2016 Proxy Season Review: Proxy Access Becomes Widespread as “Market Standard” Terms Are Reinforced; Traditional Governance Proposals Continue to Decline; Lack of Responsiveness to a Shareholder Vote Remains Principal Driver of Low Support Levels for DirectorsSullivan & Cromwell LLP - July 11, 2016
This publication summarizes significant developments relating to the 2016 U.S. annual meeting proxy season, including:
- Proxy Access Proposals Continue to Drive Changes. The dominant trend in Rule 14a-8 shareholder proposals and corporate governance actions in 2016 related to proxy access. A record number of proxy access proposals were made for the 2016 proxy season (around 200 in total), and many companies responded by adopting proxy access bylaws with terms similar to the proposal, resulting in a slight decline in proposals actually voted on. Around 190 of the S&P 500 companies have now adopted proxy access.
- Proposals Show Continued Large-Cap Focus. Shareholder proposals continued to be focused primarily on large-cap (S&P 500) companies, with more traditional governance proposals (such as board destaggering, majority voting and elimination of supermajority voting) becoming less common as most large-cap companies have adopted these arrangements. Rather than pushing these practices down to smaller companies, proponents largely turned their attention to advancing proxy access.
- Market-Standard Proxy Access Terms Solidified. The results of the proxy season, together with the terms of company bylaws and the SEC staff’s view on substantial implementation, further reinforced the market standard of 3%/3-years, allowing groups of up to 20 holders and limiting access to 20% of the board.
- Effect on Shareholder Activism. Once again, the most active proponents during this proxy season were issue-focused investors, including pension funds, labor unions, socially oriented investment entities and a small number of prolific individuals. While control-oriented activists, such as hedge funds, are not active proponents of shareholder proposals, the Rule 14a-8 process has, over time, reshaped the governance landscape to erode corporate defenses and give activists more tools to put pressure on boards and management.
- “Withhold” or “Against” Votes for Directors. Our analysis of negative recommendations by Institutional Shareholder Services for directors demonstrates that, as in past years, directors who are seen as insufficiently responsive to a prior shareholder vote, either on a governance proposal or on say-on-pay, suffer the greatest impact from a negative ISS recommendation.
- Continued Strength on Say-on-Pay. Public companies continued to perform strongly on say-on-pay, with support levels averaging over 90% and less than 1% of companies getting less than majority support. Our analysis of ISS negative recommendations on say-on-pay supports the continued importance of a pay-for-performance model, including performance standards that are clearly explained and deemed sufficiently rigorous by ISS. There continued to be significant year-over-year turnover in companies that received less than majority support on their say-on-pay vote, demonstrating that companies have been successful in addressing the reasons for a failed vote in a prior year, but also reinforcing the need for continued vigilance and shareholder outreach by companies that have historically had strong support.
- Broad Shareholder Support for Equity Compensation Plans. No large-cap companies failed to get shareholder approval for equity compensation plans, and overall support levels continued to average around 90%. Larger companies generally had higher support levels and received fewer negative ISS recommendations on these plans than small- and mid-cap companies.