By Jacquelyn Lumb
National law firm BakerHostetler hosted a webinar on preparing for the 2018 proxy season during which panelists talked about the role of proxy advisers, SEC rulemaking, and emerging issues. The panelists agreed that, while many subscribe to a proxy advisory firm’s services, they do not necessarily follow its recommendations. Companies should engage with proxy advisory firms before the proxy season is underway and before their preliminary proxy has been filed.
Proxy advisory firms. Institutional Shareholder Services reports that it holds 61 percent of the market share with 1,700 clients. Glass Lewis has 1,200 clients. Egan Jones has a smaller shop and is the least influential of the three, but one panelist noted that its guidelines are much stricter. For example, in Egan Jones’ view, a director who has served for 10 years is an affiliated outsider who is no longer fully independent. The firm also has stricter guidelines on auditor ratification and over-boarding.
Shareholder proposals. Shareholder proposals seeking proxy access are in decline and by the end of the upcoming proxy season over 80 percent of the S&P 500 companies are expected to have a proxy access policy. Other hot topics include board refreshment, diversity, and the board’s skill matrix; environmental, social, and governance issues; and shareholder engagement. The panelists said they had the most success in negotiating the withdrawal of proposals relating to board diversity after providing assurances that the companies would look to a diverse pool of candidates with every new opening on the board. However, these companies now must follow their assurances with action.
Withhold recommendations. The panelists said that among the issues that may result in a withhold recommendation by a proxy advisory firm in the election of directors is where a director has attended less than 75 percent of the board meetings, where the director serves on too many boards, where the board has failed to take action on a shareholder proposal that gained majority support, and where the board either adopts or retains what is considered an anti-shareholder rights provision.
Say on pay. With respect to say on pay, both ISS and GL pay attention to pay for performance, the structure of the compensation program, problematic pay practices, and the compensation committee’s communications and responsiveness.
Pay ratio disclosure. 2018 will be the first year for the mandatory pay ratio disclosure. Advisory firms are not expected to react the first year, but one panelist predicted that the media will have a field day. Another panelist said that after the election, he thought the pay ratio rule would be revoked, and another wondered if the SEC would come up with a regulatory maneuver to delay the mandate. Instead, the SEC and the staff issued guidance on how to comply with the requirement.
Hedging and clawbacks. Two other Dodd-Frank Act rules that were proposed by the SEC but not yet adopted relate to hedging and clawbacks. One of the panelists said the hedging proposal was a bit more palatable but the clawback proposal was pretty prescriptive. Neither is likely to be adopted any time soon, in one panelist’s view, although some companies have adopted policies in those areas. If the SEC ultimately adopts a clawback provision, companies may have to amend existing policies to reflect the new rule.