There are number of important considerations that public companies should be aware of as they begin preparing for the 2018 proxy season, including potential changes in law, pay ratio disclosure, Rule 14a-8 shareholder proposals, ISS proxy voting polices and potential proxy statement improvements.
On June 8, 2017, the House of Representatives passed a revised version of the Financial Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs (“CHOICE”) Act. The CHOICE Act is intended to, among other things, encourage economic growth, provide regulatory relief, impose new measures to end taxpayer bailouts of complex financial institutions, and help manage systemic risks. It seeks to repeal many of the measures enacted under Dodd-Frank, including pay ratio and the proposed changes to clawbacks and hedging disclosure. In addition, the CHOICE Act would make changes to SEC Rule 14a-8, including increasing the ownership and holding period requirements and potentially limiting the aggregation of shares, effectively making it harder for shareholders to submit proposals under the rule.
The Senate Banking, Housing, and Urban Affairs Committee recently began holding hearings on the CHOICE Act. Although 60 votes for passage of the full bill may not be possible, Senate Republicans may still pass portions of the Act through budget reconciliation. However, such changes are unlikely to occur before the start of the proxy season.
Pay Ratio Disclosure
Therefore, most companies (other than emerging growth companies and smaller reporting companies) will be required to provide pay ratio disclosure for the first fiscal year beginning on or after January 1, 2017, with the result that most companies will begin making disclosures in early 2018. On September 21, 2017, the SEC issued helpful guidance to assist companies with the rule. Among other things, the guidance emphasizes SEC flexibility on the use of internal records to identify the median employee, even if every element of compensation is not included in such records; the use of internal records to determine the availability of the 5% de minimis exemption; and allowing companies to use more widely recognized definitions of “employee.” The new guidance was issued in the form of an interpretive release, SEC staff guidance and revised Compliance and Disclosure Interpretations.
Actions companies should be considering include analyzing the company’s employee population, including by country; determining what method the company will use to identify the median employee; considering whether the company can, or should, attempt to rely on an exemption; and planning the company’s disclosure and communication strategy with respect to shareholders, employees and others. For additional information, please see our prior alert.
Rule 14a-8 Shareholder Proposals
Companies should continue to be mindful of the potential for activist shareholder proposals under Rule 14a-8. Proxy access proposals were very common in 2017, leading many companies to adopt some form of proxy access. As a result, companies that have not yet adopted proxy access should be prepared for such proposals. Companies that have already adopted proxy access should be prepared for “fix it” proposals focused on broadening applicable thresholds for nomination such as shareholders’ ability to aggregate ownership. Other popular shareholder proposals are expected to include proposals that address independent board chairs, majority voting, board diversity and various other social, environmental and political proposals.
The SEC recently issued additional guidance on certain issues under Rule 14a-8, including guidance that may expand the bases companies may use to exclude proposals, but also may change companies’ processes in building their cases for exclusion. Please see “Staff Issues New Guidance on Excluding Shareholder Proposals” below.
ISS Proxy Voting Policies
Recently, ISS released its revised policy voting guidelines for 2018. The updates are effective for meetings on or after February 1, 2018. Topics covered include updates on:
- voting every year against all directors of companies with unilaterally-adopted shareholder rights plans with terms of longer than one year, with commitments to put a rights plan to a vote the following year no longer considered a mitigating factor;
- beginning in 2019, voting against committee members responsible for approving “excessive” non-employee director compensation over two or more consecutive years without a compelling rationale or other mitigating factors;
- voting against relevant committee members (or the full board) where a significant level of pledged stock raises concerns, taking into account certain specified factors;
- specifying the types of disclosure of shareholder engagement efforts that ISS will consider in determining how to vote if prior say-on-pay votes receive less than 70% support;
- highlighting boards with no gender diversity, without triggering an adverse vote recommendation; and
- in connection with its pay-for-performance analysis, adding the rankings of CEO total pay and company financial performance versus a peer group over a three-year period to the items it considers.
ISS also updated its policy on certain shareholder proposals, including gender pay gap, board diversity and climate change.
Previously, ISS issued its 2018 policy survey. It included a focus on gender diversity and also covered shareholder authorization for share issuances and buybacks, implications of virtual/hybrid shareholder meetings and disclosure of pay ratios.
Proxy Statement Communication
With the recent focus on proxy access and board composition, the trend toward emphasizing the experience, skills and diversity of backgrounds of directors is likely to continue. Companies may consider skills charts or graphics showing diversity. Companies might also consider highlighting shareholder engagement, improving readability and adding graphics and executive summaries to their proxy statements.