New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney www.sullcrom.com July 11, 2016 2016 Proxy Season Review Proxy Access Becomes Widespread as “Market Standard” Terms Are Reinforced; Traditional Governance Proposals Continue to Decline; Lack of Responsiveness to a Shareholder Vote Remains Principal Driver of Low Support Levels for Directors EXECUTIVE SUMMARY This publication summarizes significant developments relating to the 2016 U.S. annual meeting proxy season, including: Proxy Access Proposals Continue to Drive Changes. The dominant trend in Rule 14a-8 shareholder proposals and corporate governance actions in 2016 related to proxy access. A record number of proxy access proposals were made for the 2016 proxy season (around 200 in total), and many companies responded by adopting proxy access bylaws with terms similar to the proposal, resulting in a slight decline in proposals actually voted on. Around 190 of the S&P 500 companies have now adopted proxy access. Proposals Show Continued Large-Cap Focus. Shareholder proposals continued to be focused primarily on large-cap (S&P 500) companies, with more traditional governance proposals (such as board destaggering, majority voting and elimination of supermajority voting) becoming less common as most large-cap companies have adopted these arrangements. Rather than pushing these practices down to smaller companies, proponents largely turned their attention to advancing proxy access. Market-Standard Proxy Access Terms Solidified. The results of the proxy season, together with the terms of company bylaws and the SEC staff’s view on substantial implementation, further reinforced the market standard of 3%/3-years, allowing groups of up to 20 holders and limiting access to 20% of the board. Effect on Shareholder Activism. Once again, the most active proponents during this proxy season were issue-focused investors, including pension funds, labor unions, socially oriented investment entities and a small number of prolific individuals. While control-oriented activists, such as hedge funds, are not active proponents of shareholder proposals, the Rule 14a-8 process has, over time, reshaped the governance landscape to erode corporate defenses and give activists more tools to put pressure on boards and management. -2- 2016 Proxy Season Review July 11, 2016 “Withhold” or “Against” Votes for Directors. Our analysis of negative recommendations by Institutional Shareholder Services for directors demonstrates that, as in past years, directors who are seen as insufficiently responsive to a prior shareholder vote, either on a governance proposal or on say-on-pay, suffer the greatest impact from a negative ISS recommendation. Continued Strength on Say-on-Pay. Public companies continued to perform strongly on say-onpay, with support levels averaging over 90% and less than 1% of companies getting less-than-majority support. Our analysis of ISS negative recommendations on say-on-pay supports the continued importance of a pay-for-performance model, including performance standards that are clearly explained and deemed sufficiently rigorous by ISS. There continued to be significant yearover-year turnover in companies that received less-than-majority support on their say-on-pay vote, demonstrating that companies have been successful in addressing the reasons for a failed vote in a prior year, but also reinforcing the need for continued vigilance and shareholder outreach by companies that have historically had strong support. Broad Shareholder Support for Equity Compensation Plans. No large-cap companies failed to get shareholder approval for equity compensation plans, and overall support levels continued to average around 90%. Larger companies generally had higher support levels and received fewer negative ISS recommendations on these plans than small- and mid-cap companies. The data in this publication incorporates proposals made at meetings held on or before June 30, 2016, unless otherwise specified. We estimate that around 90% of U.S. public companies held their 2016 annual meetings by that date. -i- 2016 Proxy Season Review July 11, 2016 Table of Contents I. Overall Trends in Rule 14a-8 Shareholder Proposals ............................................................................... 1 A. Overview of Shareholder Proposals in 2015 and 2016............................................................. 1 B. Targets of Shareholder Proposals—Large-Cap Focus Continues............................................ 2 C. Who Makes Shareholder Proposals.......................................................................................... 4 D. Shareholder Proposals on Governance Structure..................................................................... 5 1. Proxy Access Proposals .................................................................................................... 5 a. NYC Comptroller Proxy Access Proposals................................................................. 6 b. Proxy Access Proposals Made by Others .................................................................. 7 c. SEC No-Action Position on Proxy Access Proposals................................................. 7 d. Proposals to Amend Proxy Access Terms ................................................................. 8 e. Effects of Company Strategies on Proxy Access Voting Results ............................... 9 f. Proxy Access Bylaws Terms Continue to Converge ................................................ 10 g. What to Do in Preparation for 2017 .......................................................................... 11 2. Independent Chair Proposals .......................................................................................... 12 3. Continued Strong Support for Majority Voting, Elimination of Supermajority Thresholds and Board Declassification ........................................................................... 13 4. Shareholder Right to Call Special Meetings .................................................................... 14 a. Proposals to Adopt a New Right............................................................................... 14 b. Proposals to Reduce the Threshold of an Existing Right ......................................... 15 c. Terms to consider in putting forth special meeting rights ......................................... 15 5. Shareholder Right to Act by Written Consent.................................................................. 17 6. Other Less Successful Proposals.................................................................................... 18 E. Social/Political Shareholder Proposals.................................................................................... 19 F. Compensation-Related Shareholder Proposals ...................................................................... 20 II. Analysis of ISS Negative Recommendations Against Directors ............................................................. 21 A. Board Responsiveness to Shareholders ................................................................................. 23 B. Board Independence ............................................................................................................... 23 C. Compensation Issues .............................................................................................................. 24 D. Unilateral Action by the Board (Including PRE-IPO Actions) .................................................. 25 E. Lack of Formal Nominating Committee ................................................................................... 26 F. Pledging by Insiders ................................................................................................................ 27 G. Poor Attendance...................................................................................................................... 28 H. Overboarding........................................................................................................................... 28 I. Poison Pill Issues .................................................................................................................... 28 J. Material Weakness Issues....................................................................................................... 29 III. Say-On-Pay Votes ................................................................................................................................. 29 A. Companies Maintain Strong Say-on-Pay Performance .......................................................... 29 B. Overall ISS Approach on Say-on-Pay Evaluation ................................................................... 31 C. ISS Pay-for-Performance Analysis.......................................................................................... 32 1. Components of Quantitative Analysis.............................................................................. 32 2. 2016 Results of ISS Quantitative Analysis ...................................................................... 33 3. Potential Problems with Quantitative Analysis ................................................................ 34 a. Determination of Total CEO Pay .............................................................................. 34 b. Use of TSR over Fixed Periods ................................................................................ 35 c. Peer Group Construction .......................................................................................... 35 4. ISS Qualitative Analysis................................................................................................... 36 5. ISS Non-Performance-Related Factors........................................................................... 37 D. Company Rebuttals to ISS Say-on-Pay Recommendations ................................................... 37 IV. Equity Compensation Plan Approvals ................................................................................................... 38 ANNEX A Results of Votes on and Reactions to Proxy Access Proposals in 2016.........................A-1 2016 Proxy Season Review July 11, 2016 I. OVERALL TRENDS IN RULE 14A-8 SHAREHOLDER PROPOSALS A. OVERVIEW OF SHAREHOLDER PROPOSALS IN 2015 AND 2016 The following table and pie charts summarize, by general category, the Rule 14a-8 shareholder proposals voted on at U.S. companies in 2015 and 2016, and the rate at which they passed.1 SUMMARY OF 2015 AND 2016 SHAREHOLDER PROPOSALS Total Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed Type of Proposal 2016 2015 2016 2015 2016 2015 Governance 259 285 41% 44% 79 95 Social and Political Issues 200 200 22% 21% 7 0 Compensation-Related 54 82 19% 28% 0 4 Total 513 567 Proposals Voted on in 2016 Proposals Voted on in 2015 Proposals That Passed in 2016 Proposals That Passed in 2015 1 For a comprehensive discussion of shareholder proposals, as well as public company governance, compensation and disclosure more generally, see the Public Company Deskbook: Complying with Federal Governance and Disclosure Requirements (Practising Law Institute) by our partners Bob Buckholz, Marc Trevino and Glen Schleyer, available at 1-800-260-4754 (1-212-824-5700 from outside the United States) or http://www.pli.edu. -2- 2016 Proxy Season Review July 11, 2016 In 2016, governance-related proposals (including, principally, proxy access proposals) continued to represent about half of the proposals voted on, and also continued to represent the vast majority of proposals that actually passed.2 The average support level for governance proposals was down from 44% to 41%, largely due to fewer proposals on board declassification and action by written consent (which tend to receive very high support levels) and the submission to 15 companies of a new proposal calling for share buybacks (which received negligible support levels). Social and political proposals continued to be common, and a handful of these proposals actually passed in 2016, spread across a variety of topics. There was a sharp decline in both the number and the average support levels for compensation-related proposals, largely due to far fewer proposals calling for the prohibition of “golden parachutes” and for the adoption of clawbacks. No compensation-related proposals passed. B. TARGETS OF SHAREHOLDER PROPOSALS—LARGE-CAP FOCUS CONTINUES Before turning to a detailed discussion of the various categories of shareholder proposals received by U.S. public companies in 2016, it is worth taking a moment to focus on which companies generally receive these proposals. Traditionally, the vast majority of shareholder proposals have been received by large-cap companies. Over time, this has led to a bifurcated corporate governance landscape, with socalled “shareholder-friendly” governance provisions, such as destaggered boards, majority election of directors, special meeting rights and simple majority vote thresholds, being much more common at larger companies than smaller companies. Over the years, as these governance proposals have been broadly adopted by large-cap companies, some have expected mid-cap companies to come under increasing pressure to adopt these governance structures, and in fact some governance activists have expressly stated that their strategy would be to 2 By “pass,” we mean that the proposal received the support of a majority of votes cast, regardless of whether this is the threshold for shareholder action as a state law matter (including pursuant to the issuer’s bylaws). This does not include abstentions in the denominator, as this provides a consistent metric across all companies and is consistent with the methodology used by ISS and many institutional investors and advisory firms. Under ISS’s policies and those of other proxy advisory firms and institutional investors, failure to implement a shareholder proposal which was approved by a majority of the votes cast, even if that vote would not constitute passage under state law or the issuer’s bylaws, is likely to result in negative recommendations for some or all incumbent directors in the following year due to “nonresponsiveness.” See Section II below for a discussion of negative recommendations for directors under these circumstances. Throughout this publication, information on voting results for 2016 generally includes annual meetings through June 30, 2016, voting results for 2015 reflect the full year and the companies included are the U.S. companies in the Russell 3000 index. Data is based on information from ISS and FactSet Shark Repellent, as well as our own selective review of public filings. -3- 2016 Proxy Season Review July 11, 2016 focus on smaller companies.3 To date, however, shareholder proposals have remained primarily targeted at S&P 500 companies. In 2016 so far, S&P 500 companies received 75% of all proposals voted on, which is roughly the same as in each of the last five years. The following graphs show the number of governance, compensation and social/political proposals that came to a vote at large-cap companies and at mid- and small-cap companies from 2012-2016. Large-Cap (S&P 500) Small/Mid-Cap (Rest of Russell 3000) The patterns are generally consistent across the years, with the main divergence being a spike in governance proposals at large-cap companies in 2015, as a significant number of proxy access proposals were voted on. The charts above show that compensation-related and social/political proposals have a particularly low frequency at smaller companies. This is consistent with the view that activists advancing these proposals are primarily seeking as visible a platform as possible for the dissemination of their views, because these proposals rarely pass. The continued targeting of governance proposals toward large companies means that governance activists, having achieved broad victories on a number of fronts at the S&P 500, have generally moved on to the next topic, rather than pushing the same topics down to smaller companies. In 2014 and 2015, this largely meant moving from the traditionally successful governance proposals on to proxy access, as shown in the following graph of proposals coming to a vote: 3 See, e.g., CalSTRS, Corporate Governance: 2013 Annual Report, at page 12-13, available at http://www.calstrs.com/sites/main/files/file-attachments/corporate_governance_annual_report_7-19- 13.pdf. -4- 2016 Proxy Season Review July 11, 2016 Traditional Governance Proposals Make Way for Proxy Access This does not mean, however, that developments in governance proposals and practice are not pertinent to small- and mid-cap companies, for several reasons. First, the relatively small number of traditional governance proposals coming to a vote at these smaller companies understates the effect of these proposals—in some cases, a proposal is made, but does not come to a vote because the receiving company, aware of the strong support levels these proposals have received, decides to adopt the proposal. In other cases, issuers decide unilaterally to migrate to what is perceived as the norm at larger companies. As a result, over time the most popular governance practices (particularly, destaggered boards and majority voting) have become more common at smaller companies, though nowhere near as common as at large-cap companies. Second, when these proposals do come to a vote at smaller companies, they have similarly high support levels as they do at larger companies. And third, it is unclear what the next widespread governance proposal will be after proxy access; to the extent that proponents do not have a new agenda to advance at large companies, they may in fact turn their attention to smaller companies. For majority voting, in particular, proponents have kept pressure on smaller companies, with non-S&P 500 companies representing over 70% of the proposals coming to a vote in 2016, compared to 50% in 2012. C. WHO MAKES SHAREHOLDER PROPOSALS It is informative to review the identity of shareholder proponents. Based on data provided by ISS’s voting analytics with respect to 972 shareholder proposals (including proposals which were withdrawn or excluded): Individuals. The most prolific proponents, by far, were three individual investors: John Chevedden, James McRitchie and William Steiner. Collectively, these individuals and their family members were responsible for the submission of over 223 proposals—representing close to 25% of all proposals submitted, and nearly half of all governance-related proposals. Other frequent individual proponents included Gerald Armstrong (10 proposals on various governance topics) and Jonathan Kalodimos, who did not have a history of proposals prior to -5- 2016 Proxy Season Review July 11, 2016 2016, but submitted proposals to 14 companies this year seeking the adoption of policies to prioritize share buybacks. Public Pension Funds and Entities. As discussed in Section I.D.1.a, the New York Comptroller, on behalf of the New York City Pension Funds, submitted 72 proxy access proposals to public companies for the 2016 proxy season. Beyond those proxy access proposals, public sector pension funds and entities were associated with 94 other proposals this year, with particular focus on governance proposals relating to board diversity and social proposals relating to employee diversity, disclosure of political contributions and environmental issues. Labor Unions. Labor unions, such as the AFL-CIO, the Teamsters and the United Auto Workers and related entities, were the proponents of over 70 proposals, primarily relating to governance and compensation-related issues. The number of proposals by labor unions was down year-over-year, consistent with the overall reduction in governance and compensationrelated proposals. Social Investment Entities. The majority of proposals on social issues come from asset management or advisory institutions that seek to make “socially responsible” investments and advance social causes, as well as religious organizations. The entities that were most active in 2016 included As You Sow Foundation (43 proposals submitted), Trillium Asset Management (36), Arjuna Capital (22), Walden Asset Management (19), Mercy Investment Services (16) and Calvert Asset Management (15). D. SHAREHOLDER PROPOSALS ON GOVERNANCE STRUCTURE Governance matters (board-related and antitakeover concerns) remained the principal focus of shareholder proposals in 2016. Average support for governance proposals in 2016 was 41% overall, but varied significantly for different types of proposals. Average support was 48% when ISS recommended in favor of a proposal, but much lower in cases when ISS recommended against (10% in 2016, down from prior years due to a number of new and unpopular proposals). The overall number of governance proposals coming to a vote declined in 2016 from 2015, largely due a continued long-term decline in traditional governance proposals. Proxy access proposals coming to a vote were also down following the sharp spike in 2015, reflecting the significant number of 2016 proposals that were withdrawn or excluded because the company adopted proxy access with similar terms. 1. Proxy Access Proposals Proxy Access Total Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2016 2015 2016 2015 2016 2015 78 88 51% 55% 39 53 Proxy access was the most significant governance matter in the 2016 proxy season, as in 2015, but much of what occurred was outside of the annual meeting voting process. In total, approximately 200 proxy access proposals were submitted for 2016 annual meetings, but only 78 (or 39%) of these went to a vote. This is a marked contrast to 2015, when far fewer proxy access proposals were submitted (113 in total), but more (88, or 78%) came to a vote. The proposals that did not come to a vote in 2016 generally reflected situations where the company adopted a proxy access bylaw with similar key terms, resulting in -6- 2016 Proxy Season Review July 11, 2016 either the proponent voluntarily withdrawing the proposal or the SEC staff permitting exclusion of the proposal as substantially implemented. The bulk of the proposals came from either the New York City Comptroller or one of the highly prolific individuals discussed in Section I.C above. Of the 78 proposals that came to a vote, half of them passed and half did not, although ISS supported nearly all of them. In the vast majority of the instances where the proposal was voted down (other than anomalous cases where the proposal had unusual terms or where the company had a large insider ownership), management had already adopted proxy access, was proposing to do so or submitted an alternative proxy access proposal in the proxy statement. In addition to the issuers who adopted proxy access in response to receiving a proposal, or having a proposal pass in a prior year, 33 other issuers appear to have adopted proxy access since October 1, 2015 without having received a proposal. As more issuers have adopted proxy access, market practice has coalesced around certain relatively standard terms, as discussed further in Section I.D.f below. a. NYC Comptroller Proxy Access Proposals The New York City Comptroller submitted proxy access proposals to 72 companies for meetings prior to June 30, 2016 (compared to 75 for all of 2015). Most of these (52 of the 72) were withdrawn upon adoption of a proxy access bylaw that was acceptable to the Comptroller.4 In selecting companies to receive proposals, the Comptroller focused on the same factors as in 2015— climate risk, board diversity and excessive CEO pay—but also made proposals at a number of other issuers where the NYC pension funds’ holdings were the largest, even if these factors were not present. Thirty-six of the proposals were made at companies that had received Comptroller proposals for 2015. The form of Comptroller’s proposal was essentially the same as in 2015, with the key features being a 3% ownership threshold, a three-year holding requirement and a limitation on nominees of 25% of the board. The proposals generally did not address the size of any permitted group. The Comptroller did however submit proposals at three companies that had adopted proxy access (Cabot Oil & Gas Corporation, SBA Communications Corporation and New York Community Bancorp, Inc.) seeking the elimination of a 10- person group limit, lowering the ownership requirement from 5% to 3% and raising the number of nominees to 25% of the board from 20%. Two of these proposals were precatory (each of which passed) and one was binding (which failed). The Comptroller also made a binding bylaw amendment proposal at NVR, Inc. which was excluded through no-action relief on the grounds of substantial implementation, after the issuer enacted two of the four proposed changes. 4 Information about the Comptroller’s proposals was derived from information on the Comptroller’s website and from a review of the companies’ proxy statements. -7- 2016 Proxy Season Review July 11, 2016 As noted above, 52 issuers successfully negotiated withdrawal of the Comptroller’s proposal with the adoption of a proxy access bylaw. In discussions, representatives of the Comptroller often expressed negative views on a number of provisions, such as counting successful prior proxy access nominees against the limitation on the number of nominees, or limiting groups to 20 persons; nevertheless, proposals were withdrawn for bylaws that contained these provisions. The following summarizes the terms of bylaws adopted by the 52 issuers for which the Comptroller withdrew its proposal: All 52 issuers provided a 3%/3-year ownership threshold. 49 issuers limited the number of nominees to 20% of the board, while two issuers had a 25% limitation, and one limited nominees to 25% where the board was nine or smaller and to 20% where the board was larger. 44 issuers provided that there would be at least two proxy access nominees notwithstanding the above caps. 49 issuers limited the group size to 20, with the other three issuers limiting the group size to 25. 41 issuers counted successful proxy access nominees in computing the limitation on the number of nominees for some period of time, while six provided that successful proxy access nominators would be barred from making another nomination for a period of time, which was the Comptroller’s preferred approach. Three issuers included both provisions. 43 issuers prohibited the renomination of a proxy access nominee who had failed to obtain certain vote thresholds in a prior year. 40 issuers prohibited proxy access during a concurrent proxy contest. 37 issuers had no requirement as to holding securities post-meeting, 11 required disclosure of the intent to hold, and four required the intent to hold for one year after the meeting. 46 issuers required disclosure of third-party compensation, and three required disclosure of third-party nominee compensation and prohibited third-party director compensation. b. Proxy Access Proposals Made by Others The individuals discussed in Section I.C were also active in this area in 2016, with proxy access being the most common topic for their proposals. These proposals continued to advance a 3%/3-year ownership and a 25%/2-director cap, as in 2015, but added language specifying that groups of nominating stockholders must be unrestricted in number. These individuals were far less likely than the NYC Comptroller to agree to withdraw their proposal if the issuer adopted a proxy access provision. There were a number of other proponents, primarily unions and pension funds, that advanced forms of the 3%/3-year proposal, as well as a few anomalous proposals at particular companies (including a 1.5%/2-year proposal at Peoples Financial Services Corp. that received only 18% support). c. SEC No-Action Position on Proxy Access Proposals Thirty-eight issuers received no-action relief from the SEC staff to exclude proxy access proposals on the basis that the proposal was substantially implemented under Rule 14(a)-8(i)(10). The application of this exclusion became more important after the SEC staff narrowed the scope of Rule 14a-8(i)(9) in October -8- 2016 Proxy Season Review July 11, 2016 2015 such that a company may no longer exclude a shareholder proposal by putting forward a “conflicting” management proposal providing for similar rights but with different terms.5 The SEC staff granted relief in these cases even where the bylaw that was adopted by the issuer limited the number of nominations to 20% of the board (compared to 25% in the proposal) and limited the group size to 20 (compared to a call for no limit in the proposal). In addition, the companies’ bylaw provisions contained a number of other terms and conditions that have become common in proxy access bylaws but were not referenced in the proposals, including a “net long” definition of ownership, various qualification requirements for nominees (such as independence under relevant stock exchange standards and a lack of affiliation with a competitor), counting incumbent access nominees against the nominee cap, restrictions on repeat nominees and requirements to provide additional information along with the nomination notice similar to what is required under advance notice bylaws. The staff did not permit exclusion in the case of three companies that had adopted a 5% threshold, which suggests that the ownership threshold is viewed by the staff as one of the most important elements of the “essential objective” of these proposals for purposes of Rule 14a-8(i)(10).6 This suggests that a company that adopts a proxy access bylaw with terms that are currently viewed as market standard would be able to exclude a typical shareholder proposal as “substantially implemented.” What is unclear, however, is whether following this approach will result in the shareholder proponent proposing an amendment in the following year to amend the bylaw to include the provisions originally requested by the proponent, as discussed in the following section. d. Proposals to Amend Proxy Access Terms In a limited number of instances in 2016, companies that adopted proxy access terms that proponents did not believe to be sufficient received proposals to amend the terms. Four instances of such a proposal went to a vote in 2016, two of which were successful (New York Community Bancorp and SBA Communications) and two of which were not (Whole Foods Market, Inc. and Cabot Oil).7 Each of these 5 For a further discussion of this guidance, which was set forth in Staff Legal Bulletin No. 14H, see our publication, dated October 23, 2015, entitled “SEC Staff Issues Guidance on Excluding Shareholder Proposals: Competing Proposals in Proxy Statements Likely to Increase.” 6 The SEC staff rejected companies’ exclusion arguments on a number of other bases, including that the shareholder proposals were “inherently vague or indefinite” under Rule 14a-8(i)(3) or would violate the federal proxy rules by permitting the proponent to solicit an unlimited number of group members without an exemption under the proxy rules. 7 SBA is particularly interesting because SBA stockholders had supported the management terms where competing proposals were made in 2015, with a 52% vote in favor, but voted for the Comptroller’s amendments (5% to 3%, remove group limit and count recallable loaned shares) with a two-thirds vote in favor in 2016. SBA had sought no-action relief to exclude the Comptroller’s proposal on the basis that it was substantially implemented, but this was denied. -9- 2016 Proxy Season Review July 11, 2016 companies received shareholder proposals on proxy access last year—the 2015 proposal was withdrawn at Whole Foods, and was voted on but failed at the three other companies. Proponents that are seeking amendments to existing proxy access bylaws might do so through binding bylaw amendments, rather than precatory proposals, because the necessary language changes would typically fit within the Rule 14a-8 500-word limit. James McRitchie, one of the more active proxy access proponents, and the proponent of the Whole Foods amendment proposal, has argued that substantial implementation will backfire and “will reduce board discretion, since shareholders will increasingly file binding bylaw resolutions to obtain the same robust proxy access promised under vacated Rule 14a- 8(i)(10).”8 Historically, some shareholders have been hesitant to vote for binding bylaw proposals, on the basis that the company is in the best position to draft bylaw language that works as a legal and mechanical matter. The Comptroller’s proposal to Cabot Oil (which failed with 46% support) was a binding bylaw proposal. This year, the Comptroller also proposed a binding bylaw amendment at NVR, Inc., which had adopted proxy access after defeating the Comptroller’s proxy access proposal in 2015. NVR sought substantial implementation no-action relief with respect to the proposed amendment, which would have lowered the ownership threshold from 5% to 3%, eliminated the 20-holder group restriction, changed the maximum period for recalling loaned stock from three days to five days, and changed the requirement to hold the required number of shares for one year after the meeting to simply remaining a shareholder for such period. The SEC staff denied relief on the grounds that the bylaw did not compare favorably with the proposal, but NVR was able to obtain relief upon reconsideration after amending its bylaw to implement two of the four changes (lowering the ownership threshold from 5% to 3% and increasing the loaned stock recall period from three days to five days). The staff’s approach did not seem to be affected by the fact that the proposal was binding rather than precatory. The outcome in NVR is consistent with the staff’s apparent view, discussed in the prior section, that the ownership threshold is the key component of the analysis for “substantial implementation” purposes; nevertheless, there are only limited data points to date and future no-action letters may shed light on whether there are other critical terms that must align between the shareholder proposal and the company bylaw for relief under Rule 14a-8(i)(10). e. Effects of Company Strategies on Proxy Access Voting Results Annex A sets forth the 78 proxy access proposals that have gone to a vote this year as of June 30. Issuers reacted to shareholder proposals with a variety of strategies. The majority of issuers did not adopt a proxy access bylaw or include a competing proposal and simply let the matter come to a vote, in most instances indicating opposition; in these cases, the shareholder proposals were largely successful, absent unusually large insider holdings. A substantial minority of issuers adopted proxy access bylaws in 8 See http://www.corpgov.net/2016/03/substantial-implementation-will-backfire/ (Mar. 21, 2016). -10- 2016 Proxy Season Review July 11, 2016 advance of this meeting, and in these cases the shareholder proposals almost always lost. Other companies put up competing proposals, which generally won. Two issuers proposed adopting proxy access in the future, with mixed results. More details on these strategies are as follows: Adoption Prior to Vote. In 20 instances, the issuer adopted a proxy access bylaw after receipt of the proposal and in advance of the meeting. In only one instance where a bylaw was adopted prior to the meeting was the shareholder proposal successful—and that was where the ownership threshold was set by the issuer at 5%. Three other bylaws were adopted under these circumstances that had 5% ownership thresholds, and the shareholder proposal was nonetheless defeated in those three cases. Management Submits a Competing Proposal. In five instances, management submitted a competing proposal. Four of those management proposals involved a 3% threshold and 20% of the board (25% in one case) and were successful. Chipotle Mexican Grill, Inc., which proposed a 5% threshold, was not, and the 3% shareholder proposal passed. In no instance did both the management and the shareholder proposal pass. Announcement of an Intent to Adopt Proxy Access in the Future. Two issuers announced an intent to adopt proxy access in the future. In The Geo Group, Inc., the intention was quite specific: “our Board of Directors…and GEO senior management have agreed to undergo a consultation process with shareholders to amend the Company’s Bylaws before the next annual meeting of shareholders in 2017 or sooner in order to adopt ‘proxy access’ provisions that are generally in-line with [3%/3 years/20% of board].” The shareholder proposal received only 36% support. In the case of Costco Wholesale Corporation, where the proxy statement expressed an intention to adopt or propose “a form of proxy access appropriate for the Company,” without any further details, the shareholder proposal was successful, with 67% support. No Action Other Than Opposing Proxy Access Proposal in Proxy. Of the 47 instances where the company took no action in response to the proposal, 34 of the proposals were successful (including five instances where management supported or did not oppose the proposal). Of the 13 cases where the shareholder proposal failed, nine instances involved large holdings by insiders or a single, non-fund investor, one proposal had a 1.5% ownership requirement and a two-year holding period, and one proposal would have resulted, because of the extremely small board size, in the potential for 40% of the board being replaced in one year because of the requirement that “at least two” persons could be nominated by proxy access. f. Proxy Access Bylaws Terms Continue to Converge Since the 2015 proxy season, 200 public companies have adopted some form of proxy access, compared to only 15 companies before 2015. At this point, consistency has emerged in most of the key terms of these proxy access provisions. In particular, of the 226 proxy access bylaws adopted by U.S. companies from April 2015 through June 2016: 97% have a 3% ownership threshold 100% have a 3-year holding period 100% require full voting and economic ownership 91% allow aggregation by groups of up to 20 holders 92% count funds under common management as a single holder for aggregation purposes 86% limit the number of access nominees to 20% of the board, most of which (65%) provide a minimum of two access nominees -11- 2016 Proxy Season Review July 11, 2016 79% count incumbent access nominees against the current-year maximum 72% provide a nomination window of 120 to 150 days before the prior year’s proxy mailing date 92% prohibit or limit the availability of proxy access in the event of a concurrent proxy contest 83% prevent resubmission of a failed candidate who received less than a specified vote percentage (usually 25%) in the past few years 88% specifically include loaned stock for purposes of meeting the ownership threshold and holding period, with 52% of all bylaws requiring the loaned stock to be recalled at some point in time and 34% of all bylaws requiring that the stock be promptly recallable, but not actually requiring it to be recalled by a specific point in time. 70% do not address post-meeting holding of the stock, 12% require a representation of an intent to hold post-meeting for one year, and 18% require a description of the holder’s intent to hold post-meeting. 83% require disclosure of third-party compensation arrangements, 4% require description of nominee third-party compensation arrangements and prohibit director third-party compensation, and 9% prohibit nominee and director compensation arrangements g. What to Do in Preparation for 2017 Given the widespread adoption of proxy access by a number of large companies since the 2015 proxy season, many companies that have not yet received a proxy access proposal will likely consider whether it makes sense to adopt a proxy access bylaw during the “off-season.” A small but significant number of companies (at least 33) appear to have adopted proxy access without a prior shareholder proposal, although most companies have done so in the face of a shareholder proposal or other shareholder pressure. There is no one-size-fits-all approach to this question. On the one hand, adopting a proxy access bylaw with market-standard terms9 in advance of receiving a proposal is probably, but not inevitably, the course most likely to result in a bylaw with all the terms the board would prefer, while avoiding negotiations with a proponent, the expense and public attention of the no-action process or a contested vote on proxy access. This is likely to have the benefit of putting the issue behind the company, with no need for interaction or negotiation with any third party, and with market-standard terms that are, at this point, fairly reasonable. On the other hand, there is little pressure to act early, and doing so will make proxy access available to shareholders sooner than could otherwise be required. There is no guarantee that a company will receive a proxy access proposal for 2017 (especially companies outside the S&P 500) and, even if a proposal is received, any proxy access provision adopted in response would likely not take effect until 2018. Although proxy access has yet to be utilized at any U.S. issuer, and the typical terms and conditions make proxy 9 See Section I.D.1.f above for a description of terms that have become relatively standard. Adopting terms that are significantly off-market (particularly a 5% threshold rather than a 3% threshold) creates a high likelihood that the company will be targeted with a shareholder proposal to modify the bylaw. -12- 2016 Proxy Season Review July 11, 2016 access an unappealing alternative to a proxy contest for many activists that can fund one,10 proxy access does give smaller shareholders the ability to impose significant costs on the company in terms of time and expense. Another reason not to act preemptively is because, to date, issuers have not been harmed by waiting, either in terms of negative attention or in terms of ending up with provisions with less favorable terms. Issuers who have waited until they receive a proposal have still been able to adopt a bylaw with marketstandard terms, and either get the shareholder proposal withdrawn, get it excluded as “substantially implemented” or defeat it at the meeting. Even if a shareholder proposal passes, ISS’s views on responsiveness to a successful proxy access proposal this year permitted issuers to adopt bylaws with a cap of 20% of the board (rather than the 25% approved by the shareholders) and with limits on group size, (although there were no proposals in 2015 that addressed group size), without receiving a negative determination on “responsiveness,” which is likely to result in a negative board recommendation. There remains the risk, however, that forms of shareholder proposals may change (for example, becoming more pointedly opposed to restrictions on group size or other terms, putting proposals in binding form and/or seeking amendments to existing bylaws) in ways that make them more challenging to get withdrawn, to exclude, to defeat or to enact responsively. Regardless of the ultimate decision, management can take steps during the off-season to facilitate the board’s and the company’s readiness on this issue. Management should make themselves aware of, and as appropriate update the board on, trends in proxy access and the views of the company’s significant shareholders on the topic. In addition, the company should consider having a form of proxy access bylaw “on the shelf” that reflects management’s recommendation, in consultation with counsel, for terms that would be appropriate for the company, so that the company can act quickly when necessary. 2. Independent Chair Proposals INDEPENDENT CHAIR Total Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2016 2015 2016 2015 2016 2016 46 63 29% 29% 0 2 Once again, proposals requesting that companies separate the roles of CEO and chair11 were the most common type of governance proposal other than proxy access. That said, the number of proposals was 10 Common terms of proxy access bylaws that make them less appealing to control-seeking activists include a requirement to affirm the absence of a control intent, the three-year holding period, which is inconsistent with many activist investors’ historical investment periods, the limit on the number of access nominees, and the 500-word limit on supporting statements. 11 These proposals are typically formulated either as a proposal to split the roles of CEO and chair or as a proposal that the chairperson be an independent director. -13- 2016 Proxy Season Review July 11, 2016 down significantly from full-year 2015, which is not surprising given the low success rate of this proposal in recent years. Large companies have regularly received these proposals since the mid-2000s, reflecting the views of certain shareholders that having the CEO serve as chairperson may undermine the independence of the board as a whole. These proposals tend to receive significant shareholder support, but rarely pass. ISS’s support for these proposals increased significantly in both 2015 and 2016, moving from about half of proposals in 2014 to nearly 75% in 2016. ISS’s recommendations have previously had a significant impact on the voting results for these proposals, but this effect seems to be diminishing. In 2016, the average level of shareholder support was 31% if ISS supported the proposal and 21% if it did not. This 10% spread is down from prior years, when ISS’s support correlated with at least a 15% difference in voting results. While the average support level did not change from last year, this is the first year in which no independent chair proposals have passed. Fewer proposals even came close—only five proposals received over 40% support, compared to 14 in each of 2014 and 2015. The declining frequency and lower success rate for these proposals is consistent with the view of many investors that having a lead independent director with suitably broad powers and responsibilities is a suitable alternative to actually separating the CEO and chair roles. Shareholders broadly do not appear to demand the separation of the roles as a matter of principle, but instead vary in their support for this proposal depending on company-specific issues, including the company’s performance, other governance issues and the merits of the individuals serving in the CEO, chair and/or lead director roles. 3. Continued Strong Support for Majority Voting, Elimination of Supermajority Thresholds and Board Declassification MOST SUCCESSFUL GOVERNANCE PROPOSALS Total Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2016 2015 2016 2015 2016 2015 Majority Voting 18 11 70% 66% 14 8 Eliminate Supermajority Thresholds 15 14 59% 63% 9 10 Declassify Board 6 12 79% 77% 5 12 The only shareholder proposals that consistently pass are the three governance proposals that have been adopted at large companies on a widespread basis--the adoption of majority voting in director elections (rather than plurality voting), the elimination of supermajority voting thresholds to effect certain corporate actions (such as charter or bylaw changes or the removal of directors) and the declassification of boards. When these proposals come to a vote, they usually pass. Although their prevalence is down considerably from their peak in the mid- to late-2000s, this is primarily because most large public companies have already enacted these governance changes. As a result, there are fewer high-profile targets left—only two of the declassification proposals and five of the majority voting proposals were at S&P 500 companies this year. As discussed in Section I.B above, governance activists, having achieved -14- 2016 Proxy Season Review July 11, 2016 broad success at driving these changes at large-cap companies, have tended not to show similar fervor in advancing their cause at small- and mid-cap companies, choosing instead to shift their focus to advancing proxy access. 4. Shareholder Right to Call Special Meetings RIGHT TO CALL SPECIAL MEETINGS Total Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2016 2015 2016 2015 2016 2015 Adopt new right 4 9 41% 50% 2 3 Lower % on existing right 14 11 42% 39% 2 1 Proxy advisory firms and many shareholders support the right of shareholders to call a special meeting because this enables shareholders to act on matters that arise between annual meetings (such as the removal of a director, including in circumstances intended to permit an acquisition offer to proceed, or the amendment of bylaws). The right to call special meetings should be viewed in conjunction with the movement away from classified boards—in Delaware, directors of a non-classified board can generally be removed by shareholders without cause. Thus, given the trend of declassifying boards, the ability to act outside the annual meeting to remove directors without cause can be viewed as the dismantling of an effective mechanism to provide directors with additional time to consider hostile takeover proposals and seek superior alternatives. About 63% of S&P 500 companies now provide shareholders with some right to call a special meeting, a development driven largely by shareholder proposals and shareholder support for the concept over the past decade. a. Proposals to Adopt a New Right Given the widespread adoption of special meeting rights at large companies, most shareholder proposals on the topic seek to reduce the ownership threshold for an existing special meeting right, rather than to introduce a new right at a company that does not provide one. Only four proposals were voted on in 2016 to add a new right: Adopt at 10%. Two proposals sought to provide the right to holders of 10% of the outstanding stock, and in each case management included a competing proposal that would result in a 25% threshold. At Huntsman Corporation, the shareholder proposal passed with 53% support and a precatory management proposal also passed with 60% support. The proxy statement stated that if both were approved, the board would implement the management proposal and not act on the shareholder proposal. At Chipotle Mexican Grill, Inc., the shareholder proposal failed with 43% support while a binding management proposal passed with 95% support. Chipotle’s proxy statement did not address what action it would take if both proposals were adopted. Adopt at 15%. The other two shareholder proposals sought to provide the right to holders of 15% of the outstanding stock and were not countered with a competing management proposal: at Celgene Corporation, the proposal passed with 63% support; and at Guidance -15- 2016 Proxy Season Review July 11, 2016 Software, Inc. the proposal failed with minimal support in the context of a proxy fight where the dissident was putting forward this proposal. The inclusion by a number of companies of competing management and shareholder proposals on one topic is a change from years prior to 2015, because the SEC staff’s historical view would have allowed the company to exclude the shareholder proposal as conflicting with the management proposal. The SEC staff’s new position on the application of Rule 14a-8(i)(9), which led to an increase in the inclusion of competing proposals, is discussed in Section I.D.1.c above. b. Proposals to Reduce the Threshold of an Existing Right The significant number of proposals seeking to reduce the ownership threshold to call a special meeting shows that many governance activists are not satisfied with the 25% threshold that has become the market standard at large companies. Of the 14 such proposals that came to a vote, 11 sought to reduce a 25% threshold to either 10% or 15%, and all but one of these failed (the exception being Staples, Inc.). The two other failed proposals sought to reduce a 30% threshold and a 15% threshold to 10%. The other proposal that passed was a proposal to reduce a 50% threshold to 10% at CBRE Group, Inc., which received 52% support, while a competing management proposal to reduce the 50% to 30% also passed with 85% support. Here, CBRE’s proxy statement noted that the management proposal was binding and would be enacted if approved, but that if the shareholder proposal was also approved, “our Board would consider it and further engage with our stockholders on it as a matter of good corporate governance.” c. Terms to consider in putting forth special meeting rights Issuers considering putting forth a special meeting right, either preemptively or in response to a proposal, may wish to consider the following terms: Threshold. Though practice varies considerably, 25% has emerged as the most common threshold for special meeting rights at public companies. Both Vanguard and T. Rowe Price have indicated that 25% is an appropriate level in their view. The following chart shows the threshold for special meeting rights at the 302 S&P 500 companies that are incorporated in Delaware.12 12 Based on data from FactSet Shark Repellent. We have limited this analysis to Delaware companies, because certain other states provide a statutory default special meeting right at 10%. -16- 2016 Proxy Season Review July 11, 2016 Thresholds to Call Special Meetings at Delaware S&P 500 Companies Definition of ownership. Many companies require “record” ownership of shares (as opposed to “beneficial” ownership), essentially requiring street name holders to work through their securities intermediaries to become a record holder. This eliminates uncertainty as to proof of ownership, but introduces an additional administrative step for shareholders seeking to use the right. In addition, a number of companies have introduced a “net long ownership” concept into their special meeting provision—essentially reducing the shareholders’ actual ownership level by any short positions or other hedging of economic exposure to the shares. Companies that do not include a “net long” concept should nevertheless ensure that the information required to be provided by the requesting shareholders includes details of any hedging transactions, so that the company and other shareholders can have a full picture of the requesting shareholders’ economic stake in the company. Pre- and post-meeting blackout periods. In order to avoid duplicative or unnecessary meetings, many companies provide that no meeting request will be valid if it is received during a specified period (usually 90 days) before the annual meeting, or during a specified period (usually 90 or 120 days) after a meeting at which a similar matter was on the agenda. Limitations of matters covered. Special meeting provisions typically provide that the special meeting request must specify the matter to be voted on, and that no meeting will be called if, among other things, the matter is not a proper subject for shareholder action. Generally, the only items that may be raised at the special meeting will be the items specified in the meeting request and any other matters that the board determines to include. Timing of meeting. Companies typically provide that the board must set the meeting for a date within 90 days from the receipt of a valid request by the requisite percentage of shareholders. Often, the special meeting provisions provide that, in lieu of calling a special meeting, the company may include the specified item in a meeting called by the company within that same time period. Holding period. A few companies require the requesting shareholders to have held the requisite number of shares for a specified period of time prior to the request. Inclusion in charter versus bylaws. Companies should consider whether to include the special meeting provisions in the charter, the bylaws or a combination. In most cases, companies include the critical provisions (such as ownership threshold) in the charter so that shareholders cannot unilaterally amend them, but provide the details and mechanics in the bylaws, so that they can be adjusted by the board without a shareholder vote. -17- 2016 Proxy Season Review July 11, 2016 If a shareholder proposal is made, there is a potential advantage in putting forward a management proposal, rather than letting the shareholder proposal come to a vote with no management alternative and determining whether and in what form to adopt proxy access after the fact. If a 10% special meeting shareholder proposal comes to a vote and passes, the adoption of a provision with the terms described above (in particular, a 25% threshold) may well not be seen as “responsive” by proxy advisory firms assessing director recommendations in the following year. ISS’s FAQs indicate that a threshold above 10% will be deemed responsive only if the company’s outreach to its shareholders finds a different threshold acceptable to them, and the company disclosed these results in its proxy statement, along with the board’s rationale for the threshold chosen, and even then the analysis is on a case-by-case basis. In addition, ISS takes a limited view of the permissible restrictions on the special meeting right, including a view that restrictions on agenda items are generally seen as negating the right to call a special meeting. 5. Shareholder Right to Act by Written Consent RIGHT TO ACT BY WRITTEN CONSENT Total Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2016 2015 2016 2015 2016 2015 17 36 41% 39% 1 2 The number of proposals requesting that the company grant shareholders the right to act by written consent dropped significantly from 2015, largely because the individuals who were the main proponents shifted their attention to proxy access in 2016. ISS recommended in favor of all but one of these proposals in 2016, and the proposals, as usual, received relatively strong support levels. However, only one proposal passed in 2016, compared to two in 2015. The corporate laws of most states provide that shareholders may act by written consent in lieu of a meeting unless the company’s certificate of incorporation provides otherwise. Commonly, public companies provide in their charters that shareholders may not act by written consent, or that they may act by written consent only if the consent is unanimous. The concern that companies have about giving shareholders the right to act by written consent is that the written consent process can frustrate an orderly and transparent debate on the merits of the proposed action, as would occur if it were raised at a shareholder meeting. Moreover, action by written consent can be seen as inherently coercive in that consent solicitations may not, in certain instances, give shareholders the benefit of the notice and disclosure requirements applicable to proxy solicitations. In 2016, all the companies that had written consent proposals up for a vote already provided shareholders with the right to call a special meeting, and the companies stressed in their opposition statements that special meetings were a preferable and sufficient mechanism for allowing shareholder action between annual meetings. The low success rate of written consent proposals seems to reflect broad agreement by shareholders that special meeting rights adequately address this concern, and render written consent rights unnecessary. The only company that had a written consent proposal pass in 2016, L-3 -18- 2016 Proxy Season Review July 11, 2016 Communications Holdings, Inc., did not recommend that shareholders vote against the proposal, but rather made no recommendation and included no opposition statement. Prior to 2015, many companies, upon receiving a written consent proposal, put forth a management proposal to adopt written consent rights, thereby allowing the company to exclude the shareholder proposal as “conflicting” under Rule 14-a-8(i)(9). However, as discussed further in Section I.D.1.c above, the SEC staff in 2015 suspended granting no-action relief sought on the grounds that a shareholder proposal conflicted with a management proposal and adopted a new, more restrictive approach as set out in Staff Legal Bulletin No. 14H. Unlike special meeting proposals, there were no conflicting management and shareholder written consent proposals in 2016 proxy statements, presumably because companies were comfortable that they could defeat the shareholder proposals without putting forward their own. A company would most likely not want to allow a written consent proposal to come to a vote in the situation where it has a strong chance of passing, because ISS takes a fairly strict view as to what restrictions can be included in a written consent bylaw subsequently adopted by management in order for it to be deemed “responsive” to the shareholder proposal. Based on results to date, if a company does not have a special meeting right and receives a written consent proposal, there is a greater chance that the written consent proposal might pass. A company in that situation could consider putting forward a competing written consent proposal with terms that it prefers, or adopting a special meeting right in order to reduce the chance that the written consent proposal could pass. 6. Other Less Successful Proposals Some less frequent and less successful shareholder proposal types are addressed below. These proposal types are likely infrequent because they have been highly unsuccessful during the past few years of annual meetings. 2016 was no exception and generally those proposals that were brought to a vote failed. Dual Class. Proposals to approve a recapitalization plan where all stock has one vote per share occurred only 11 times in 2016 so far, and 12 times in 2015. These proposals tend to be submitted on a regular basis at the small percentage of public companies that have dual class stock. Despite ISS support’s for 100% of these proposals, none of them passed, and the overall average support rate was only 27% in 2016, likely because super-voting stockholders vote against these proposals. Board Diversity. There has been a small, but increasing, number of shareholder proposals seeking either policies or reports on board diversity, with eight such proposals so far in 2016, compared to five in 2015 and three in 2014. ISS supports board diversity proposals in a majority of cases, and supported seven of the eight proposals in 2016. Two of the proposals passed in 2016, and the average support level was 26%. No Abstentions in Vote Counting. The past two years have seen an increase in the number of proposals seeking a slight change in company’s voting thresholds for all matters, with seven coming to a vote in each of 2015 and 2016. Many companies provide that, for most matters put to a shareholder vote, the proposal will “pass” as a legal matter only if it receives a majority of votes present at the meeting in person or by proxy and entitled to vote. Under this standard, which is the default voting standard under Delaware law, the numerator -19- 2016 Proxy Season Review July 11, 2016 is the number of “for” votes, and the denominator includes the number of “for” votes, “against” votes and abstentions, but not broker non-votes (which are shares held by brokers for which the beneficial owner has not given voting instructions, and which the broker does not have discretionary authority to vote). The “no abstentions” proposals call for abstentions not to be included in the denominator. This has little practical effect for a few reasons: first, the number of abstentions is typically small; second, because most shareholder proposals are precatory in nature, there is no legal significance to whether they have “passed” as a state law matter; and third, proxy advisors and shareholders will generally assess the vote results based on their own policies, not the technical state law requirement. This lack of practical importance likely explains the low vote results for these proposals, with an average of only 8% support in 2016 and no proposals coming close to passing. Adopt Policy Favoring Buybacks. A new type of proposal emerged in 2016, calling for the adoption of a policy giving preference to stock buybacks (as opposed to dividends) as a means of returning capital to shareholders. Fifteen such proposals were voted on in 2016, most of which were submitted by Jonathan Kalodimos, an individual shareholder. Company policies on share buybacks have been a controversial issue in recent years, with activist investors often seeking significant buybacks through an actual or threatened proxy contest, and more traditional institutional investors expressing concerns over whether such a practice prevents the company from investing in longer-term growth. Against this backdrop, it is unsurprising that these proposals received negligible support, with no proposal receiving over 3% support. Although companies should be aware of these types of proposals, we do not anticipate many companies facing such shareholder proposals next season (with the possible exception of board diversity), since they have had such a low rate of success in recent years. E. SOCIAL/POLITICAL SHAREHOLDER PROPOSALS SOCIAL/POLITICAL PROPOSALS Total Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2016 2015 2016 2015 2016 2015 Political issues 66 72 25% 27% 2 0 Environmental issues 65 66 24% 18% 1 0 Anti-discrimination 19 11 15% 14% 2 0 Human rights issues 18 14 9% 9% 0 0 Sustainability report 15 17 30% 30% 1 0 Health and safety 9 3 11% 4% 0 0 Animal rights 3 9 37% 7% 1 0 Other social policy issues 5 8 12% 11% 0 0 The landscape for proposals on social and political issues in 2016 was generally similar to that in 2015— these proposals continue to be common, but in almost all cases they fail, and usually by a wide margin. Nonetheless, in 2016, more of these types of proposals passed than in any other recent year (seven so far, compared to none in 2015). These were not reflective of any particular trend or topic, but were spread across a number of categories as shown in the chart above. Given the overall low support levels, the successful proposals were likely tapping into a particular company-specific concern held by shareholders of that company. -20- 2016 Proxy Season Review July 11, 2016 In 2016, as in prior years, the most common types of proposals related to political expenditures and spending (generally, a request for additional disclosure on political expenditures and/or lobbying costs or, in some cases, calls for an advisory vote or prohibition on political spending) and environmental issues. There was also a significant increase in proposals on the topic of discrimination, particularly gender diversity. Two of these proposals passed in 2016—one calling for the addition of sexual orientation and gender identity to the company’s non-discrimination policy, and one seeking a report on the gender pay gap. The increase in anti-discrimination proposals is consistent with the increase in proposals on board diversity, discussed above. 2016 also saw an increase in proposals focusing on health and safety issues, including consumer and public health effects of company products, as well as worker safety. ISS supported 67% of the social and political proposals voted on in 2016, which is largely consistent with prior years. Social and political proposals had an average support level of 30% if ISS recommended in favor, and 6% if ISS recommended against, though this is likely more a matter of correlation than causation based on the types of proposals being voted on. The continued frequency of proposals on social policy issues, despite their overwhelming failure to receive majority support, suggests that activist shareholders submitting these proposals use corporate proxy statements as a forum for raising social issues in a high-profile manner. F. COMPENSATION-RELATED SHAREHOLDER PROPOSALS COMPENSATION-RELATED PROPOSALS Total Shareholder Proposals Voted On Average % of Votes Cast in Favor Shareholder Proposals Passed 2016 2015 2016 2015 2016 2015 Limit golden parachutes 16 37 30% 35 0 4 Stock retention 11 11 17% 23 0 0 Clawbacks 6 16 14% 29 0 0 Other compensation-related 21 18 14% 17 0 0 With respect to compensation-related proposals, 2016 was notable for the steep decline in the number of proposals to prohibit “golden parachutes” in the form of single-trigger accelerated vesting of performance and other equity awards. These proposals seemed to be gaining some momentum in recent years, with five such proposals passing in 2014 and four passing in 2015. Still, the pass rate for these proposals was low compared to the number submitted, and the individual investors who submitted most of these proposals in past years turned their focus to proxy access in 2016. In addition, an increasing number of companies have begun including “double-trigger” termination provisions (i.e., those that accelerate outstanding awards only if a change in control occurs and the person is terminated) into their compensation arrangements, which should help a company avoid or defeat a “golden parachute” shareholder proposal. Stock retention proposals were submitted at a similar rate in 2016 as in 2015, both of which were dramatically reduced from previous years. These proposals tend to get minimal support and not pass. -21- 2016 Proxy Season Review July 11, 2016 The number of clawback proposals, recommending the board adopt a policy requiring the recoupment of incentive compensation under certain circumstances, declined from an unusually high level in 2015. The reduced frequency of these proposals probably relates to the fact that the SEC proposed mandatory clawback rules in July 2015.13 Proposals on more fundamental compensation issues (such as enhancing pay-for-performance linkage, avoiding repricing of options and disclosing supplemental executive retirement plan obligations) continue to be far less frequent than they were in the years immediately before the advent of universal advisory say-on-pay votes. Say-on-pay appears to have provided shareholders with an alternative mechanism for expressing concerns over executive compensation. ISS supported 63% of the compensation-related proposals in 2016, and shareholder support averaged 28% for proposals where ISS recommended in favor, as compared to 5% for proposals where ISS recommended against. II. ANALYSIS OF ISS NEGATIVE RECOMMENDATIONS AGAINST DIRECTORS As discussed in Section I.D.3 above, over the past decade, majority voting provisions have become commonplace, particularly among larger companies. This widespread adoption, together with NYSE rule changes in 2009 that prevent brokers from exercising discretion to vote uninstructed shares in uncontested elections, has given more potency to negative recommendations on, and votes against, directors. “Withhold” or “against” votes on directors (whether they arise from the application of the voting policies of proxy advisory firms and shareholders or from active campaigns launched by dissident shareholders) can have significant effects on companies and their directors, even in uncontested elections.14 For companies that have majority voting provisions, negative votes can trigger a director resignation policy but, more broadly, negative votes can cause reputational harm to individual directors and the company, discourage qualified directors from continuing to serve (or new qualified candidates from agreeing to be nominated), raise the company’s profile as a target for shareholder activists and generally impair a company’s public and investor relations efforts. If a director receives a majority negative vote, the continued service of that director and/or the failure to address the underlying cause for 13 For a discussion of this proposal, see our publication, dated July 7, 2015, entitled “SEC Proposes Mandatory Compensation Clawbacks.” Large financial institutions will also be subject to clawback requirements through the incentive compensation rules that have been proposed by the U.S. financial regulators under the Dodd-Frank Wall Street Reform and Consumer Protection Act, as discussed further in our publication, dated April 27, 2016, entitled “Details Emerge: Proposed Regulation of Incentive Compensation at Large Financial Institutions.” 14 SEC rules require that, even in an uncontested election, shareholders be given the opportunity to “withhold” votes from, or vote “against,” a director. Typically, the option to vote “against” a director rather than “withhold” applies at companies with majority voting provisions. In this publication, we refer to both types of votes as “negative” votes on the director or “votes against” the director. -22- 2016 Proxy Season Review July 11, 2016 the negative vote may well result in a negative vote for other directors in the following year. Companies should therefore be aware of the primary reasons that shareholders may vote against specific directors, committee members or the board as a whole, and the likely impact of these reasons on voting results. ISS’s policies provide a number of reasons why they ISS recommend votes “against” directors. In 2016, ISS issued negative recommendations against over 1,000 directors at more than 430 companies in the Russell 3000.15 Although these negative recommendations had an appreciable effect on director support levels, it remains relatively uncommon for directors to receive less-than-majority support—only 26 of these directors (less than 3% of the total who received negative recommendations) had more “against” votes than “for” votes, and none was at an S&P 500 company. The following table summarizes the frequency of negative recommendations, the resulting shareholder vote and the number of directors receiving less-than-majority support during 2016 for all U.S. Russell 3000 companies, broken down by the rationale given by ISS for the negative recommendation. The data in this section is not comparable to the data in our firm’s proxy review publications for prior years, because this year we have omitted companies outside the Russell 3000 in order to provide information more relevant to most U.S. listed companies.16 2016 ISS DIRECTOR “WITHHOLD” OR “AGAINST” RECOMMENDATIONS (U.S. RUSSELL 3000 COMPANIES) Number of Directors Receiving Negative ISS Recommendations Average Shareholder Vote for Directors (% of votes cast) Number of Directors Receiving <50% of Votes Cast Independence issues (nonindependent directors on key committees or failure to maintain a majority independent board) 374 87% 7 Compensation issues 192 80% 2 Taking unilateral action that reduces shareholder rights (or failing to put preIPO restrictive provisions to a shareholder vote) 127 85% 1 Absence of a formal nominating committee 100 90% 0 Failure of risk oversight due to pledging of shares by executives 73 84% 0 Lack of responsiveness to shareholder concerns (e.g., failure to implement a successful shareholder proposal) 66 66% 11 Poor attendance at board and committee meetings (<75%) 65 72% 5 15 Data used in this section relates to annual meetings of Russell 3000 companies that were held from January 1, 2016 through June 10, 2016, as reported to us by ISS. 16 There is some overlap in the provided categories because some directors received negative recommendations for more than one reason. -23- 2016 Proxy Season Review July 11, 2016 2016 ISS DIRECTOR “WITHHOLD” OR “AGAINST” RECOMMENDATIONS (U.S. RUSSELL 3000 COMPANIES) Number of Directors Receiving Negative ISS Recommendations Average Shareholder Vote for Directors (% of votes cast) Number of Directors Receiving <50% of Votes Cast Overboarding 59 72% 5 Poison pill issues (e.g., maintaining a pill with dead-hand provisions or failing to put a pill up for a shareholder vote) 55 76% 0 Failure to address material weakness in internal controls 48 81% 1 Failure to opt out of amendment to Indiana law resulting in classified board 5 74% 0 Excessive non-audit fees paid to auditors, or failure to disclose a breakdown of fees 4 73% 0 Other company-specific reason 10 78% 0 A. BOARD RESPONSIVENESS TO SHAREHOLDERS The table above shows that the impact of a negative ISS recommendation varies considerably depending on the reason for the recommendation. As in prior years, the most impactful recommendations in that regard are those against incumbent directors for a lack of “responsiveness”—typically, if the board has failed to act on a successful shareholder proposal from a prior year or failed to address the underlying issue that led to a director receiving a majority “against” vote.17 Although this is far from the most common reason for a negative recommendation, shareholders as a group seem to take this issue particularly seriously—directors in this category received the support of an average of only 66% of votes cast (the lowest of any category). Moreover, a total of 11 directors received less than 50% of votes cast in favor for a lack of responsiveness, more than in any other category of negative recommendation (and a far higher percentage of the negative recommendations than in any other category). Given that this category comprised more than 40% of all directors receiving less-than-majority support, issuers should take such responsiveness concerns very seriously. B. BOARD INDEPENDENCE The most common rationale for a negative ISS recommendation against a director in 2016 related to independence issues. ISS will recommend against directors that ISS deems non-independent if, among other things, they serve on the audit, compensation or nominating committee or if the board is not made up of a majority of independent directors under the ISS “independence” standards (which are, in some 17 See Section II.C for discussion of a third type of nonresponsiveness—a perceived failure to take sufficient steps to address receiving less than 70% support on the prior year’s say-on-pay vote. This too had a significant impact on director support levels. -24- 2016 Proxy Season Review July 11, 2016 circumstances, more stringent than the company’s own independence policies under stock exchange rules). Directors in this category received average shareholder support of 87% of votes cast. This suggests that shareholders broadly do not typically view a violation of ISS’s strict independence standards as a significant concern. That said, seven directors did receive less-than-majority support after receiving a negative recommendation due to independence concerns. Given the varying independence definitions used by proxy advisory firms and certain institutional investors, companies should consider including in the board’s annual independence review process some discussion of whether any particular relationships are expected to trigger adverse recommendations or votes from proxy advisory firms or from the company’s significant shareholders. Boards are, of course, in no way required to comply with the director independence definitions of these parties, but an assessment of perceived independence issues under these definitions can help the company identify and prepare for potential adverse votes from shareholders. C. COMPENSATION ISSUES At a number of companies, ISS identified various purported deficiencies in the oversight of executive compensation as a basis for negative director recommendations, including approval of problematic pay practices, failure to be responsive to perceived executive compensation best practices and pay-forperformance disconnects. Under ISS’s policies, if a management say-on-pay proposal is up for a vote in a particular year, ISS will not issue negative recommendations against directors for compensation-related reasons, except in “egregious situations.” Therefore, all negative recommendations for compensationrelated reasons in 2016 were either at companies that did not have a say-on-pay vote in 2016 (because they are on a biennial or triennial cycle) or at companies where ISS deemed the compensation oversight concern to be “egregious.” Approximately 78% of the companies that had a director with a negative ISS recommendation in 2016 for compensation-related reasons were in the first category—that is, they did not have a say-on-pay vote in 2016 and, therefore, ISS directed its concerns on compensation issues toward director recommendations (typically against the compensation committee, though “in exceptional cases” ISS will recommend a vote against the full board). The rationales for the negative recommendations in these cases, therefore, were generally consistent with those that would drive negative say-on-pay results, including a disconnect between pay and performance, or the inclusion in compensation arrangements of tax gross-up rights or single-trigger severance arrangements. The other 22% of companies where directors received negative ISS recommendations in 2016 for compensation-related reasons did have a say-on-pay vote in 2016, but apparently ISS found the compensation-related issues to be sufficiently egregious to warrant negative recommendations against -25- 2016 Proxy Season Review July 11, 2016 directors anyway. Of these 21 companies, 17 had received less than 70% favorable votes on say-on-pay in 2015,18 with eight receiving less than 50%, and almost all of the ISS recommendations focused on the issuer’s failure to respond to (or to disclose that they responded to) the concerns underlying those results through shareholder outreach and changes in compensation programs. The perceived failure to be responsive to a low prior-year say-on-pay vote was the most impactful type of compensation-related negative ISS recommendation. For directors who received a negative recommendation for this reason, the average level of shareholder support was 68%, compared to 80% for compensation-related recommendations generally. These results reflect the importance for companies with low say-on-pay results to focus their efforts on engaging in shareholder outreach efforts, and disclosing those outreach efforts and any resulting compensation changes in their next proxy statement, to demonstrate to ISS and shareholders that management has taken action with respect to the prior year’s vote. D. UNILATERAL ACTION BY THE BOARD (INCLUDING PRE-IPO ACTIONS) ISS has made a number of policy changes in recent years that have increased the focus on the board’s adoption of governance structures that ISS perceives to reduce shareholder rights materially without shareholder approval. First, for the 2015 season, ISS adopted a formal policy that codified and clarified its practice of recommending votes against directors who take these sorts of unilateral action. ISS’s FAQ on this policy, issued in February 2015, elaborated on what it considered to be changes materially diminishing shareholders rights: Materially adverse unilateral amendments include, but are not limited to: Authorized capital increases that do not meet ISS’ Capital Structure Framework; Board classification to establish staggered director elections; Director qualification bylaws that disqualify shareholders’ nominees or directors who could receive third-party compensation; Fee-shifting bylaws that require a suing shareholder to bear all costs of a legal action that is not 100% successful; Increasing the vote requirement for shareholders to amend charter/bylaws; Removing a majority vote standard and substituting plurality voting; Removing or restricting the right of shareholders to call a special meeting (raising thresholds, restricting agenda items); and Removing or materially restricting the shareholder’s right to act in lieu of a meeting via written consent. 18 ISS’s policy is to vote case-by-base on compensation committee members (or, in exceptional cases, the full board) if the company’s prior year say-on-pay vote receives less than 70% support, taking into account the company’s response (among other factors). -26- 2016 Proxy Season Review July 11, 2016 Unilaterally adopted bylaw amendments that are considered on a case-by-case basis, but generally are not considered materially adverse, include: Advance notice bylaws that set customary and reasonable deadlines; Director qualification bylaws that require disclosure of third-party compensation arrangements; and Exclusive Venue/Forum (when the venue is the company’s state of incorporation). The 2015 proxy season saw a notable increase in negative recommendations against directors on this basis, but this increase was largely due to situations where a board adopted a fee-shifting bylaw during 2014. During 2015 and 2016, the adoption of fee-shifting bylaws became much less common for public companies, following Delaware corporate law amendments that prohibited them and significant negative shareholder attention on the subject.19 In 2016, ISS expanded its policies on unilateral adoption of these sorts of restrictive provisions to apply to board actions that took place prior to or in connection with a company’s initial public offering, and that are not put up for a shareholder vote in the subsequent year. ISS’s 2016 policy indicates that one of the factors ISS will consider in determining whether to recommend against directors is whether the company has made a public commitment to put the provision to a shareholder vote within three years of the date of the IPO. Of the 127 directors who received negative recommendations in 2016 for taking unilateral actions, 57 related to a failure to request shareholder approval for restrictions that were in place at the time of an IPO. The average support level for directors who received negative ISS recommendations due to the unilateral adoption of provisions that limit shareholder rights was 85% in 2016, and only one director received lessthan-majority support (relating to the unilateral elimination of shareholder special meeting rights). Although this suggests that, in most cases, shareholders broadly do not view a violation of ISS’s standards for these actions as a significant concern, the particular circumstances of the individual issuers may be more relevant. For example, issuers with high insider holdings or supportive investors may be more likely to adopt such changes because they are less concerned about the impact of a negative recommendation. E. LACK OF FORMAL NOMINATING COMMITTEE Another common basis for a negative recommendation at smaller companies is the absence of a formal nominating committee. Under ISS’s policies, this will trigger a negative recommendation for all non- 19 Effective August 1, 2015, Sections 102 and 109 of the Delaware General Corporation Law provide that the certificate of incorporation and bylaws may not contain any provision imposing liability on a stockholder for attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim. For a further discussion, see our publication, dated June 12, 2015, entitled “Delaware Legislature Says No to “Loser-Pays” Fee-Shifting Bylaws But Yes to Forum-Selection Bylaws for Stock Corporations.” -27- 2016 Proxy Season Review July 11, 2016 independent directors, even if these responsibilities are undertaken by the independent directors as a group, as permitted for listed companies under Nasdaq rules. At a small number of companies, the negative recommendation was also based on the lack of a formal compensation committee, though this is less common than it was in prior years, now that NYSE and Nasdaq rules require listed companies to have formal compensation committees. As noted in the table above, ISS issued a significant number of negative recommendations for this reason in 2016, but directors in this category still generally received high levels of shareholder support, indicating that shareholders generally do not share ISS’s concerns in this regard. There were no directors in this category with less-than-majority support. F. PLEDGING BY INSIDERS 2016 was the fourth year under ISS’s policy that any amount of hedging or the significant pledging of stock by directors or executives will be viewed as a “failure of risk oversight” that can lead to recommendations against some or all directors. ISS’s FAQs provide that “whether pledged securities were ‘significant’ for director recommendation purposes is determined by measuring the aggregate pledged shares in terms of common shares outstanding or market value or trading volume.”20 ISS does not provide a bright-line percentage that will be considered “significant” for these purposes as compared to shares outstanding, market value or trading volume. Based on our review of the proxy statements, these negative recommendations were made at companies where the amount of stock pledged by insiders ranged from 6% to 69% of the outstanding stock, broken down as follows: Pledged Shares as a % of Outstanding Number of Companies at Which Directors Received Negative Recommendations 6-10% 7 10-20% 5 20-30% 5 30-40% 2 40-50% 2 Over 60% (highest being 69%) 2 One additional company, where insiders had pledged shares representing 7.5% of the outstanding stock, received only a cautionary note in the ISS report, rather than a negative recommendation. The fact that a company with a lower percentage (6%) pledged received a negative recommendation is likely due to that company having a lower trading value and/or market cap, as these are also factors in ISS’s analysis. A total of 73 directors at 23 companies received negative recommendations in 2016 due to pledging by insiders. Voting results for these directors averaged 84%, and none received less-than-majority support. 20 ISS notes, however, that it deems any pledging of stock by an insider not to be a responsible use of company equity. Any amount of pledged stock by a director or officer will be a negative factor in the company’s corporate governance rating under ISS’s QuickScore rating system. -28- 2016 Proxy Season Review July 11, 2016 In nearly all cases, the negative recommendations were made against the incumbent members of the audit committee, given this committee’s typical responsibility for risk management. The only exceptions were at companies where the proxy statement expressly states that risk oversight is a function of the full board; in those cases, all incumbent directors received negative recommendations. Although ISS’s policies also call for negative recommendations if there is any hedging by insiders (not just a “significant” amount as with pledging), no directors have received negative recommendations on that basis (due, perhaps, to the fact that, unlike pledging, there is no proxy requirement to disclose specific hedging arrangements by insiders, although such information is often available on Forms 4). G. POOR ATTENDANCE ISS will recommend a negative vote in the case of a director that attended less than 75% of all board and committee meetings in the relevant year. This also appears to be a significant issue for shareholders, as five of the 26 directors who received a majority of “against” votes were in this category, and the average support level for directors in this category was only 72%. H. OVERBOARDING ISS will recommend a negative vote in the case of directors who: sit on more than six public company boards;21 or are the CEOs of public companies and sit on more than two public company boards besides their own. Based on the voting results, investors generally seem to share ISS’s concern with directors who sit on a large number of boards. The results for this category were identical to those for poor attendance—five of the 26 directors who received a majority of votes against were in this category, and the average support level for directors in this category was 72%. I. POISON PILL ISSUES Another relatively impactful reason for a negative recommendation in 2016 involved poison pill issues. In particular, ISS will recommend against directors if: the company has a poison pill with a “dead hand” feature that limits the ability of a future board to remove the pill; the board adopts a poison pill with a term of more than 12 months, or renews an existing poison pill, without shareholder approval; or 21 In ISS’s 2016 policy updates, it announced that, beginning in February 2017, the “six” in the first prong will be reduced to “five.” Some large institutional investors set the permissible number of board positions at a lower number. For example, BlackRock’s policies state that it is “most likely to withhold votes for over-boarding where a [non-CEO] director is … serving on more than four public company boards.” -29- 2016 Proxy Season Review July 11, 2016 the board makes a material adverse change to an existing poison pill without shareholder approval. Directors receiving negative recommendations for this reason had average voter support of only 76%, although no directors received less-than-majority support for this reason. J. MATERIAL WEAKNESS ISSUES ISS’s policies state that they will vote on a “case-by-case” basis in the event of “poor accounting practices,” which include material weaknesses identified in Sarbanes-Oxley Section 404 disclosure. In fact, all situations where ISS issued a negative recommendation for accounting practices in 2016 involved a perceived “failure to address material weaknesses in consecutive years.” A total of 48 directors (all audit committee members) received a negative recommendation for this reason in 2016, but only one of these directors received less-than-majority support (and that director received 49.9%). Directors in this category averaged support levels of 81%. III. SAY-ON-PAY VOTES A. COMPANIES MAINTAIN STRONG SAY-ON-PAY PERFORMANCE 2016 was the sixth year of say-on-pay votes under SEC Rule 14a-21(a), which was adopted in 2011 under the Dodd-Frank Wall Street Reform and Consumer Protection Act. The following table summarizes the 2015 and 2016 say-on-pay voting results for meetings through June 30, 2016: Russell 3000 S&P 500 2016 2015 2016 2015 Percentage passed (majority support) 99% 98% 99% 99% Percentage with >70% support 94% 92% 94% 95% Percentage with ISS “Against” recommendations 11% 11% 7% 9% Average support with ISS “For” recommendations 95% 95% 94% 95% Average support with ISS “Against” recommendations 68% 63% 62% 67% U.S. companies, broadly speaking, had similar results on say-on-pay votes in 2016 as compared to 2015, and other recent years, in that the vast majority of companies achieve high levels of support, and very few come close to failing. The generally low rate of negative results is largely a result of the efforts that companies, particularly larger companies, have made to engage with shareholders, understand their concerns, and address these concerns through changes in compensation practices and/or clearer compensation disclosure. Both companies and shareholders, as well as shareholder advisory firms, have become more adept at effective off-season communications where the company can obtain feedback on the most recent voting results, as well as expectations and concerns for the coming year. There continues to be significant year-over-year turnover in failed votes (i.e., votes with less-than-majority support)—of the 31 companies that failed their say-on-pay votes in 2015 and had their 2016 vote as of June 30, 28 achieved majority support in 2016, and 17 had support levels over 70%. This demonstrates -30- 2016 Proxy Season Review July 11, 2016 that companies with failed votes have generally been successful in engaging in and disclosing shareholder outreach efforts and, potentially, implementing program changes, in a way that brings them back to high support levels in future years. The year-over-year turnover has a negative implication, of course—namely, that success in one year is by no means a guarantee of continued success. Of the 24 companies in the Russell 3000 that failed say-onpay votes in 2016 so far, only three had failed their 2015 vote, and most had well over 70% support in 2015. The four S&P 500 companies that failed say-on-pay in 2016 so far had support levels ranging from 83% to 92% in 2015. These reversals of results highlight the importance of continuous attention to shareholder concerns and shareholder outreach on compensation matters, even if the most recent vote has demonstrated high support levels. Off-season communications with shareholders, which have become a regular feature of corporate governance and shareholder relations for many large companies, help the company anticipate and address shareholder concerns, whether by adjusting compensation practices, crafting responsive disclosure, or both. Increasingly, these off-season communications serve to facilitate discussion on topics other than compensation as well. Shareholder outreach takes various forms at different companies, including face-to-face meetings, one-on-one phone calls, group conference calls and web meetings, and, in some cases, includes board members. Companies conducting such outreach must be mindful that company representatives may not disclose material non-public information in these discussions due to selective disclosure concerns under Regulation FD. This is typically not a concern, however, because the purpose of these meetings is for the company to gather information from shareholders—that is, primarily to listen. Companies with largely retail shareholder bases, of course, necessarily must engage in much of these outreach efforts through their ongoing public disclosure. In addition, companies should ensure that the appropriate personnel at institutional clients are involved in the discussions and the decision process—often institutional investors have both governance experts and investment professionals, each of whom will have critical input into the voting process, but may have differing views. Companies have increasingly engaged with proxy advisory firms in the off-season as well—for example, to address any misconceptions evident from the prior vote and to discuss issues that may be relevant to the next year’s vote. ISS22 and Glass Lewis23 post their engagement policies on their websites. The 22 ISS’s engagement policies are available at http://www.issgovernance.com/policy/EngagingWithISS. 23 Glass Lewis’s engagement policies are available at http://www.glasslewis.com/for-issuers/glasslewis-corporate-engagement-policy/. -31- 2016 Proxy Season Review July 11, 2016 policies of both firms restrict their ability to engage with companies during the solicitation period for the annual meeting, which means broader discussions with these firms can occur in the off-season. B. OVERALL ISS APPROACH ON SAY-ON-PAY EVALUATION ISS has a multipronged approach to assessing executive compensation for the purposes of recommending a vote for or against the management say-on-pay proposal.24 However, an analysis of ISS’s 2016 negative recommendations for S&P 500 companies suggests that the most important criterion continues to be the pay-for-performance assessment, and that the most important factor under this payfor-performance assessment is the alignment of CEO pay (as reported in the Summary Compensation Table in the proxy statement) with Total Shareholder Return in relation to the ISS-determined peer group.25 ISS’s policies provide that it will recommend a vote against a company’s say-on-pay proposals if any of the following is true: There is a significant misalignment between CEO pay and company performance (pay-forperformance); The company maintains significant problematic pay practices (for example, excessive change-in-control or severance packages, benchmarking compensation above peer medians, repricing or backdating of options, or excessive perquisites or tax gross-ups); or The board exhibits a significant level of poor communication and responsiveness to shareholders. ISS applies these standards by assigning companies a “high,” “medium” or “low” level of concern for each of the five evaluation criteria listed in the following table, which shows the number of “high concerns” under each criterion for U.S. S&P 500 companies that received a negative say-on-pay recommendation from ISS in 2016: 24 Glass Lewis’s executive compensation assessment policy appears to be less formulaic than ISS’s, though Glass Lewis publicly discloses less detailed information about its policy than ISS does. Based on Glass Lewis’s published information, it evaluates compensation based on five factors: overall compensation structure, implementation and effectiveness of compensation programs, disclosure of executive compensation policies and procedures, amounts paid to executives and the link between pay and performance. In evaluating pay for performance, Glass Lewis looks at the compensation of the top five executive officers, not just the CEO. In addition, Glass Lewis looks at performance measures other than total shareholder return—it measures performance based on a variety of financial measures and industry-specific performance indicators. See http://www.glasslewis.com/wpcontent/uploads/2016/01/2016_Guidelines_United_States.pdf for more information. 25 See Section III.C.3 below for a discussion of the comparability issues that can arise from the use of the Summary Compensation Table numbers and the ISS peer group construction. -32- 2016 Proxy Season Review July 11, 2016 U.S. S&P 500 Companies with Negative ISS Recommendations Total 28 Number that had “high concern” on: Pay-for-Performance 26 Severance/Change-in-Control Arrangements 2 Compensation Committee Communication and Effectiveness 1 Non-Performance-Based Pay Elements 1 Peer Group Benchmarking 1 These results indicate that, although pay-for-performance is just one factor in the overall compensation assessment, it is the dominant determinant of ISS’s outcome on the say-on-pay vote. All four S&P 500 companies that had a failed say-on-pay vote in 2016 had a “high concern” on pay-for-performance, and only one had a “high concern” on any other factor. A more detailed discussion of ISS’s pay-forperformance policies and how they were applied in 2016 follows. C. ISS PAY-FOR-PERFORMANCE ANALYSIS Beginning with the 2012 proxy season, ISS adopted and published a new methodology for evaluating the pay-for-performance prong of its assessment of executive compensation in the context of say-on-pay proposals. This methodology has remained unchanged over the past few years. 26 ISS’s assessment methodology begins with a quantitative analysis of both relative and absolute alignment of pay-forperformance. If the quantitative assessment reflects an apparent pay-for-performance disconnect (i.e., a “high” or “medium” concern), ISS applies a qualitative analysis, including an in-depth review of the company’s Compensation Discussion & Analysis, to “identify the probable causes of the misalignment and/or mitigating factors.”27 1. Components of Quantitative Analysis The three components of ISS’s quantitative assessment are as follows: Relative Alignment of CEO Pay and Total Shareholder Return (Three-Year Period). The metric that is given the greatest weight in the quantitative assessment is the relative alignment of CEO pay and Total Shareholder Return, or TSR,28 to those of a peer group. The relative alignment metric looks at the difference between (a) the percentile rank within the ISS-selected peer group of a company’s TSR and (b) the percentile rank within that peer 26 Technical information and guidance on ISS’s say-on-pay methodology is available on the ISS website at https://www.issgovernance.com/policy-gateway/2016-policy-information/. 27 See ISS’s U.S. 2016 Executive Compensation Policies FAQs, available at https://www.issgovernance.com/file/policy/us-executive-compensation-policies-faq-16-march- 2016.pdf. 28 TSR measures how much an investment in the stock would have changed over the relevant period, assuming the reinvestment of dividends. -33- 2016 Proxy Season Review July 11, 2016 group of a company’s CEO pay.29 The company’s score is based on this difference calculated on a three-year basis. The scoring system effectively gives greater weight to this metric by triggering “high concern” at a relatively low level—specifically, if the weighted pay percentile exceeds the weighted TSR percentile by 30 percentage points or more. As discussed below, this metric appears to be the strongest predictor of ISS recommendations and of overall voting results. Relative CEO Pay to Peer Group Median (One-Year Period). The second relative component of the pay-for-performance assessment is prior-year CEO pay as a multiple of the peer group median. ISS’s scoring system may trigger a “high concern” if this multiple is 2.33x or higher. Absolute Alignment of CEO Pay and Total Shareholder Return (Five-Year Period). The third component measures alignment between the trend in the CEO’s pay and the company’s shareholder returns over a five-year period. This does not depend on year-by-year sensitivity of CEO pay to changes in TSR, but instead compares the straight-line slopes of five-year trend lines (based on a linear regression) for each of CEO pay and TSR. A “high concern” may be triggered if the CEO pay trend slope exceeds the TSR trend slope by 30 percentage points or more. 2. 2016 Results of ISS Quantitative Analysis The following table summarizes the outcome of these quantitative tests for the 28 U.S. S&P 500 companies that received a negative ISS recommendation on say-on-pay in 2016: U.S. S&P 500 Companies with Negative ISS Recommendations Number that had “high concern” on pay-for-performance overall 26 Number that had “high concern” on the: Relative Alignment of CEO Pay and TSR (3-year) 22 Relative CEO Pay to Peer Group Median (1-year) 4 Absolute Alignment of CEO Pay and TSR (5-year) 1 As the table indicates, most large companies that received negative ISS recommendations had a “high concern” on the three-year alignment of CEO pay and TSR versus peer groups. In contrast, the one-year relative CEO pay test yielded a “high concern” at only a small minority of these companies, and the fiveyear absolute alignment test produced one “high concern” within this group. These results reflect the importance of the relative TSR alignment test in driving ISS recommendations. Companies should be mindful of the variables that go into these tests, some of which (such as their stock price and ISS’s peer group selection) companies may have little control over, and which bring a level of arbitrariness to the calculation. 29 See Section III.C.3.a below for a discussion of how “CEO pay” is calculated and some potential comparative problems this may cause. -34- 2016 Proxy Season Review July 11, 2016 3. Potential Problems with Quantitative Analysis Certain features of ISS’s quantitative analysis have been subject to some criticism and may yield inappropriate results in certain circumstances. Many companies have raised these or other arguments in supplemental proxy filings that seek to rebut a negative recommendation from ISS. If a company receives, or thinks it is going to receive, an adverse outcome under the ISS quantitative test in circumstances where it is not warranted, the company should reach out as appropriate to ISS to make sure that the qualitative portion of the test takes into account any special circumstances, and should maintain a dialogue with shareholders to gauge their level of concern and ensure that they are viewing the results of the quantitative assessment in the proper context. In addition, the concerns outlined below are often the focus of companies’ supplemental proxy materials following a negative recommendation, as discussed in Section III.D below. a. Determination of Total CEO Pay All the ISS quantitative metrics look at the level of “CEO pay.” The “CEO pay” for a particular year for these purposes is the total compensation reported in that year’s Summary Compensation Table in the proxy statement under SEC rules. Among other problems, this introduces potential comparative difficulties, because different forms of compensation are reflected differently in the table even though they may pertain to services in the same period. For example, equity awards for services in a particular year that are made shortly after year-end are included in the Summary Compensation Table in the proxy statement for the subsequent year (because that is when the grant occurred), but awards that are made in cash and already earned are included in the Summary Compensation Table for the current year. In addition, differences in equity granting practices may skew results—for example, in the case of special one-time grants. Furthermore, this measurement does not take into account any post-grant change in value of an equity award due to an increase or decrease in the stock price. ISS introduced “realizable pay” as a new qualitative factor for S&P 500 companies in 2013, in an effort to address concerns that the quantitative “grant date” calculation does not capture when or whether compensation is actually earned. “Realizable pay” is the sum of relevant cash and equity-based grants and awards made during a three-year measurement period, based on equity award values for actual earned awards, or target values for ongoing awards, calculated using the stock price at the end of the measurement period. The qualitative analysis involves a consideration of whether the total pay granted during the three-year period is significantly higher or lower than the realizable pay at the end of the period. This metric, however, still involves a valuation of unearned compensation, albeit at the end of a period rather than as of the grant date, and thus continues to mix elements of the grant date and earned compensation in a way that can yield disparate results. -35- 2016 Proxy Season Review July 11, 2016 b. Use of TSR over Fixed Periods The formulaic use of three- and five-year TSR can place undue emphasis on short-term spikes or drops in stock price at the start or end of the measurement periods and does not provide an opportunity for a thorough analysis of the factors relating to the company, its industry or the markets generally that may be contributing to the shareholder return. Companies should seek to ensure that their shareholders and ISS recognize and take into account any meaningful factors that cause the TSR in the tests used by ISS to be not reflective of the company’s performance in the context of its compensation decisions. c. Peer Group Construction As the above numbers show, the “relative alignment” between CEO pay and TSR when compared with the company’s peer group is an influential element of ISS’s calculation. Accordingly, the selection of an appropriate peer group is a critical factor. ISS’s peer group construction generally consists of 14 to 28 companies that are identified based on market cap, revenue (or assets for financial firms), GICS industry group and a company’s self-selected peers.30 Companies should review their peer group used in ISS’s 2016 report to confirm whether it is appropriate in light of a particular company’s business and competition for talent. If the ISS peer group contains companies that the company believes are not, in fact, suitable comparisons, or omits peers the company believes should be included, the company should give consideration to discussing with ISS in the off-season the appropriateness of the peer group construction, or consider whether the inclusion of a different self-selected peer group in the proxy statement may lead to a more appropriate ISS peer group under ISS’s policies. Glass Lewis uses a less formulaic approach to peer group construction than ISS does, stating that its approach “avoids the limitations of arbitrary financial cut-offs or discrete industry groupings and better represents the complex relationships that exist in a competitive marketplace.” Glass Lewis instead bases its peer groupings on an analysis of the proxy disclosure by various companies of the peers they use for compensation benchmarking purposes, combined with “analytics from the social networking space.” Glass Lewis (through its partnership with Equilar, a compensation benchmarking firm) then uses this data to create a “peer network” through which it ranks a company’s peers based on the strength of their connection as indicated by these analytics.31 30 The introduction of a company’s self-selected peers into ISS’s methodology for selecting peer groups was implemented in 2013 to address criticism of ISS’s past practices, which had resulted in some companies being placed in peer groups with companies that operated in different industries, or different segments of their industry. 31 Information on Glass Lewis’s say-on-pay and pay-for-performance assessment policies is available at http://www.glasslewis.com/issuer/pay-for-performance/. -36- 2016 Proxy Season Review July 11, 2016 4. ISS Qualitative Analysis If ISS’s quantitative analysis reflects an apparent pay-for-performance disconnect, then ISS uses a further qualitative review to determine a final vote recommendation. Under ISS’s policies, the qualitative review takes into account a range of factors, including: the ratio of performance-based equity awards to time-based equity awards; the overall ratio of performance-based compensation to total compensation; the completeness of disclosure and rigor of performance goals; peer group benchmarking practices; financial and operational performance (both absolute and relative to peers); realizable pay compared to grant pay; and any special circumstances, such as a new CEO or anomalous equity grant practices. Based on our review of the narrative in the relevant ISS reports, the qualitative factor that most commonly contributed to the negative recommendation for U.S. S&P 500 companies in 2016 was the failure of incentive compensation to be sufficiently performance-based in one or more of the ways described below. This concern was discussed by ISS for 25 of the 28 U.S. S&P 500 companies that received negative ISS recommendations on say-on-pay. This is perhaps not surprising, because it would seem to be closely related to the pay-for-performance alignment that the quantitative tests are intended to address. ISS’s identified concerns in this regard generally fall into the following categories: The use of performance conditions that are not sufficiently rigorous, or insufficient disclosure of performance goals. Even if a company does utilize performance-based awards, ISS will see the awards as problematic if ISS views the goals as too easy to meet, or if the goals are not disclosed in sufficient detail for ISS to make an assessment. Sixteen of the 28 S&P 500 companies receiving negative ISS recommendations were identified as having performance standards that were not sufficiently rigorous, while 13 of the 28 were assessed to have limited, opaque or undisclosed performance goals. The use of time-based awards rather than performance-based awards. ISS identified this concern at 13 of the 28 S&P 500 companies that received negative recommendations. ISS’s failure to consider time-vested option awards or other equity awards to be performancebased has been the subject of criticism because such awards can give the holders a stake in the performance of the company and align the interests of executives with those of shareholders. The use of subjective criteria for determining compensation. ISS cited the existence of subjective criteria for the determination of a bonus or the ability to use discretion to increase an executive’s bonus as a negative factor in 15 of the 28 companies. ISS viewed companies using these discretionary measures as excusing poor performance. While ISS did cite these provisions with approval when companies elected to use this discretion to reduce the size of an award, these cases were rare and ISS largely viewed discretion as suspect. The use of above-target payouts. ISS referenced the existence of payouts that exceeded the company’s target in 13 of the 28 cases. ISS viewed these above-target payouts as suggestive of weak performance standards, or, at least, the need for the company to closely examine its performance standards. -37- 2016 Proxy Season Review July 11, 2016 5. ISS Non-Performance-Related Factors ISS’s policies take into account various non-performance-related factors that can, in certain circumstances, trigger a negative recommendation even where a company does not have a “high concern” on pay-for-performance. This was relatively rare, however, with only five of the 28 S&P companies that received negative recommendations having a “high concern” for non-performance-related issues. The most common non-performance-related “high concern” in 2016 involved severance or change-in-control arrangements that were not in shareholder interests: one of the 28 companies received “high concern” for providing excise tax gross-up payments in connection with a merger and another received “high concern” for excessive severance payments to its departing co-founder. ISS assessed an additional 11 of the 28 S&P 500 companies as “medium concern” for severance or change-in-control arrangements. Other non-performance-related “high concerns” at particular companies were excessive home securityrelated perquisites, peer group benchmarking above the median and poor responsiveness to a low 2015 say-on-pay vote. D. COMPANY REBUTTALS TO ISS SAY-ON-PAY RECOMMENDATIONS A significant number of the companies that received negative ISS and/or Glass Lewis vote recommendations regarding their 2016 say-on-pay proposals filed supplemental proxy materials to communicate to shareholders their disagreement with the proxy advisory firm’s assessment or to reaffirm support for their executive compensation practices more generally. Five of the 28 companies issued explicit rebuttals.32 In some cases these supplemental filings are very detailed, point-by-point rebuttals of the ISS or Glass Lewis analysis, including pointed criticisms of the application of the proxy advisory firm’s tests, further explanation of the compensation committee’s rationale for particular decisions, and alternative measures that show pay aligned with performance. An additional five companies filed general statements in support of their executive compensation practices.33 These supplemental filings serve the important purpose of educating shareholders and encouraging a thoughtful consideration of the issues, and can function as a presentation deck for one-on-one discussions with significant investors. In addition, for many institutional investors these communications, 32 S&P 500 companies that filed supplemental materials in 2016 in response to negative ISS and/or Glass Lewis say-on-pay recommendations include Deere & Company, Citigroup Inc., Expeditors International of Washington, Inc., Pioneer National Resources Company, and SL Green Realty Corp. 33 S&P 500 companies that filed supplemental materials in 2016 advocating shareholder support for their executive compensation practices without explicitly referencing negative ISS and/or Glass Lewis say-on-pay recommendations include BB&T Corporation, Anadarko Petroleum Corporation, Ventas, Inc., Sempra Energy, and salesforce.com, inc. -38- 2016 Proxy Season Review July 11, 2016 together with any direct discussions with the company, can also serve as documentation to support the investor’s decision to reject a negative ISS or Glass Lewis recommendation and vote with management. IV. EQUITY COMPENSATION PLAN APPROVALS ADOPTION OR AMENDMENT OF OMNIBUS STOCK PLANS Russell 3000 S&P 500 2016 2015 2016 2015 Number of proposals voted on 557 745 86 130 Percentage with ISS “against” recommendations 23% 19% 7% 10% Average level of support 89% 90% 93% 92% Number of failed proposals (<50% support) 3 1 0 0 U.S. listed companies are required under stock exchange rules to obtain shareholder approval for the plans under which they award executive compensation to employees and directors. 34 Because shareholders generally support the use of equity compensation by public companies as a means to align the interests of employees with those of investors, in most cases these proposals are uncontroversial and pass by a wide margin. As indicated in the chart above, the average support levels for these proposals are typically around or above 90%, and a very small number of proposals fail to achieve majority support. Beginning in 2015, ISS introduced an “equity scorecard” approach to assessing equity plans. The scorecard method considers factors under three main categories:35 Plan cost. Cost is calculated as the Shareholder Value Transfer relative to industry/marketcap peers; this measures the dilutive effect of the new shares requested as well as shares remaining for issuance under existing plans (often called “dilution” or “overhang”), and is calculated both with and without outstanding unvested awards. Equity plan features. Specifically, penalizing lack of minimum vesting periods, broad discretionary vesting authority, liberal share recycling and single-trigger change-in-control provisions. Historical grant practices. Specifically, three-year “burn rate” relative to peers and vesting requirements in recent CEO grants, among other factors. ISS recommendations have a fairly significant impact on voting results—in 2016, the average support level was 93% when ISS recommended “for” approval and 78% when ISS recommended “against.” ISS 34 See Section 303A.08 of the NYSE Listed Company Manual; Nasdaq Stock Market Rule 5635. 35 ISS’s current equity plan scorecard approach is described in its 2016 Equity Plan Scorecard: Frequently Asked Questions, available on its website. The basic scorecard approach was maintained for 2016, but with a number of scoring adjustments applicable to meetings held on or after February 1, 2016. -39- 2016 Proxy Season Review July 11, 2016 issued “against” recommendations for only six S&P 500 companies so far in 2016. For all six of these companies, ISS highlighted “excessive plan cost” as one of the reasons for the negative recommendation. Other common reasons included discretionary vesting authority (five of the six), liberal share recycling (three of the six) and excessive burn rate (three of the six). Despite the negative recommendations, all six of these proposals received majority support—the lowest support level was 56%, but the second lowest was 69%. Metrics that are similar to those used by ISS—“burn rate” and “dilution”—have become increasingly common features of proxy disclosure supporting the approval of equity compensation plans. The following graph shows the increasing number of proxy statements that reference these metrics over the past 12 years (with the drop from 2015 to 2016 consistent with the reduced number of proposals year-to-date). Number of Proxy Statements Containing Specified Phrases There is no SEC disclosure requirement that relates to concepts such as “burn rate” or “dilution.” Instead, this disclosure trend has been driven by the emphasis that proxy advisors and institutional investors place on these metrics, and, to a lesser extent, by enhanced disclosure in reaction to a wave of proxy disclosure strike suits beginning in 2012. These suits sought to enjoin annual meetings on the grounds of inadequate disclosure as to equity plan approvals, including the allegation that the disclosure did not include projected share usage and other metrics that the board assessed in determining how many additional shares to approve. As with many portions of proxy statements, companies’ disclosure supporting their equity plan approvals has changed over time from a straight-forward compliance exercise to a document that conveys to shareholders the company’s view of its use of equity compensation as part of its capital management. . * * * Copyright © Sullivan & Cromwell LLP 2016 -40- 2016 Proxy Season Review July 11, 2016 ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance, corporate and real estate transactions, significant litigation and corporate investigations, and complex restructuring, regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 800 lawyers on four continents, with four offices in the United States, including its headquarters in New York, three offices in Europe, two in Australia and three in Asia. CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Stefanie S. Trilling (+1-212-558-4752; firstname.lastname@example.org) in our New York office. CONTACTS New York Frank J. Aquila +1-212-558-4048 email@example.com Robert E. Buckholz +1-212-558-3876 firstname.lastname@example.org Catherine M. Clarkin +1-212-558-4175 email@example.com Jay Clayton +1-212-558-3445 firstname.lastname@example.org Audra D. Cohen +1-212-558-3275 email@example.com H. Rodgin Cohen +1-212-558-3534 firstname.lastname@example.org Heather L. Coleman +1-212-558-4600 email@example.com Donald R. Crawshaw +1-212-558-4016 firstname.lastname@example.org Robert W. Downes +1-212-558-4312 email@example.com Mitchell S. Eitel +1-212-558-4960 firstname.lastname@example.org William G. Farrar +1-212-558-4940 email@example.com Matthew M. Friestedt +1-212-558-3370 firstname.lastname@example.org Joseph B. Frumkin +1-212-558-4101 email@example.com David B. Harms +1-212-558-3882 firstname.lastname@example.org Alexandra D. Korry +1-212-558-4370 email@example.com Stephen M. Kotran +1-212-558-4963 firstname.lastname@example.org John P. Mead +1-212-558-3764 email@example.com Mark J. Menting +1-212-558-4859 firstname.lastname@example.org Scott D. Miller +1-212-558-3109 email@example.com Robert W. Reeder III +1-212-558-3755 firstname.lastname@example.org Glen T. Schleyer +1-212-558-7284 email@example.com Marc Trevino +1-212-558-4239 firstname.lastname@example.org -41- 2016 Proxy Season Review July 11, 2016 SC1:4156690.5 Washington, D.C. Janet T. Geldzahler +1-202-956-7515 email@example.com Eric J. Kadel, Jr. +1-202-956-7640 firstname.lastname@example.org Robert S. Risoleo +1-202-956-7510 email@example.com Los Angeles Patrick S. Brown +1-310-712-6603 firstname.lastname@example.org Eric M. Krautheimer +1-310-712-6678 email@example.com Alison S. Ressler +1-310-712-6630 firstname.lastname@example.org Palo Alto Sarah P. Payne +1-650-461-5669 email@example.com John L. Savva +1-650-461-5610 firstname.lastname@example.org London Nikolaos G. Andronikos +44-20-7959-8470 email@example.com Kathryn A. Campbell +44-20-7959-8580 firstname.lastname@example.org Richard C. Morrissey +44-20-7959-8520 email@example.com John O’Connor +44-20-7959-8515 firstname.lastname@example.org David Rockwell +44-20-7959-8575 email@example.com George H. White III +44-20-7959-8570 firstname.lastname@example.org Paris William D. Torchiana +33-1-7304-5890 email@example.com Frankfurt Krystian Czerniecki +49-69-4272-5525 firstname.lastname@example.org Melbourne Robert Chu +61-3-9635-1506 email@example.com Sydney Waldo D. Jones Jr. +61-2-8227-6702 firstname.lastname@example.org Tokyo Izumi Akai +81-3-3213-6145 email@example.com Keiji Hatano +81-3-3213-6171 firstname.lastname@example.org Hong Kong Garth W. Bray +852-2826-8691 email@example.com Michael G. DeSombre +852-2826-8696 firstname.lastname@example.org Chun Wei +852-2826-8666 email@example.com John D. Young Jr. +852-2826-8668 firstname.lastname@example.org Annex A A-1 2016 Proxy Season Review July 11, 2016 Results of Votes on and Reactions to Proxy Access Proposals in 2016 (for meetings from January 1 to June 30, 2016) The following table is organized by the company’s response to the shareholder proposal. Green font means the shareholder proposal received more than 50% of votes cast, and red font means the proposal received less than 50% of votes cast. Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? Companies that adopted a proxy access bylaw after receipt of shareholder proposal and in advance of meeting: AmerisourceBergen Corporation 3/3/2016 31.6% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 Kenneth Steiner 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Apple Inc. 2/26/2016 32.7% Adopted: 3% / 3 years / 20% / group of 20 James McRitchie 3% / 3 years / greater of 25% and 2 directors / unrestricted group size Yes: Failed 3% / 3 years / 25% / unrestricted group size Applied Materials, Inc. 3/10/2016 30.4% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 Kenneth Steiner 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No BorgWarner Inc. 4/27/2016 63% 5% / 3 years / 20% / group of 10 John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No The Brink’s Company 5/6/2016 31.2% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 William Steiner 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Dana Holding Corporation 4/28/2016 34.5% Adopted: 3% / 3 years / 25% / group of 20 Not disclosed 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Dover Corporation 5/5/2016 29.7% Adopted: 3% / 3 years / greater of 20% and 2 individuals / group of 20 John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No A-2 2016 Proxy Season Review July 11, 2016 Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? Ecolab Inc. 5/5/2016 28.3% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Edison International 4/28/2016 36.4% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Fiserv, Inc. 5/18/2016 25.6% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 Not disclosed 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Flowserve Corporation 5/19/2016 45.4% Adopted: 5% / 3 years / greater of 20% and 2 directors / group of 20 Not disclosed 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Kansas City Southern 5/5/2016 26.8% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 James McRitchie and Myra Young 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Lowe’s Companies, Inc. 5/27/2016 30.5% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 Not disclosed 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Marathon Petroleum Corporation 4/27/2016 32.7% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Noble Energy, Inc. 4/26/2016 38.4% Adopted (in 2015): 5% / 3 years / 20% / group of 20 NYC Comptroller 3% / 3 years / 25% / remove group limit / replace 25% renomination eligibility threshold with 10% Yes: Failed 3% / 3 years / 25% / group size not addressed Oshkosh Corporation 2/2/2016 39.7% Adopted: 5% / 3 years / 20% and not less than 2 directors / group of 20 Not disclosed 3% / 3 years / 25% / group size not addressed No A-3 2016 Proxy Season Review July 11, 2016 Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? QUALCOMM Incorporated 3/8/2016 46.9% Adopted: 3% / 3 years / 20% / group of 20 James McRitchie 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Raytheon Company 5/26/2016 34.8% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Sonoco Products Company 4/20/2016 30.2% Adopted: 3% / 3 years / greater of 20% and 1 director if classified or 2 directors if not classified / group of 20 William Steiner 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Stericycle, Inc. 5/25/2016 35.4% Adopted: 3% / 3 years / greater of 20% and 2 directors / group of 20 John Chevedden 3% / 3 years / greater of 25% and 2 directors / group size not addressed No Companies that put forward a competing management proposal: Chipotle Mexican Grill, Inc. (management proposal failed with 23.6%) 5/11/2016 57.4% Proposed: 5% / 3 years / greater of 20% and 1 director / group of 20 NYC Comptroller 3% / 3 years / 25% / group size not addressed Yes: Failed 3% / 3 years / 25% / group size not addressed Cummins Inc. (management proposal passed with 97.1%) 5/10/16 31.6% Proposed: 3% / 3 years / greater of 25% and 2 directors / group of 20 John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Kate Spade & Company (management proposal passed with 81.8%) 5/19/2016 22.6% Proposed: 3% / 3 years / 20% and not less than 2 directors / group of 20 Not disclosed 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Knight Transportation, Inc. (management proposal passed with 93.7%) 5/12/2016 22.3% Proposed: 3% / 3 years / 20% and not less than 2 directors / group of 20 / borrowed or hedged shares not eligible William Steiner 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No A-4 2016 Proxy Season Review July 11, 2016 Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? VeriSign Inc. (management proposal passed with 97.5%) 6/9/2016 29.3% 3% / 3 years / greater of 20% and 2 / group of 20 John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Companies that announced an intent to adopt proxy access: Costco Wholesale Corporation (company announced intent to adopt, terms TBD) 1/29/2016 66.5% N/A Not disclosed 3% / 3 years / 25% / group size not addressed No The GEO Group, Inc. 4/27/2016 35.9% 3% / 3 years / 20% / group size TBD Alex Friedmann 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Companies that simply let the shareholder proposal come to a vote: Barnwell Industries 3/7/2016 34.5% N/A Ned L. Sherwood 3% / 3 years / 25% / group size not addressed No Bio-Rad Laboratories, Inc. 4/26/2016 19.9% N/A James McRitchie and Myra Young for designee John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Boyd Gaming Corporation 4/14/2016 39% N/A Not disclosed 3% / 3 years / 25% / group size not addressed No Celgene Corporation 6/15/2016 68.6% N/A UAW Retiree Medical Benefits Trust 3% / 3 years / 25% / group size not addressed No Community Health Systems, Inc. 5/17/2016 83.2% N/A Denise Nappier, CT State Treasurer 3% / 3 years / 25% / group size not addressed Yes: Failed 3% / 3 years / 25% / group size not addressed A-5 2016 Proxy Season Review July 11, 2016 Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? CONSOL Energy Inc. 5/11/2016 52.4% N/A NYC Comptroller 3% / 3 years / 25% / group size not addressed Yes: Failed 3% / 3 years / 25% / group size not addressed CSP Inc. 2/9/2016 7.5% N/A James McRitchie and Myra Young 3% / 3 years / greater of 25% and 2 directors / unrestricted group size Yes: Failed 3% / 2 years / 34% / unrestricted group size Deere & Company 2/24/2016 60% N/A Not disclosed 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No The Dow Chemical Corporation 5/12/2016 72.2% N/A Not disclosed 3% / 3 years / 25% / group size not addressed No Ellie Mae, Inc. 5/25/2016 55.8% N/A Myra Young for designee John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No EMCOR Group, Inc. 6/2/2016 78.5% N/A William Steiner 3% / 3 years / greater of 25% and 2 directors / group size not addressed No Exxon Mobil Corporation 5/25/2016 61.9% N/A NYC Comptroller 3% / 3 years / 25% / group size not addressed Yes: Failed 3% / 3 years / 25% / group size not addressed Ferro Corporations 4/28/2016 57.1% N/A Kenneth Steiner 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No FleetCor Technologies, Inc. 6/8/2016 62.3% N/A NYC Comptroller 3% / 3 years / 25% / group size not addressed Yes: Failed 3% / 3 years / 25% / group size not addressed A-6 2016 Proxy Season Review July 11, 2016 Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? FLIR Systems, Inc. 4/22/2016 85.6% N/A UAW Retiree Medical Benefits Trust 3% / 3 years / 25% / group size not addressed No Genomic Health, Inc. 6/9/2016 35.5% N/A James McRitchie and Myra Young 3% / 3 years / greater of 25% and 2 directors / group size not addressed No The Goodyear Tire & Rubber Company 4/11/2016 65.3% N/A John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Guess?, Inc. 6/30/2016 45.1% N/A Marco Consulting Group Trust I 3% / 3 years / 25% / group size not addressed No The Interpublic Group of Companies, Inc. 5/19/2016 66% N/A Kenneth Steiner 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Johnson Controls, Inc. 1/27/2016 70.7% N/A Not disclosed 3% / 3 years / 25% / group size not addressed No L Brands, Inc. 5/19/2016 52.5% N/A John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Marlin Business Services Corp. (management in support of shareholder proposal because planning on submitting a similar proposal) 6/8/2016 98.1% N/A George Pelose 3% / 3 years / 25% / group size not addressed No Medivation, Inc. 6/22/2016 63.5% N/A James McRitchie and Myra Young 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No A-7 2016 Proxy Season Review July 11, 2016 Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? Monster Beverage Corporation 6/14/2016 43.4% N/A NYC Comptroller 3% / 3 years / 25% / group size not addressed Yes: Failed 3% / 3 years / 25% / group size not addressed NASDAQ, Inc. (management did not make a recommendation on this proposal) 5/5/2016 75.2% N/A Kenneth Steiner 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No NCR Corporation 5/11/2016 52.7% N/A Myra Young 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Netflix, Inc. 6/9/2016 71.8% N/A NYC Comptroller and CT Retirement Plans Trust Funds 3% / 3 years / 25% / group size not addressed Yes: Passed 3% / 3 years / 25% / group size not addressed NextEra Energy, Inc. 5/19/2016 73.3% N/A Myra Young/her representati ve John Chevedden 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No NRG Energy, Inc. (management did not make a recommendation on this proposal) 4/28/2016 94.8% N/A NYC Comptroller 3% / 3 years / 25% / group size not addressed No Old Republic International Corporation 5/27/2016 74.4% N/A CalPERS 3% / 3 years / 25% / group size not addressed No O’Reilly Automotive 5/3/2016 66.2% N/A NYC Comptroller 3% / 3 years / 25% / group size not addressed No PACCAR Inc. 4/26/2016 45.2% N/A NYC Comptroller 3% / 3 years / 25% / group size not addressed Yes: Failed 3% / 3 years / 25% / group size not addressed A-8 2016 Proxy Season Review July 11, 2016 Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? Peoples Financial Services Corp. 5/14/2016 18% N/A David J. Wukich and Daniel P. Wukich 1.5% / 2 years / 25% / group size not addressed No PharMerica Corporation 6/17/2016 79.2% N/A UAW Retiree Medical Benefits Trust 3% / 3 years / 25% / group size not addressed No Proto Labs, Inc. 5/19/2016 71% N/A James McRitchie and Myra Young 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No PTC Therapeutics, Inc. (management in support of shareholder proposal) 6/10/2016 84.8% N/A UAW Retiree Medical Benefits Trust 3% / 3 years / 25% / group size not addressed No SciClone Pharmaceuticals, Inc. 6/9/2016 88.2% N/A James McRitchie 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No SolarCity Corporation 6/7/2016 11.4% N/A James McRitchie 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Southwest Airlines Co. 5/18/2016 69.2% N/A Kenneth Steiner 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No Spectrum Pharmaceuticals, Inc. 6/28/2016 59.4% N/A Not disclosed 3% / 3 years / 25% / group size not addressed No Starbucks Corporation 3/23/2016 57.4% N/A John Harrington 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No A-9 2016 Proxy Season Review July 11, 2016 Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? T-Mobile US, Inc. 6/16/2016 23.6% N/A Eileen Dunbar on behalf of Marco Consulting Group Trust I 3% / 3 years / 25% / group size not addressed Yes: Failed 3% / 3 years / 25% / group size not addressed Universal Health Realty Income Trust 6/9/2016 70.5% N/A UAW Retiree Medical Benefits Trust 3% / 3 years / 25% / group size not addressed No Universal Health Services, Inc. 5/18/2016 8.9% N/A NYC Comptroller 3% / 3 years / 25% / group size not addressed / not an executive officer or director of UHS / provisions related to Class B/D SHs No Urban Outfitters, Inc. (management in support of shareholder proposal) 5/24/2016 63.6% N/A NYC Comptroller 3% / 3 years / 25% / group size not addressed Yes: Failed 3% / 3 years / 25% / group size not addressed Vector Group Ltd. 4/28/2016 45.5% N/A Kenneth Steiner 3% / 3 years / greater of 25% and 2 directors / unrestricted group size No WEC Energy Group, Inc. 5/5/2016 74.7% N/A NYC Comptroller 3% / 3 years / 25% / group size not addressed No A-10 2016 Proxy Season Review July 11, 2016 Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? Companies that received proposals to amend existing proxy access bylaw: Cabot Oil & Gas Corporation (binding bylaw amendment proposed by the Comptroller) 5/4/2016 45.5% Adopted (in 2015): 5% / 3 years / 20% / group of 10 NYC Comptroller 3% / 3 years / 25% / remove group limit / 10% vote requirement for renomination eligibility / section to be amended only by majority of outstanding SH (not directors) / must state intention with respect to being SH at any level for one year after the meeting date (no requirement to remain SH for any period of time after meeting date) Yes: Failed 3% / 3 years / 25% / group size not addressed New York Community Bancorp, Inc. 6/7/2016 67.1% Adopted (in 2015): 5% / 3 years / 20% / group of 10 NYC Comptroller 3% / 3 years / 25% / remove group limit Yes: Failed 3% / 3 years / 25% / group size not addressed SBA Communications Corporation (management proposal failed with 29.4%) 5/13/2016 67.6% Originally adopted (in 2015): 5% / 3 years / 20% / group of 10, but asked shareholders to approve NYC Comptroller 3% / 3 years / 25% / remove group limit / ensure loaned shares SH has power to recall in 5 days counted as eligible towards ownership requirement Yes: Failed 3% / 3 years / 25% / group size not addressed A-11 2016 Proxy Season Review July 11, 2016 Company Meeting Date FOR as % of votes cast on SH Proposal Key Terms of Management Bylaw Main Proponent Key Terms of SH Proposal 2015 Vote? Whole Foods Market, Inc. 3/9/2016 39.8% Adopted (in 2015): 3% / 3 years / 20% / group of 20 Not disclosed Greater of 25% and 2 directors / remove group limit / no prohibition on otherwise legal compensation arrangement between SH nominees and parties other than corporation / loaned securities count towards ownership / no limitation on renomination / board should defer decisions about suitability of SH nominees to SH vote to extent possible No
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