The beginning of a new year triggers a reminder that the 2015 proxy season will soon be upon us. Many public companies use this time of year to review both their own experiences last proxy season and that of other companies, as well as to consider issues that are expected to be important in the coming year.
Several parties will influence the next proxy season. The following are my comments on which parties are expected to play an active role on which issues. Hopefully you’ll find this helpful in preparing for the 2015 proxy season.
While your company may have been fortunate to have a history of passive shareholder behavior, times have changed. Previously, passive shareholders have become more vocal. Greater shareholder involvement is not a sign of shareholder displeasure with management or stock price performance per se, as much as a sign that, today, shareholders view their roles and responsibilities differently.
For example, traditional passive investors such as the New York City Comptroller’s Office, which oversees city pension funds with $160 billion in assets, and Vanguard, the large mutual fund company, are playing a larger role in proxy matters.
The New York City Comptroller is actively encouraging formalizing proxy access rules by submitting proposals for inclusion in the proxy statements of 75 companies in which it has an investment. Proxy access rules dictate the process under which shareholders can submit matters for inclusion in the proxy statement for a vote by shareholders.
Another example is Vanguard’s initiative to stimulate greater shareholder interaction with companies’ directors, an action which would have been considered unthinkable only a few years ago.
Proxy Advisory Firms
Proxy advisory firms, the two most well-known being ISS and Glass Lewis, are expected to continue to play a large role in shaping the discussion and quantifying issues for the upcoming proxy season. Institutional shareholders may not follow the proxy advisory firms blindly, but the impact of the firms is unmistakable.
Hot button corporate governance issues for the proxy advisory firms in this 2015 proxy season appear to be:
- Overall board accountability to shareholders
- Proxy access rules defining treatment of shareholder proxy proposals
- Establishment of the independent chairman position and director and chair tenure
- “Say on Pay” votes
- Bylaw amendments which impair shareholder standing, such as litigation cost shifting
- Equity compensation plan features.
The SEC and Capitol Hill
With the political winds changing, Capitol Hill may play a larger role in corporate governance issues starting this year. Delays in implementation of certain Dodd-Frank rules are an example.
The SEC, which has been seen as slow to implement certain corporate governance provisions such as the CEO pay ratio rules, may now find support from Capitol Hill for these delays. The SEC Chairwoman, Mary Jo White, recently surprised companies and shareholders, however, by reversing and sending for further consideration an SEC “no action letter” on proxy access after criticism from institutional shareholders including NYC’s Comptroller (see above).
Last year saw several high profile proxy victories for activists, such as at the companies Bob Evans Farms (BOBE) and YUM! Brands Inc. (YUM) . Activist funds are growing in number and size and will, no doubt, play a larger role in corporate governance issues. So far, activists have focused most of their energy on large cap companies, such as Apple Inc. (AAPL) and those mentioned above, where their impact is greatest. With time, smaller activist funds will likely target microcap and small cap companies as well.
Shareholder litigation attorneys continue to generate fees by attacking public companies, especially small and midcap companies, for claimed deficiencies in proxy statement disclosure. The threat of lawsuit drives the trend toward more, if not better, disclosure in proxy statements. The US Supreme Court, last summer, maintained in place the legal basis on which much class action litigation is based, the “efficient market theory”, so the plaintiff’s bar will likely continue its influence on proxy issues.
Preparation of a company’s proxy statement has changed from a perfunctory task to one with greater risk, demanding greater care and effort by company management, its counsel and board. Several more parties now play a role in proxy content. It’s wise to begin preparation early to consider and include issues from these sources.
Please contact me to discuss your company’s capital needs.
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