Shareholder proposals are a staple of annual shareholders meetings. In the U.S. and Canada, proposals are mainly made by labour-affiliated investors, individual activists, and social-, policy- or religious- oriented investors. They cover a wide range of topics from corporate governance to corporate social responsibility.
In 2013, in the U.S., the most common topics dealt with political contributions and lobbying, board declassification and independent chairs. In Canada, compensation issues, such as say-on-pay or limiting CEO compensation, consisted of more than half the proposals in 2013.
According to U.S. and Canadian corporate law, the board of directors manages the business and affairs of a corporation. Shareholder proposals can only be presented as recommendations. Thus, a board of directors is not legally compelled to implement a proposal that is approved by a majority of shareholders.
For the 2014 U.S. proxy season, however, ISS will apply a policy of potentially recommending that shareholders vote against directors where the board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year. The recommendations will be made on “a fact-specific case-by-case basis” and consider the following factors:
- disclosed outreach efforts by the board to shareholders in the wake of the vote;
- rationale provided in the proxy statement for the level of implementation;
- the subject matter of the proposal;
- the level of support for and opposition to the resolution in past meetings;
- actions taken by the board in response to the majority vote and its engagement with shareholders; and
- the continuation of the underlying issue as a voting item on the ballot
Similarly, in Canada, the 2014 proxy season will be the first where ISS applies its policy of recommending that shareholders withhold from continuing individual directors, committee members, or the continuing members of the entire board of directors if the board failed to act on a shareholder proposal that received majority support from shareholders. While the Canadian policy is not as detailed as in the U.S., ISS will apply it on a case-by-case basis. In doing so, it will give consideration to the board response and rationale.
With its updated policies on the subject, ISS seeks to strike a balance between the directors’ duties to act in the best interest of the company and their responsiveness to shareholders. It will be interesting to watch the influence of this new policy on director elections, if any, over the course of the coming proxy season.