COMPENSATION IN CONTEXT
U.S. PROXY SEASON HALFTIME REPORT – GOVERNANCE TRENDS
May 26, 2015
As we hit the halfway point for the 2015 U.S. proxy season, a number of trends related to governance practices are carrying through from recent years, an analysis of ISS Voting Analytics data shows.
Director Elections
Shareholders have largely endorsed directors standing for election in 2015, with average support levels of upwards of 96 percent, similar to last year. However, as is the case every year, a number of directors have not fared well at the ballot box. Fourteen directors have failed to receive majority support so far this season, compared with 12 board members at this time last year.
The lion's share (12 of the 14) of year-to-date 2015 failed director votes have been at firms outside the Russell 3000 index. On a sector basis, most of the failed director elections have occurred at firms in the Technology Media and Telecom sector (with seven failed votes) and financial services firms (3 failed votes). Companies in the financial services sector topped last year's list with the most failed director votes.
Drivers of Low Votes
The primary drivers of low director support come as no surprise to governance observers. Similar to prior years, affiliated directors on key committees, non-responsiveness to majority supported shareholder proposals or majority opposed directors and say on pay plans, unilaterally adopted poison pills, unilaterally adopted bylaw amendments, directors sitting on too many boards, and persistent pay-for-performance concerns are the major drivers of low shareholder support for directors.
Shareholder Proposals
Of roughly 950 resolutions submitted at almost 500 firms for the 2015 proxy season, 600 shareholder proposals have so far appeared on proxy ballots at close to 350 companies. In aggregate, about 18 percent of the proposals have been withdrawn and approximately 14 percent excluded from ballots with the SEC's assent. Voting Analytics has average investor support for the approximately 190 shareholder resolutions where vote results are currently available at 33.5 percent support. Twenty eight (or roughly 15 percent) of these have received majority support, with proxy access proposals accounting for almost half of the majority votes. For context, these tallies compare with about 560 proposals at almost 330 companies in all of 2014, which received, on average, 32.7 percent support, and 83 of which received majority votes.
Governance Proposals Most Ubiquitous
Governance proposals account for half of all resolutions on ballots this year, followed by environmental and social (E&S) proposals with 37 percent of the total tally, and compensation proposals at 13 percent.
Governance proposals have received 43 percent average support of votes cast "for" and "against," whereas shareholders have supported E&S and compensation resolutions by 22.6 percent and 33.4 percent on average, respectively. Governance proposals have also drawn 25 of the 28 majority votes thus far this year, with the remaining three majority votes for compensation resolutions. No E&S proposals have thus far received majority support, in contrast to this time last year when a lobbying disclosure proposal obtained majority support in early May. In 2014, seven E&S resolutions received majority support - six of which were opposed by boards.
Proxy Access Aplenty
In terms of volume, proxy access is the highest-profile shareholder proposal topic this proxy season, with 84 shareholder proposals on the ballot to date, or more than four times the number of proposals that appeared on ballot in 2014. Nearly all of the proxy access shareholder proposals are modeled on the 3 percent-for-three-years formulation featured in the SEC's vacated proxy access rule. Voting Analytics data shows that access proposals have so far received 54.9 percent shareholder support at the 32 companies where vote results are available. Fourteen have received majority support.
The boards of seven companies have sponsored proxy access proposals that compete with the shareholder proposals on ballot, with terms that are more restrictive. Of the two dueling proposal vote outcomes available, investors voted down the board-sponsored 5 percent-for-three-years proposal at AES Corp. (Governance Quickscore: 2) which received just 36 percent support, favoring the 3 percent-for-three-years shareholder proposal with more than 66 percent support. At Exelon (Governance Quickscore: 6), however, shareholders did the exact opposite, and passed the 5 percent-for-three-years board proposal with more than 52 percent support, whereas the 3 percent-for-three-years shareholder proposal received 44 percent support.
Continued Calls for Independent Board Chairs
After proxy access, the next most frequently occurring shareholder resolution is that calling for an independent board chair, with 64 proposals on ballot so far this year. Average shareholder support for the 29 proposals for which vote results are available currently stands at 29.5 percent, down slightly from last year's 31.1 percent average support. So far in 2015, no independent chair shareholder proposals have received majority votes - the proposal at Baxter International (Governance Quickscore: 10) came close, with 48.9 percent shareholder support. Last year, four independent chair proposals received majority support, two of which are on ballot again in 2015.
Management Say on Pay Update
As expected in 2015, management say-on-pay (MSoP) ballot volumes are down thanks to the dearth of biennial and triennial advisory votes falling in the 2015 calendar year. For the typical proxy voter, this should translate to a 10 percent year-over-year drop in MSoP ballot volumes. For many investors, this may turn out to be a false economy, however, since the focus simply shifts to the compensation committee and the election of directors. Levels of support have, however, remained relatively unchanged from last year, with average shareholder support for MSoP proposals at 92.3 percent. Eleven firms have so far received less than majority support, compared with 16 failed votes at this time last year. Most of this year's failed votes have occurred at Russell 3000 firms and in the Industrials sector.
Roller Coaster Rides
A number of boards witnessed reversals of fortune with year-over-year support for say on pay increasing by 50 percentage points or more. Support at Sensient Technologies (Governance Quickscore: 1, Compensation Pillar Quickscore: 3) jumped to 98 percent in 2015 from 46 percent support in 2014, and at FirstMerit Corporation (Governance Quickscore: 2, Compensation Pillar Quickscore: 6), shareholders approved say-on-pay by a margin of 93 percent this year, up from 42 percent support last year.
Other companies experienced the opposite reversal of fortune. Walter Energy (Governance Quickscore: 3, Compensation Pillar Quickscore: 9) saw support for say on pay drop by nearly 70 percentage points, from 95 percent in 2014 to 28 percent this year. Shareholders also thumbed down pay at Schnitzer Steel (Governance Quickscore: 9, Compensation Pillar Quickscore: 8) this year, with just 24 percent support, down from 76 percent support in 2014, and, at Nuance Communication, (Governance Quickscore: 10, Compensation Pillar Quickscore: 10), where the say on pay vote just barely passed last year with 51 percent support, votes in favor dropped significantly in 2015, with just 14.6 percent support. – Edward Kamonjoh, ISS' Head of U.S. Strategic Research Analysis and Studies
