Every year around this time NACD provides resources to help directors prepare for the coming spring proxy season. This month we released a new Proxy Season Preparation Toolkit, supplemented by our standing NACD Resource Centers—one on Preparing for Proxy Season and one on Board-Shareholder Engagement. These tools should be useful to directors as they work proactively with management to enhance the value of their proxy statements—a trend identified in NACD’s most recent public company governance survey.
These efforts to improve proxy statements will be especially crucial in 2019, which could usher in changes thanks to recent developments in Washington. Specifically, new proxy rules may arise from the US Securities and Exchange Commission’s November 15 Roundtable on the Proxy Process,* which covered proxy voting, shareholder resolutions, and proxy advisors. Proxy game changers could also emerge from actions in Congress, where legislators are close to voting on two bills seeking to rein in proxy advisors.
Here, accordingly, are some contingencies that may be on the horizon—along with recommendations you may wish to consider with your corporate counsels.
Contingency 1: Your proxy voting results may reflect more retail views.
Equity markets today are by and large institutional (70%) rather than retail (30%)** and retail shareholders are far less likely to participate in voting, since in many cases brokers vote for them (2018 Proxy Season Review, Broadridge and PWC, 2018). Certainly, institutional holders are important. I know this from my early years at Institutional Shareholder Services, where I began my governance career, as well as from my past two decades at NACD, which remains actively engaged with institutions through our Investor Perspectives series. Still, the voice of the retail shareholder matters for every company. Research has shown that retail owners are more likely to vote for management proposals and against shareholder proposals critical of management. (See “Small Investors Support the Boards. But Few of Them Vote,” by Gretchen Morgenson, the New York Times, Oct. 6, 2017.)
I believe that retail investors need a stronger voice in proxy voting, and I am not alone in my belief. In his opening statement at the November 15 SEC Roundtable, Commissioner Elad L. Roisman noted that the managers of passive index funds may vote shares without being required to check in with investors. He asked: “Should asset managers reach out to the underlying holders to understand their voting preferences?” The answer is yes, Roisman implied, citing the proposed SEC rule, Regulation Best Interest, which would require brokers voting proxies to vote in the interests of beneficiaries (including individuals who are retail buyers).
If this pending SEC rule passes soon, there could be more retail participation by spring 2019. But note that one impediment to this may be what I call the “black box” of beneficial ownership—an often-forgotten topic resurrected during the November 15 SEC Roundtable. Public companies don’t know who all their shareholders are because shareholders who buy through brokers can vote in the broker’s name rather than their own. This is because of an obscure rule that allows an “objecting beneficial owner” (OBO) to remain anonymous; only the identity of a “non-objecting beneficial owner” (NOBO) can be disclosed to the company. (See the SEC comment letters from Gary A. LaBranche, president and CEO of the National Investor Relations Institute, and Darla Stuckey, president and CEO of the Society for Corporate Governance.) Amending this rule would go a long way toward improving board-shareholder relations in future proxy seasons
Recommendation: Remember your retail investors! Ask your director of investor relations to give the board a rough breakdown of individual vs. institutional holders and encourage outreach to both groups—not just the institutions (but see below about NOBO-OBO challenges).
Contingency 2: Your shareholders may be required to meet higher ownership thresholds before submitting resolutions—and/or to achieve better success rates for resubmitting them.
SEC rule 14(a)8 identifies 13 valid reasons to exclude a shareholder proposal—and the SEC recently clarified these reasons. (See, for example, Staff Legal Bulletin 14J, Oct. 23, 2018.)
Under this rule, shareholders need only hold $2,000 or 1 percent in company stock for one year to submit a proposal. A number of groups would like to raise those thresholds, including the Business Roundtable. In a written comment submitted in advance of the SEC roundtable, Business Roundtable senior vice president and counsel Maria Ghazal urged the SEC to raise the $2,000 amount as well as the ownership time.
Rule 14(a)8 also sets a low bar for resubmitting failed proposals—a.k.a. zombie proposals. A company can exclude a resubmitted shareholder proposal only if the previous submission failed to receive the support of either less than 3 percent, if voted on once within the previous five years; less than 6 percent, if voted on twice within the previous five years; or less than 10 percent support, if voted on three or more times within the previous five years.
A coalition of business groups including the US Chamber of Commerce would like to raise this resubmission threshold. As the Chamber’s Tom Quaadman, executive vice president of the Center for Capital Markets Competitiveness, said in comments submitted in advance of the Roundtable, “The resubmission thresholds under Rule 14a-8 should be raised so that proponents must receive a meaningful level of support before resubmitting proposals that are overwhelmingly unpopular with investors.” The Chamber’s letter recommends a 6-15-30 progression to replace the existing 3-6-10—a sensible suggestion in my view. Last year, NACD joined the Chamber and others in signing a comment letter to the SEC advocating this approach.
Recommendation: Ask your shareholder relations director and/or legal counsel to keep tabs on the ownership level of shareholders proposing resolutions, and on the number of times the same proposals have been submitted. That way the company can begin to prepare for a time when the thresholds rise. At the same time, make sure that your communications convey the message that all valid resolutions from qualified shareholders will be valued.
Contingency 3: The proxy advisors making recommendations on your company may be forced into greater accuracy and transparency.
Two pending federal bills—one originating in the House and one in the Senate—would require all proxy advisors to register as investment companies with the Securities and Exchange Commission, and set specific standards for such registration. If either bill becomes law, proxy advisors such as Egan-Jones, Glass Lewis, and ISS will have to meet a higher standard of accuracy and independence. (ISS, the most dominant of the three, is already registered, but without having to meet all of the stringent standards now being proposed.)
- R. 4515, sponsored by Rep. Sean Duffy (R-WI) and cosponsored by one other Republican and one Democrat, passed the House December 20, 2017, and awaits a Senate vote. The Duffy bill would not only require proxy advisory firms to register as investment companies, but would also set many new requirements including disclosure of conflicts of interest, appointment of an ombudsman, and ongoing correction of inaccurate information.
- 3614, a narrower bill sponsored by Sen. Jack Reed (D-RI) and cosponsored by two other Democrats and three Republicans, was introduced November 13, 2018, and, if passed by the Senate, will go to the House for a vote. The Reed bill, in addition to requiring registration, would mandate periodic examination of disclosures and policies.
NACD agrees that all proxy advisors should register with the SEC to further accuracy and transparency.
Recommendation: Don’t suffer in silence if one or more of the proxy voting advisors makes an inaccurate statement about your company when issuing a voting recommendation on one of the resolutions in your company’s proxy. In fact, make sure the advisor is notified. Given these pending bills (which could be reintroduced next year if they don’t pass in 2018), proxy advisors are likely to correct their mistakes promptly.
In summary, Proxy Season 2019 may see more retail shareholder participation, improved quality of shareholder resolutions, and greater accuracy in proxy advisor recommendations—all good news for companies and all trends that NACD supports.
But just because proxy conditions improve does not mean that directors can coast along on a wave of goodwill. As always, preparing for proxy season requires hard work. Therefore, I urge all directors to explore the resources we offer for this proxy season, and wish you every success.