholders and disclose it to shareholders. The recent SDX initiative suggests that boards would be well advised to discuss the format for shareholder dialogue, including the adoption of a policy.
Over the last decade, gender diversity in corporate decision-making functions has attracted increasing attention on the part of law-makers and regulators. In some countries, laws have been passed to impose quotas for female directors in publicly-traded corporations. In others, regulatory interventions have mandated disclosure regarding gender diversity in boards of directors and senior executives. Further, the importance of gender diversity reaches beyond the regulatory sphere. Indeed, a significant number of model corporate governance codes around the world have recommended that boards give proper consideration to gender diversity.
The mainstreaming of gender diversity in corporate governance is now a reality for Canadian public corporations. Last November, the 2014 edition of the Globe and Mail Report on Business Board Games focused on gender diversity. Moreover, gender diversity will soon be part of securities regulation. Indeed, a number of members of the Canadian Securities Administrators (CSA) have proposed amendments to Form 58-101F1 Corporate Governance Disclosure to deal with the composition of the board of directors of non-venture issuers that relates to gender diversity.
Specifically, the amendments require that issuers disclosure annually information pertaining to the following elements: (i) director term limits, (ii) policies regarding the representation of women on the board, (iii) the board’s or nominating committee’s consideration of the representation of women in the director identification and selection process, (iv) the issuer’s consideration of the representation of women in executive officer positions when making executive officer appointments, (v) targets regarding the representation of women on the board and in executive officer positions, and (vi) the number of women on the board and in executive officer positions.
The amendments come into force on December 31, 2014. The new disclosure requirements apply to management information circular or annual information form filed following an issuer's financial year ending on or after December 31, 2014.
Undoubtedly, the reform has notable consequences for issuers for the coming proxy season. The new requirements impose additional disclosure requirements on items not typically addressed in proxy materials. More importantly, the amendments suggests that boards of directors should hold conversations on the items addressed by the new requirements in order to establish or refine their corporation's position on gender diversity.