Heard in the (Virtual) Halls – This proxy season, don’t take your success for granted
By Eileen Cohen
Companies and shareholders alike are gearing up for an active 2023 proxy season. As we head into the heart of the corporate reporting period, public companies need to consider recent developments such as the new SEC rules on Pay for Performance1 and the Universal Proxy Card, as well as the noticeable increase in shareholder proposals, which will require more time and attention both from issuers and owners.
Below are four important matters companies need to consider as they engage with shareholders around their annual meetings:
Say-on-Pay remains top of mind for investors. We are seeing a continuing decline in approval rates for Say-on-Pay, with the number of companies receiving less than 70% approval increasing. While the average approval rate for say-on-pay was 86% in 2022, it was the lowest level in five years2. Large state pension funds and other influential investors are increasingly likely to vote against say-on-pay, with Calpers serving as a good example, having voted in 2022 against 79 of the top 100 companies in its portfolio3. Meanwhile, concerns about compensation also appear to be driving more investors to vote against the Chair of Compensation Committees. In 2022, 7.3% of S&P500 companies saw votes against the Comp Committee chair, up from 5% just a year before and 3.8% in 20174. Companies would be wise to not take past vote outcomes for granted and to ensure that compensation disclosure is discussed with shareholders in a clear and straightforward manner. An additional step worth considering is the engagement of a third-party consultant to test-run the language. Further, companies should anticipate how the split of voting among the large investment firms and the ability for asset management clients to vote their own proxies may be confusing when they assess the way large fund managers voted their shares. In this regard, we counsel companies engaging with large investment firms to get a sense of how many of their shares may be voted by the underlying client.
Overall, support for the re-election of directors. Votes against the Chair of the Nomination and / or Governance Committees reached 8% of S&P 500 companies versus 4.5% just 5 years ago5. The observed increase in votes against directors may reflect a lift in activist campaigns and the end of any pandemic-era ‘free pass’ for directors. We continue to advocate that the best approach for companies is to highlight the specific skillset of each board member in addition to the board’s comprehensive profile. As activism heats up6, it is the individual directors who are targeted, particularly in the era of Universal Proxy Cards. By supplying more robust information about each director’s skillset, the company will be able to support their election of an activist-nominated candidate.
Risk oversight continues to dominate investors’ discussions. Recent evidence of weakness of risk oversight in the financial sector highlights a key function of the board and raises the question of how risk is defined. Public companies should be prepared to explain how the board engages with management on key risk metrics and who in management reports this information to the board. Is it the Chief Risk Officer, the Chief Executive Officer or someone else? Investors are seeking assurance that information on those key metrics has not been filtered through.
The number of shareholder proposals submitted continues to rise, although votes in favor of these proposals are weakening. There were 249 shareholder proposals (with Environment and Social themes) votes in 2022 (100 more than in 20217.) Yet only 12% received majority support, down from 20% the year before. The SEC narrowed its focus on what constitutes micromanagement by allowing more shareholder proposals to appear in the proxy. We advise our clients to continue to engage with all investors on these proposals and to note that many investors are in ‘proposal fatigue mode’, one of the reasons why we continue to see declining support. In some cases, the company’s response to the proposal may lie in board oversight and skillsets, may be addressed with improved disclosure. Additionally, seeking a no-action exemption from the SEC should still be a viable consideration.
These subtle shifts in governance place a higher emphasis on board accountability and raise the stakes for how companies can and should communicate executive compensation, board oversight and individual directors’ skillsets. To thrive in this dynamic landscape, we recommend public companies engage in honest self-examination so they can better enable their boards for more rigorous and mindful oversight.
Eileen Cohen is a Senior Counselor at H/Advisors Abernathy, where she provides corporate governance and sustainability counsel to the firm’s clients. Eileen retired from JP Morgan as a Managing Director in 2018, a position she held since 2001. At JP Morgan, she served as Chair of the North America Governance Committee and led the firm’s corporate engagement activities. Eileen can be reached at firstname.lastname@example.org.
1SEC Final rule: Pay Versus Performance (sec.gov)
2Source: Broadridge, Factors That Will Impact Proxy Season in 2023
3Source: The Most Overpaid CEO’s, As you Sow, February 2023
4Source: EY, Four Key Takeaways from the 2022 Proxy Season
5Source: EY, Four Key Takeaways from the 2022 Proxy Season
6According to Reuters data published in January 2023, in 2022, the market saw a 36% increase in global activism and the highest level since 2018, with most of the increase registered in the U.S.
7Source: EY, Four Key Takeaways from the 2022 Proxy Season
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