This first edition of ProxyPulse for 2014 looks back at key trends from the 2013 fall “mini-season” covering 1,0661 shareholder meetings held between July 1 and December 31, 2013. We also include comparative shareholder voting behavior data from the 2012 fall mini-season2.
This edition looks at several areas including public company ownership composition, director elections, say-on-pay, proxy material distribution, and the mechanics of shareholder voting. In addition, we examine how historical shareholder voting behavior and the current corporate governance environment are likely impacting the early 2014 spring proxy season.
1 For purposes of data comparability, we excluded from our analysis the voting results of four micro-cap companies with significantly atypical shareholder profiles in which retail ownership exceeded 90%.
2 A season over season comparison provides a consistent view of all companies with proxy activity during that part of the calendar year.
The analysis is based upon Broadridge’s processing of shares held in street name, which accounts for over 80% of all shares outstanding of U.S. publicly-listed companies. For purposes of this report, the term “institutional shareholders” refers to mutual funds, public and private pension funds, hedge funds, investment managers, managed accounts and voting by vote agents. The term “retail shareholders” refers to individuals whose shares are held beneficially in brokerage accounts.
3 An exempt solicitation is defined as one in which a proponent sends a letter to shareholders through Broadridge. A “vote no” letter is an example of an exempt solicitation. Unlike proxy contests, exempt solicitations do not involve distribution of opposition proxy cards.
4 For these purposes, a proxy contest is defined as a meeting in which a counter solicitation is made.
2013 fall mini-season retail ownership stable year over year, but retail voting decreases. During the 2013 fall mini-season, 56% of street shares were owned by institutional investors and 44% by retail investors – approximately the same as during the 2012 fall mini-season. However, 2013 fall mini-season retail ownership was 11 percentage points higher than during the 2013 spring proxy season. This is likely due to the greater percentage of small and micro-cap companies that hold their annual meetings during mini-season and tend to have a greater retail ownership base.
Retail investors voted about 27% of their shares in the 2013 fall mini-season – a decrease of about 2 percentage points from the previous year. Institutional investors on the other hand voted 85% of their shares, an increase of 5 percentage points from the same period in 2012. Voting rates varied widely by company size during the 2013 fall mini-season. For instance, institutional investors voted 90% of their shares at small-cap companies but only 68% at micro-caps. Retail voting was highest at mid-cap companies (37%) and lowest at large-caps (25%).
It’s critical to understand your company’s institutional and retail ownership distribution, as voting behaviors tend to vary widely by segment and company size.
Directors continue to be elected with sizable shareholder support, but fewer are reaching the 90% threshold. In the 2013 fall mini-season, there was a decrease in the percentage of directors receiving over 90% shareholder support – 69% did so compared to 72% during the 2012 fall mini-season. This phenomenon was most notable at large-cap companies, where the number of directors garnering over 90% shareholder support decreased by 8 percentage points year over year.
Reasons for shareholders to vote against a director can vary. According to PwC’s What Matters in the Boardroom 2013, 55% of investors say a perceived inability to keep up with the demands of the director role is the “most or a very important” factor in making a decision to vote for or against a director. Forty-nine percent of investors say the same regarding perceived lack of expertise and 40% say so about a perceived lack of independence. Negative recommendations from proxy advisory firms and long board tenure are the least important factors in motivating an investor to vote for or against a director (6% and 3%, respectively).
Consider benchmarking your board’s level of negative director voting against peers.
Say-on-pay proposals generally received high favorable support during the 2013 fall mini-season but 18% of companies received less than 70% support. During the 2013 fall mini-season, shareholders supported pay plans at rates over 90% at 53% of companies and more than eight of ten pay plans received at least 70% support. Eighteen percent of companies had favorable say-on-pay votes of less than 70% – the threshold looked at closely by proxy advisory firms. Support across market caps was consistent year over year with the exception of micro-caps where we observed a decrease of 15 percentage points in average support.
These high levels of shareholder support for pay plans may be attributable to the changes that companies have made as a result of their previous year’s say-on-pay vote. According to PwC’s What Matters in the Boardroom 2013, seven of ten directors indicate some type of action was taken by their company in response to the prior year’s say-on-pay voting results and 82% of investors believe some action was taken. A majority of directors and investors both believe say-on-pay voting has resulted in compensation being more performance-based. Investors credit say-on-pay with increased communication between the two groups regarding compensation issues and a reduction in the use of controversial benefits.
On the whole, investors indicate that directors should reconsider their company’s executive compensation plan at lower levels of negative say-on-pay voting than directors do. One in five investors believe that 11-20% negative shareholder voting signals a need to revisit compensation, compared to only 13% of directors.
The chart to the right tracks director and investor perspectives on sensitivity to negative say-on-pay voting compared to actual voting outcomes in the 2013 fall mini-season. For example, 58 companies that had say-on-pay votes received between 21% and 30% negative shareholder voting. Thirty-seven percent of directors and 42% of investors say this level of negative shareholder voting should prompt a reconsideration of executive compensation structures.
Boards should continually re-evaluate the message shareholders are sending through say-on-pay voting.
Electronic delivery of proxy materials and electronic shareholder voting continues to grow, but 73% of retail shares were un-voted in the 2013 fall mini-season. The means by which shareholders receive their proxy materials and vote their shares is evolving rapidly. The majority of institutional investors received proxy materials through an electronic platform and 98% of institutional shares were voted electronically in the 2013 fall mini-season.
However, retail shareholders received their proxy materials in a variety of ways and used a more diverse mix of voting methods. For 42% of retail shares, investors received proxy materials electronically and 20% through a mailed notice (compared to 36% and 21%, respectively, in the same period in 2012). In addition, for 38% of retail shares, investors were mailed the full paper package – a decrease of 5 percentage points from the same period in 2012.
Seventy-three percent of all voted retail shares were voted via the internet, a 3% increase over 2012, and 20% voted via paper ballot, a 4% decrease from 2012. However, in all, only 27% of all retail shares were voted during the 2013 fall mini-season.
Understand how your company disseminates proxy materials and the preferred voting methods of your shareholders.
Shareholder proposal topics appear similar to last year. According to early data, over 700 shareholder proposals have been submitted to US public companies for 2014, with board declassification leading the way among governance-related issues, followed by proposals for independent board chairs and political spending disclosure. The Shareholder Rights Project (SRP), a program at Harvard Law School conducted in coordination with public pension funds and charitable organizations, has filed 31 board declassification proposals at S&P 500 and Fortune 500 companies this year. Independent board chair proposals have been largely driven by public pension funds and organized labor. The Center for Political Accountability has been an organizing force behind many of the political spending disclosure proposals, offering investors a “model resolution.” 2014 compensation-related shareholder proposals include a new variation that would limit executive pay to 99 times that of the median worker.
Amended proxy advisor policies may impact director voting. For 2014, there has been a change in policy at Institutional Shareholder Services (ISS) that may affect director voting. In determining whether to recommend “withhold” votes against directors, ISS will take a case-by-case approach in assessing whether a company has adequately implemented a shareholder proposal that received the support of a majority of the votes cast in the prior year. ISS will consider the company’s disclosure of its shareholder outreach efforts, the rationale provided in its proxy statement for the level of implementation, the subject matter of the proposal, the level of support for and opposition to the proposal, and whether the underlying issue continues to be a voting item for this year’s proxy. A negative recommendation from a proxy advisory firm such as ISS could have a negative impact on director voting results.
Shareholder activism is top of mind. A number of high-profile activist investors have made significant demands of companies or launched proxy contests in 2014. The demands are varied and include everything from selling off a business unit to issuing special dividends to seeking board representation. Heightened shareholder activism is consistent with a trend we have seen over the last several years. For example, there was a 69% increase in the number of exempt solicitations between 2012 and 2013 and a 10% increase in the number of proxy contests year over year. We will continue to monitor the activism landscape and in our next edition look more deeply at trends by industry and size.