ISS recently released the results of its 2017-2018 global policy survey. The respondents, mostly from the U.S., included 131 investors, 382 corporate issuers, 46 consultants/advisors, 28 corporate directors and 13 organizations that represent or provide services to issuers. Highlights of the survey are summarized below:
Multi-class capital structures. In many instances, there was a substantial divergence between the responses of investors and non-investors. For example, with regard to multi-class share structures with unequal voting rights, 43% of investors said that these structures are not appropriate and 43% viewed multi-class structures as appropriate in certain circumstances, such as for new public companies subject to sunset provisions or periodic reapproval by the holders of the low-vote shares. For some investors, the key issue was how to demonstrate board independence. In contrast, half of the non-investors responded that companies should be allowed to choose whatever capital structure they see fit, and only 27% would require a sunset or reapproval provision; only 11% opposed these capital structures under any circumstances. Some non-investors contended that shareholders that oppose the structure can just chose not to invest.
Board gender diversity. Apparently, just about everyone is on board with the concept of board gender diversity—almost 70% of investors viewed as problematic the absence of any women on a board. However, making board diversity a reality seems to be a tougher proposition. According to ISS, despite the recent heightened attention given to the issue, “there have been varying levels of progress amongst companies in increasing the number of female directors on boards and some institutional investors continue to express frustration with a perceived lack of progress in boosting gender diversity in certain markets or industry sectors.”
The answers cited by investors to address this issue were, in order, engagement or supporting shareholder proposals or supporting a shareholder-nominated candidate. About a quarter of investors also indicated that disclosure of a board’s approach to increase gender diversity would be mitigating, while 43% saw the absence of women as indicative of problems in the recruitment process. Fewer than 10% thought an absence of women directors was not problematic, with board composition best left to the board. Of investors, 23% would assess the issue on a case-by-case basis, taking into account “the appropriateness of the existing directors based on their experience and skill sets; whether the board is composed of people who are capable of representing shareholders; company size; and turn-around situations.”
Of non-investors, 54% thought the absence of a woman director on a board was problematic, while over half of those said that disclosure would be mitigating. The most favored remedy was engagement, while non-investors also favored votes against members of the nominating committee rather than support for a shareholder nominee to the board. Only 19% thought the absence of women was not problematic. Those preferring a case-by-case approach would take into account considerations similar to those of investors, and some expressed concerns about quotas.
Some of the largest asset managers, such as BlackRock, are actively supporting efforts to improve board gender diversity. For example, in its Investment Stewardship Report for Q2 2017, BlackRock (reportedly the largest asset manager, with $5.1 trillion under management) indicated that, in the second quarter, it supported eight out of nine shareholder proposals that requested the adoption of a policy on board diversity or disclosure around plans to increase board diversity. The majority of the companies did not have any women on their boards. According to BlackRock, board gender diversity “is important from a sustainable investment perspective given that diverse groups have been demonstrated to make better decisions. In the board context, this appears to be because they are better able to consider, where appropriate, alternatives to current strategies—a proposition that can ultimately lead to sustained value creation over the long term.” Similarly, as reported in the WSJ, State Street Global Advisors “voted against the reelection of directors at 400 companies this year on grounds they failed to take steps to add women to their boards.” According to the article, State Street found that 476 companies in its portfolio “lacked a single female board member. Of that group, the Boston-based firm said 400 companies failed to make any significant effort to address the issue.” As a result, State Street voted against members of the nominating committees of those companies’ boards. (See this PubCo post.) And recently, the NYC Comptroller’s Office, leveraging the success of its proxy access campaign and the “powerful tool” it represents to “demand change,” has announced the Boardroom Accountability Project 2.0, which will focus on, among other things, corporate board diversity. (See this PubCo post.)
Share issuances and buybacks. In contrast to many European markets, U.S. markets do not require shareholder votes on share buybacks or on issuances up to the amount authorized in the company’s charter except in specified circumstances. More than seven out of ten of the investors favored votes on share issuances while less than half called for votes on share buybacks, leaving that instead to the board’s discretion. Of non-investors, 61% thought both share issuances and buybacks were matters best left entirely in the board’s discretion.
In recent Senate testimony, SEC Chair Jay Clayton was asked, in light of concerns about companies’ conducting buybacks with the short-term goal of increasing the stock price at the cost of other corporate investments, whether buyback disclosure should be required more often than quarterly. Clayton would not comment on the timing of disclosure, but expressed concern about potential abuses. Although he thought that buybacks can be an efficient and appropriate way to return capital in the right circumstances, he would be troubled by short-term motivation and would look at disclosure issues in that light. (See this PubCo post.)
Virtual/hybrid shareholder meetings. Holding a meeting online can allow shareholders to participate remotely, thus potentially increasing participation, while reducing costs associated with physical meetings. However, ISS observes, critics have charged that “virtual-only meetings may hinder meaningful exchanges between management and shareholders.”
Almost 20% of investors thought either virtual-only shareholder meetings (where the meeting is held entirely with no physical location) or hybrid shareholder meetings (where physical meetings are supplemented by real-time audio or video, with a variety of types of online participation by shareholders) were acceptable, and 8% thought neither were acceptable. However, 36% were fine with hybrid meetings, but not virtual-only shareholder meetings, and 32% were fine with either, so long as virtual-only meetings afforded the same shareholder rights as physical meetings.
Among non-investors, 42% viewed either virtual-only or hybrid shareholder meetings to be acceptable without reservation. The majority of non-investors, however, did not agree with that view, with 22% finding hybrid meetings acceptable, but “virtual-only” meetings acceptable only if they provided the same shareholder rights as a physical meeting, and 15% did not approve of either.
Originally, the virtual annual meeting was viewed as “CPR” for the debilitated annual shareholder meeting, which had, over time, evolved into a moribund ritual of corporate governance, as fewer and fewer shareholders were able or willing to overcome the logistical and financial burdens of attendance in person. With virtual technology, large numbers of shareholders were suddenly able to attend meetings on their laptops. Ironically, however, it has been shareholders — the designated beneficiaries of the virtual annual meeting — that have raised objection to virtual-only meetings because they were viewed to insulate management and directors from shareholders and allow management to avoid uncomfortable questions. While the number of virtual-only annual meetings increased in number from 21 in 2011 to 154 in 2016 to over 160 in the first half of 2017, the criticism among some commentators and institutional holders has not abated: critics continue to contend that virtual-only meetings limit an important shareholder right, precluding shareholders from direct eye-to-eye engagement with management and the board. For example, the policy of the Council of Institutional Investors currently provides that companies should hold virtual meetings “only as a supplement to traditional in-person shareowner meetings, not as a substitute.”
In light of these concerns, a group of representatives of “interested constituencies,” including CalSTRS, the National Association of Corporate Directors, Nasdaq, the Society of Corporate Secretaries & Governance Professionals and others, have developed a set of best practices or safeguards for virtual meetings, Guidelines for Protecting and Enhancing Online Shareholder Participation in Annual Meetings. Interestingly, the introduction to the Guidelines admits that the group participants were “unable to agree on when virtual-only and hybrid meetings of shareholders may be used….” and, ultimately, left that decision for each company to make on its own, taking into account specified factors. (See this PubCo post and this PubCo post.)
Pay Ratio. Contrary to many predictions, ISS found that investors were actually planning to use the pay-ratio data that will start to appear in proxy statements in 2018. Only 16% said they were not planning to use the data. Almost three-quarters of investors replied that they intended either to compare the ratios across companies/industry sectors and/or to assess year-over-year changes at individual companies. The remainder appeared to be in wait-and-see mode. Investors advised shareholders to use the data as one data point or as background for engagement.
Of non-investors, 21% indicated that they intended to follow the same practices as the majority of investors above. However, 44% of non-investors expressed skepticism about the usefulness of the data, citing issues such as demographic and geographic disparities among peer companies as well as differences in the use of part-time or contract workers. Respondents were also asked how shareholders should use disclosed data on pay ratios. For the most part, non-investors did not think the data would be meaningful to shareholders.