With proxy season almost upon us, it is a good time to think about what shareholder activists will likely be focusing on this year. Because activist campaigns often span several seasons, it is helpful to first reflect on 2013 shareholder proposals and voting results to better predict the most likely themes for the 2014 season.
A Look Back
Consistent with recent years, the three main areas of focus for shareholders during the 2013 proxy season were corporate governance, compensation and social issues.
Governance. Board declassification, majority voting and elimination of supermajority voting were the most successful governance-related shareholder proposals at S&P 500 companies. An increasing number of large companies are declassifying their boards and eliminating supermajority voting, either as a result of shareholder campaigns or by being proactive in garnering support for management proposals. For instance, over 90% of S&P 500 companies have declassified boards, compared to less than 50% a decade ago. Shareholders also focused on separation of CEO/Chairman roles, proxy access and shareholder rights to call special meetings and act by written consent.
Compensation. Compensation-related proposals by shareholders at large companies fell into two main buckets: stock retention requirements for executives and “golden parachute” arrangements. These proposals were always unsuccessful.
Social. Though also largely unsuccessful, social issues at play were mostly political and environmental in nature, such as political contributions and lobbying costs, environmental sustainability and human rights.
A Look Ahead
Certainly, companies should continue to expect shareholder proposals regarding board declassification, majority voting and elimination of supermajority voting. To avoid drawing unwanted attention for not adopting what have become “best practices,” companies finding themselves in the dwindling minority would be wise to discuss internally the best approach for putting forth proposals that will get the attention and support of major shareholders.
We can also expect proposals on social issues such as political contributions, lobbying, environmental sustainability and climate change. In fact, these kinds of proposals together made up nearly 40% of the shareholder proposals in 2013 and the average shareholder support for them has almost doubled since 2005. This is definitely an area to keep an eye on in terms of targeted campaigns. In particular, shareholders may be more vocal with respect to political spending given the withdrawal of mandated political spending disclosure from the 2014 rulemaking agenda of the SEC (see A Setback for Mandated Political Spending Disclosure).
An interesting governance conversation these days is “board refreshment.” Shareholders are beginning to question whether a “seasoned” director can truly be considered independent. While Institutional Shareholder Services (ISS) recommends voting against director term limits, in a situation where the average tenure of directors is more than 15 years, it will consider whether there is sufficient independence from management and whether there has been enough turnover to allow new perspectives.
Diversity in the boardroom is also expected to continue to be another area of shareholder interest.
Pre-emptive Shareholder Engagement
In the absence of a reliable crystal ball, the best way to know what institutional investors and other major shareholders are thinking is through ongoing shareholder outreach and engagement, especially given the waning influence of shareholder advisory firms (see Shareholder Engagement and Governance Road Shows). A recent study by SharkRepellent shows that companies with returns underperforming the Russell 3000 were three times more likely to be targeted by activists than companies that over-performed. In the underperforming cases, shareholders often sought governance changes in order to bring a fresh perspective to the boardroom or to separate the CEO/Chairman roles to create more independent oversight at the board level.
Another burgeoning area of shareholder activism is centered on business strategy and management. Large institutional investors like T. Rowe Price and BlackRock have set up internal groups to assess governance practices and corporate strategies to find ways to improve performance. As institutional investors are becoming more focused on performance, they are also being more proactive in seeking takeovers, spin-offs, extraordinary dividends and buybacks and divestitures. For example, The Timken Company was the subject of a heated shareholder campaign calling for the separation of the company’s two main lines of business. Four months after shareholders approved the non-binding shareholder proposal, Timken spun off its steel-making business.
While it might be easier said than done, it is a good idea to proactively pursue governance change through the company’s own initiatives before becoming the target of activist attention, particularly in the case of stagnant or disappointing performance. Engage with your top shareholders to identify what, if any, voting policies they have in place and what they view the company’s vulnerabilities to be. Active, long-term shareholders can provide valuable perspective before the governance proposal or strategic campaign is launched.
Tips for Dealing with Shareholder Proposals
Should a shareholder proposal come your way, here are a few tips for handling it:
- If you are not already, become familiar with Rule 14a-8 and the other procedural and substantive rules and guidance relating to shareholder proposals, as well as the various deadlines involved in the shareholder proposal process;
- Engage with the proposal’s proponent early in the process;
- Decide whether you have a basis for submitting a no-action request to the SEC and, if you do, be thoughtful about whether you want to go down that road; and
- At the risk of sounding repetitive, keep the dialogue with the proponent and other shareholders going after proxy season.