Shareholders Turn Their Attention to Golden Parachutes and Political Contributions While More Companies Implement Winning Governance Proposals, The Conference Board Reports

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Sep 18, 2014, 10:00 ET

NEW YORK, Sept. 18, 2014 /PRNewswire/ -- Research released today by The Conference Board in collaboration with FactSet reconstructs how shareholder activism and voting at annual general meetings (AGMs) of U.S. public companies have evolved in the last five years. The report, Proxy Voting Analytics (2010-2014), examines data from more than 2,500 AGMs held at Russell 3000 companies between January 1 and June 30. It shows a fundamental shift in the types of resolutions submitted to a vote by shareholders, the sophistication developed by activist investors in the use of technology and social media to agitate for corporate change outside of the AGM, and the increased propensity of senior management to implement precatory shareholder proposals on corporate governance that have received the support of a majority of voting shares.

The introduction of say on pay was one of the most significant developments in corporate/investor relations following the financial crisis of 2008 and led to a sensible decline in the volume of shareholder proposals on executive compensation. Nonetheless, targeted pay issues can still find their way onto corporate voting ballots at annual meetings, and in some cases they receive wide support. For example, the report shows that, among Russell 3000 companies that held meetings during the first half of 2014, five investor-sponsored proposals restricting golden parachutes received majority support, the highest number ever recorded for this topic.

"The introduction of say on pay was a game changer in the design of compensation policies, as many large investors are now heard by management as part of the process and ahead of a shareholder meeting," says Matteo Tonello, Vice President at The Conference Board and coauthor of the report with researcher Melissa Aguilar. "However, some institutions, especially labor-affiliated funds, continue to file resolutions on executive compensation, which they now view as a surgical tool for the removal of controversial pay practices. The five proposals approved on the restriction of golden parachutes are an example of this development."

Political spending and lobbying activities, a topic virtually absent from voting ballots until a few years ago, became the most frequently submitted shareholder proposal type of 2014, with a wide range of sponsors (investment advisers, individuals, religious group, in addition to a handful of labor unions) requesting more disclosure or, in some cases, restrictive policies. There were 86 such proposals voted during the first half of the year, five of which received more than 40 percent support.

"Since Citizens United, this type of shareholder request has steadily risen to the top of the social and environmental policy category, and is far more frequent than proposals on human rights or environmental issues," says John Laide, Vice President at FactSet Research Systems. "Interest in the issue is not expected to subside, and proposals on political issues receive the highest average support among social and environmental topics, although they're still far below the average support for governance topics."

The Conference Board and FactSet also reported the 2014 rate of withdrawals of shareholder proposals (11.6 percent of the total submissions in the Russell 3000), which doubled from a few years ago as companies chose to preempt a vote on certain investor requests by voluntarily implementing their own reforms. It was not all a product of engagement, however, and guidelines on board responsiveness from proxy advisory firm ISS also drove the surge of management proposals on issues previously raised by activists.

Other findings highlighted in Proxy Voting Analytics (2010-2014) include:

Shareholder proposal volume was slightly lower this year, with a sharper decline among larger companies as investors focus on new topics and broaden their targets.
Excess cash on U.S. companies' balance sheets fueled the growth of the activist hedge fund industry, and the number of resolutions sponsored by hedge funds surpassed the record levels of 2008.
Activity in the area of executive compensation by investment funds affiliated with labor unions continued to soften as those investors showed new interests, especially in social and environmental policy issues.
Proposals on corporate governance, once a stronghold for pension funds, were sharply reduced as more companies introduced engagement policies with large investors.
Shareholder resolutions on social and environmental policy rose to unprecedented levels, while some institutional investors dropped governance issues that were a staple of their past activity but never garnered widespread support.
The rate of withdrawals of shareholder proposals doubled from a few years ago as companies preempt some issues by voluntarily implementing their own reforms.
As large groups of institutional investors reduced their 14a-8 filings or shifted their attention to new and less popular topics, the percentage of voted proposals winning the support of a majority of shareholders reached a new low.
Proposals on board declassification and majority voting have become a sure bet for labor unions and public pension funds, as they are widely recognized as a baseline in corporate governance.
A surge in requests from corporate gadflies made the separation of CEO and chairman roles the top shareholder proposal topic by volume, but the institutional investment community remains skeptical of a one-size-fits-all approach to board leadership.
Support for shareholder proposals on proxy access rights reached a tipping point in 2014, with five proposals approved and four others receiving the support of more than 40 percent of votes cast, and a handful of companies submitted board-sponsored proposals.
Say-on-pay analysis confirms a significant turnover in failed votes, with several companies losing the confidence of their shareholders this year after winning the vote by a wide margin in 2013.
Although activism campaign announcements in the Russell 3000 were up in 2014, the number of campaigns related to a shareholder meeting declined, as some hedge funds choose to agitate for change without even filing a shareholder proposal.
Observations made in 2013 that hedge funds were starting to set their sight on larger companies appear disputed by numbers for 2014, when a sharp decline in activism campaign volume was recorded among S&P 500 companies.
Proxy contests were the only type of activist campaign related to a shareholder vote to increase among Russell 3000 companies in 2014, with a concentration in the retail trade and finance industries, and dissidents reported their highest success rates in years.
Engagement between corporations and investors has not curbed the most hostile forms of activism, as the volume of proposals to elect a dissident's nominee remain fairly high.

Download the Executive Summary at: www.conference-board.org/proxy2014. The complete report, Proxy Voting Analytics (2010-2014), will be released in in the fall. To receive a complimentary copy when it becomes available, please register for free at www.conference-board.org/directornotes.

About The Conference Board

The Conference Board is a global, independent business membership and research association working in the public interest. Our mission is unique: To provide the world's leading organizations with the practical knowledge they need to improve their performance and better serve society. The Conference Board is a non-advocacy, not-for-profit entity holding 501(c)(3) tax-exempt status in the United States. For more information, please visit www.conference-board.org. To enable peer comparisons among its member companies, The Conference Board offers a portfolio of benchmarking data and analysis on corporate governance, proxy voting, sustainability and citizenship. It can be accessed at https://www.conference-board.org/data/corporatebenchmarking/.

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