2014 Proxy Season Review: Shareholder Proposals on Board Declassification, Majority Voting and Elimination of Supermajority Provisions Continue to Receive Strong Support and Begin Migration to Smaller Companies; Handful of “Golden Parachute” Proposals Achieve Majority Support for the First Time; Board Responsiveness Continues to Be a Key Driver of Withhold VotesSullivan & Cromwell LLP - June 25, 2014
During the 2014 proxy season, governance-related shareholder proposals continued to be common at U.S. public companies, including proposals calling for declassified boards, majority voting in director elections, elimination of supermajority requirements, separation of the roles of the CEO and chair, the right to call special meetings and the right to act by written consent. While the number of these proposals was down from 2012 and 2013 levels, this decline related entirely to fewer proposals being received by large-cap companies, likely due to the diminishing number of large companies that have not already adopted these practices. Smaller companies, at which these practices are less common, have not seen a similar decline and, if anything, are increasingly being targeted with these types of proposals.
Shareholder proposals on social issues (particularly those related to political contributions and lobbying costs) and compensation-related issues (particularly those relating to acceleration of vesting upon a change-in-control and stock retention) also remained common but, as in the past, these proposals generally received far lower support than governance-related proposals. However, a handful of proposals relating to acceleration of vesting upon a change-in-control (so-called “golden parachutes”) actually achieved majority support in 2014, which has almost never happened in prior years.
In addition, during the 2014 proxy season, U.S. public companies continued to have, on average, strong results on their advisory say-on-pay votes, reflecting companies’ success in engaging with shareholders, understanding and anticipating their concerns, and communicating the company’s actions and positions.
In the area of director elections, 2014 saw an increase in negative recommendations from proxy advisory firms and low vote results for directors as a result of a perceived lack of responsiveness to shareholder concerns. This increase is likely due, at least in part, to new policies of Institutional Shareholder Services, the proxy advisory firm, that call for withhold recommendations for directors who fail to implement a shareholder proposal that received the majority of votes cast (as opposed to votes outstanding) in the prior year.
In this publication, we:
- Quantify and discuss various categories of shareholder proposals voted on this season, and highlight important trends and legal developments;
- Discuss developments in the use by companies of litigation as an avenue to exclude shareholder proposals, including challenges posed by recent decisions on the issue of standing;
- Analyze the key reasons that directors of U.S. companies received “withhold” or “against” recommendations from ISS in 2014, and the impact of these recommendations on voting results;
- Discuss the primary drivers of negative recommendations by ISS on say-on-pay proposals;
- Analyze the results from 2014 say-on-pay votes, including the greater success of large companies in avoiding problematic vote results; and
- Highlight the increased use by shareholder proponents of new avenues for publicizing their arguments and counterarguments regarding their proposals.
Sullivan & Cromwell LLP will host a client podcast this summer to discuss 2014 proxy season developments. Information on this podcast will be disseminated shortly.