Considerations for 2014 Proxy Season and Beyond
The 2013 proxy season reflected a continued increase in the number of shareholder proposals submitted to public companies, while the SEC no-action relief process resulted in fewer successful efforts of public companies to exclude shareholder proposals from proxy statements compared to recent years. However, public companies appear to be having success in negotiating with shareholders as an increased number of shareholder proposals were withdrawn prior to the stockholder meeting in 2013 compared to prior years. Common shareholder proposals in 2013 included (i) proposals to appoint an independent board chair, (ii) proposals to declassify classified boards of directors (and dismantle other similar protective provisions), and (iii) proposals to increase the diversity of the board of directors. Shareholder proposals for 2014 are expected to include (i) elimination of super-majority provisions to amend by-laws, (ii) proxy access, (iii) ability of stockholders to act by written consent and/or call special meetings, and (iv) social and environmental proposals related to political contributions, human rights policies and environmental sustainability. In its 2014 Policy Update, ISS stated that (a) starting in 2014 it will review the responsiveness of a board to any shareholder proposal that receives one year of a majority of votes cast in support (rather than the previous triggers of either two years of a majority of votes cast in a three-year period or one year of a majority of shares outstanding); (b) ISS has adopted a case-by-case approach, including a list of factors for analysts to consider, for assessing board implementation of prior successful shareholder proposals, and (c) ISS provided analysts with broader discretion when determining which directors to hold accountable in the event the level of responsiveness to shareholder proposals is found to be insufficient. Among the changes for 2014 related to board action on successful shareholder proposals is that ISS will consider in the case-by-case analysis the board’s rationale provided in the proxy statement for not adopting a shareholder proposal.
In its 2014 Policy Update, ISS also included a new recommendation for votes on a case-by-case basis for shareholder proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its supply chain, or report on its human rights risk assessment process, considering (i) the degree to which existing relevant policies and practices are disclosed, including information on the implementation of these policies and any related oversight mechanisms; (ii) the company’s industry and whether the company or its suppliers operate in countries or areas where there is a history of human rights concerns; (iii) recent, significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and whether the company has taken remedial steps; and (iv) whether the proposal is unduly burdensome or overly prescriptive. ISS indicated that the rationale for this update is that during the 2013 proxy season, proponents filed new resolutions related to a company’s assessment of its risks related to human rights issues by asking companies to either perform a human rights risk assessment or report on their human risks risk assessment process. This focus on human rights issues dovetails with new “conflicts minerals” disclosure requirements for 2014 discussed below.
Stockholders and corporate governance advocates are expressing more concern regarding director tenure. The primary stated concerns related to directors who have been in place for significant periods of time include the effect on the board’s independence and diversity. Some stockholders are arguing that the longer a director is entrenched on a board, the less independent he or she becomes from management. In addition, allowing directors to remain entrenched for a long period of time naturally limits board diversity. The concept of “board refreshment” is being advocated by large institutional investors, such as CalPERS, as well as organizations focused on effective corporate governance. ISS has indicated that once a director’s tenure on a board exceeds 15 years, it will consider whether that director is sufficiently independent from management. However, ISS’s policy currently is to recommend voting against term limits for directors.
In recent years, the relationship between a company and its significant stockholders has evolved. Management is now expected to spend considerable time and energy engaging with stockholders on corporate governance and other matters. Part of the reason for this changing dynamic may be the say-on-pay advisory voting requirement mandated by the Dodd-Frank Act of 2010. Significant stockholders are asking the board to justify executive compensation, in particular where stockholders indicate their disapproval of executive compensation through the non-binding advisory vote. Recent industry reports have indicated that companies that described in their proxy statement proactive stockholder outreach efforts following unsuccessful say on pay votes received favorable say on pay votes the following year. Effective engagement with significant shareholders may lead to better relationships with such shareholders over time which will help facilitate effective corporate governance changes and avoid surprises for public company boards.
Considerations Beyond 2014 Proxy Season
Below are some additional considerations for SEC disclosures required for public companies following the 2014 proxy season.
Public companies that manufacture or contract to manufacture products which contain “conflict minerals” are required to begin filing a Form SD regarding the level of due diligence it exercised to determine whether its products and products in its supply chain contain conflict minerals, along with a conflict minerals report in the event the company determines, following specified due diligence, that its products incorporate conflict minerals originated in one of the covered countries and did not come from recycle or scrap sources. The first Form SD are required by May 31, 2014 with respect to calendar year 2013. Conflict minerals are (i) gold, (ii) cassiterite/tin, (iii) columbite-tantalite/tantalum, and (iv) wolframite/tungsten. The covered countries for the conflict minerals analysis are the Democratic Republic of the Congo and adjoining countries: Angola, Burundi, Central African Republic, Republic of the Congo, Rwanda, South Sudan, Tanzania, Uganda and Zambia. Based on the many uses of these conflict minerals throughout the supply chain, the SEC has indicated that it expects the rule to apply to approximately 6,000 reporting companies. Please see our September 21, 2012 post on Conflict Minerals here.
CEO Pay Gap Disclosure
In September 2013 the SEC voted 3-2 in favor of proposed rules mandated by the 2010 Dodd-Frank Act regarding disclosure of the pay gap between employees and the CEO. Under the proposed rules, in addition to the compensation disclosure already required for the CEO and the other “named executive officers” and the mandated “say on pay” advisory vote disclosures, public companies would also have to disclose (i) the median of the annual total compensation of all its employees except the CEO; (ii) the annual total compensation of its CEO; and (iii) the ratio of the two amounts. As indicated by the close vote of the SEC, final rules regarding this disclosure requirement may be subject to litigation or other challenges and this disclosure requirement may not become effective until later in 2014 or 2015.