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15 July 2019
Increase in opposition in director elections
Increase in opposition to say-on-pay proposals
Major shifts in number of and support for E&S shareholder proposals
Record levels of E&S proposals withdrawn
With 70% of the annual meetings for the Russell 3000 having now taken place (1,812 companies), in this article, ISS takes an early look at the 2019 proxy season. In brief, ISS found increases in opposition to director elections and to say-on-pay proposals, as well as increases in the number of, and withdrawal rates for, environmental and social (E&S) proposals relative to governance (the "G" in ESG) proposals. In addition, the disparity in the levels of support for E&S proposals relative to the historically more popular governance proposals has narrowed dramatically.
Although it's nothing compared to the 9.4% level of opposition recorded in 2009 after the 2008 financial crisis, ISS reports that, so far in 2019, 4.9% of director elections received less than 80% support, reflecting a "steady increase" in opposition since the historical low of 2.9 percent recorded in 2015. According to ISS, the 2019 level of opposition is the highest "since the advent of say-on-pay proposals in 2011." ISS also notes that the trend does not track negative ISS recommendations, which declined in 2019 to 8.1% from 8.9% in 2018.
ISS attributes the rise in opposition to an evolution in investor views and processes on various social and governance issues, as "[m]any investors add new factors to their analysis or refine existing criteria of their board evaluation policies. In addition to board accountability, factors such as board diversity, board refreshment, director overboarding, and board leadership appear to be taking a larger role in investors' director election assessment process. And while director election policies become more involved, for each of the factors under assessment, investors have a diverse set of viewpoints based on their own unique preferences and policies."
ISS observes that opposition to say-on-pay proposals continues to increase, citing, for 2019, 13.5% of proposals receiving less than 80% approval, 8% below 70% approval and 2% below 50% approval. ISS characterizes that data as "almost historical records, after reaching its lowest point in 2017. While 2018 was a year of negative returns for U.S. stocks, based on our early estimates, executive compensation levels are reaching new record highs," with the median CEO pay increase at 6% for the S&P 500, primarily driven by big stock grants. ISS reports that the proportion of performance-based comp increased to 58% for the S&P 500 CEOs. As with director elections, investors may be applying more sophisticated analyses to performance metrics and incentive targets and their alignment with strategy, as well as to issues such as mega-grants, "excessive emphasis on TSR, complicating the compensation program with too many metrics, or disclosing retentive pay (compensation that the executive expects to receive regardless of performance) in the guise of performance pay."
ISS reports that there were more—and more types of—E&S shareholder proposals (454) submitted so far this year than governance proposals (367), as has been the case for the two preceding years. According to ISS, the proposal filed most often was for an independent board chair (66 filings), followed by political contributions disclosure (62 filings) and board diversity (45 filings). It is important to note that, historically, while governance proposals have often garnered significant support, E&S proposals have not. Remarkably, so far in 2019, the levels of shareholder support for E&S proposals (30%) are only nine percentage points lower than for governance proposals (39%), the lowest spread on record. Using 30% as a threshold for significant support, ISS found that, in 2019, 48% of E&S proposals received shareholder support over 30%. Notably, however, until 2010, no more than 10% of E&S proposals achieved that level of support. To illustrate this trend, ISS observes that proposals for political contributions disclosure received higher support rates in 2019 than proposals for independent chairs. ISS maintains that the data suggests that E&S and governance proposals are no longer compartmentalized as separate concepts.
This shift in voting support may reflect a recognition by investors of the financial impact of environmental risk. Majority votes in favor of several climate-change proposals in the last few proxy seasons have been attributed to changes in prior positions on the issue from asset manager BlackRock and other institutions. In its 2018 voting guidelines, BlackRock said that, where it has concerns regarding E&S issues, it may vote against directors or support shareholder proposals on this issue, taking into consideration whether the company has taken steps to address the concern and implement a response, as well as any near-term economic disadvantage to the company related to the issue. (See this PubCo post.) An analysis by non-profit CDP (fka the Carbon Disclosure Project) of responses to its climate change questionnaire for 2018 showed that, among the group of 500 largest companies, 215 companies (representing almost $17 trillion in market cap) responding to questions regarding financial impact estimated, in the aggregate, almost a trillion dollars at risk from climate-related factors. In terms of likelihood of occurrence, about half of these risks were reported as "likely, very likely or virtually certain," while most of the remaining risks were reported as "about as likely as not." The majority of these risks (about $747 billion) were expected to materialize in the short- to medium-term (around five years or less). (See this PubCo post.) Others have emphasized that there is a viable business case for ESG. (See this PubCo post.)
ISS reports that the percentage of E&S proposals withdrawn to date in 2019 is at record levels—almost half of proposals—reflecting an increased willingness by companies to engage with proponents and reach a resolution of their demands, leading to withdrawal of the proposals. ISS cites as factors contributing to the rising rate of withdrawals of E&S proposals "[c]hanging investor expectations on key issues such as diversity and climate change (see this PubCo post), public pressure on high-profile issues like the opioid crisis and gun safety (see this PubCo post), and companies' own more pro-active approach to managing social and environmental risks." Interestingly, withdrawal rates for governance proposals are unusually low, reflecting, ISS suggests, the absence of market consensus and related lower shareholder voting support rates for many of the current governance proposals, such as independent board chairs. By comparison, past prevalent topics such as adoption of a majority vote standard generally received higher support levels. ISS also noted a slight increase in grants by Corp Fin of no-action relief related to E&S proposals, primarily as a result of withdrawal of the underlying proposals.
In this article, The Long View: US Proxy Voting Trends on E&S Issues from 2000 to 2018, ISS contended that "investor voting behavior among owners of U.S. companies has changed significantly—perhaps almost revolutionarily—over the past two decades." What's more, "the most significant change in investors' voting behavior pertains to environmental and social issues, as these proposals are earning record levels of support in recent years." In this piece, ISS contended that support for E&S proposals began to increase after the 2008 financial crisis, which created a new focus on governance and sustainable business practices, including environmental and social issues. Over the last 10 years, the median level of support for E&S shareholder proposals increased as a percentage of votes cast from 6% in 2008 to 24% in 2018, reflecting a "dramatic change in investors' attitudes towards environmental and social issues." Similarly, in 2018, 36% of E&S shareholder proposals received support of over 30% of votes cast, up from 7% in 2008. This change in voting results reflected increased pressure from the public and regulators, global policy initiatives, major disaster events (such as the 2010 Deepwater Horizon oil spill and the 2011 Fukushima nuclear disaster) and "the evolution of the debate by proponents from a values-based framework to a value-oriented discussion of managing potential business risks." As investors became more actively engaged, policy issues, such as climate change and diversity, rose to the forefront. (See this PubCo post.)
For further information on this topic please contact Cydney Posner at Cooley LLP by telephone (+1 415 693 2000) or email (firstname.lastname@example.org). The Cooley LLP website can be accessed at www.cooley.com.
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