With the 2013 proxy season halfway over, Latham & Watkins partners Jim Barrall, Mark Gerstein and Steven Stokdyk were joined by Rhonda Brauer, Senior Managing Director of Corporate Governance at Georgeson, for a webcast taking stock of the 2013 season and discussing what is on the horizon for 2014.
Key trends identified in the webcast are highlighted below. For more information, a recording of the full webcast is available.
Executive Compensation in 2013
- Increased shareholder support - 2013 saw slightly higher levels of shareholder support in terms of executive compensation, compared to 2012.
Key Battleground Issues in 2013:
- Pay for performance – The alignment of executives’ pay with the total shareholder return continues to be an issue. Pay for performance was a factor for 37 of the 38 companies that failed their votes and was problematic for many others.
- Rigor of the performance goals – Glass Lewis and ISS are raising the bar and tweaking the model. They are no longer just looking to see whether or not the compensation elements are performance related or performance based; they are now starting to look at the rigor of the performance goals.
- Unresponsiveness & Shareholder Engagement – Failure of boards to respond to prior failures in their votes or votes with less than 70% approval, was a factor in 22 of the companies that fail their votes and a point of contention for many others. It is imperative for companies that get less than 70% or just more than 70% to do the outreach in order to really understand why.
- Continued Supplemental Filings – There have been a high number of supplemental filings in 2013. Half way through the season, there have been 65, which is on pace with 2012.
- Proxy & Executive Compensation Litigation – The seeds for these lawsuits were sown in 2011 and 2012, but they have really taken off in 2013.
- Growing Use of Clawback Polices – This trend has accelerated in 2013. Expect to see more in 2014.
- Defining “Pay” – There is an emerging consensus on pay-for-performance “pay” definition. An industry working group is creating a set of principles to define pay. The group is expected to publish a whitepaper later in 2013.
Activism in the 2013 Season
- Bigger Targets – Thirty percent of companies targeted in activist campaigns had a market capitalization of more than US$1billion dollars, compared to 20.2% in 2012.
- Increased Pressure on Acquisitions – There has been increased pressure on acquisitions, particularly in the context of negative ISS and Glass Lewis recommendations. This is leading to more proactive efforts by merger participants to establish dialogue with stockholder and monitor trends and votes.
- Willingness to Invest Time & Resources – Activists are increasingly willing to invest time and resources at the outset of a potential campaign. This underscores the need ensure your board is aware of alternatives available to them, aware of the market’s perceptions of the weaknesses of the company, and aware of the prospects for value generating transactions.
- Director Compensation – Some activists have established incentive compensation arrangements with their nominees that reward them based upon future short term performance at the target. Investors (including leading institutions) have expressed concern this may provide the wrong incentives to the activist nominees if they are elected.
Share Ownership and Voting Developments
- Increase in Anti- Pledging Polices – The number of companies disclosing such polices in their proxy agreements has increased from 8 in 2013 to 107 in 2013.
- Vote Counting Standards – The applicable standards on vote approval depend on charter, bylaw applicable law and stock exchange rules.
- Reporting Votes – Because of the different ways of voting, there has been a fair amount of spin in 2013 in terms of how votes are reported.
- Split Voting Becomes Easier – ISS voting service and Broadridge have dramatically improved the ability to process and execute split voting, but it still requires significant time and coordination.
A Look Ahead to Next Season
- Potential for Proxy Firms to Lose Influence – Proxy firms are increasingly under the microscope and organizations like Vanguard and BlackRock are reaching out directly. More direct company engagement is expected this year, but for smaller companies without the resources proxy advisors are still necessary.
- Possible Move Toward Universal Ballots – There were fewer proxy access proposals last year and next year, for the first time, we will see the possibility of proxy access nominees actually appearing in company proxy statements at HP and Western Union. This may mean we will start to see the rise of Universal Ballots next year.