What to look out for during 2020 proxy season

Industry professionals in the US foresee no turning around from the direction companies and investors have been headed in recent years, with a growing number of shareholder proposals in 2020 on issues under the ESG umbrella. In terms of which proposals end up in votes at AGMs, there is an expectation that the trend toward negotiating the withdrawal of many environmental and other disclosure-based proposals will continue, but also concern about a new SEC approach to deciding which proposals can be excluded.

Brigid Cremin Rosati, a director of business development at Georgeson, is among those anticipating more political spending/lobbying disclosure proposals ahead of the 2020 US presidential election. No such proposals received majority support in 2017 or 2018, but three did so at S&P 1500 companies in 2019, she notes. A variety of sponsors are bringing political spending/lobbying proposals, including unions and public pension funds but also a growing number of conservative groups, according to Rosati.

Board diversity has been a focus of recent proxy seasons and industry professionals anticipate a continued increase in proposals and engagement in 2020. The drive for greater gender diversity has been fueled in part by several large institutional investors. For example, State Street Global Advisors (SSGA) reports that as of June 30, 2019, 43 percent of the 1,350 companies targeted by SSGA’s Fearless Girl campaign had either added a female director to their board or committed to doing so.  SSGA now plans to take a tougher approach to companies that haven’t responded. The firm has said that in 2020 it will vote against the entire nominating and governance committee ‘if we have concerns about the lack of gender diversity for four consecutive years and are unable to engage in productive dialogue.’

PJT Camberview partner Krystal Gaboury Berrini says a confluence of factors is bringing the E and S of ESG issues to the fore in terms of shareholder proposals. These include the Task Force on Climate-related Financial Disclosures (TCFD) gaining momentum, she says, adding that this will gain an additional boost when TCFD-based reporting becomes mandatory in 2020 for the more than 2,300 signatories to the UN-supported Principles for Responsible Investment.

The focus on human capital management will also continue in 2020, Rosati says. Other issues potentially featuring in proposals include gun control and linking executive compensation to ESG-based metrics, she adds.

Getting onto the ballot

A notable feature of the 2019 proxy season has been the extent to which companies were willing and able to negotiate over shareholder proposals such that they were withdrawn. According to Georgeson, 386 E and S proposals were submitted in 2019 but only 160 – 41 percent – were ultimately voted on at AGMs. Meanwhile, 332 governance-related proposals were filed and 236 (71 percent) of them reached a vote.

Peter Kimball, head of advisory and client services for North America at ISS Corporate Solutions, says governance proposals are less likely to be withdrawn than environmental ones because proponents of the latter – and companies – tend to have room to negotiate the level of disclosure. More firms are focused on making disclosures about sustainability, human trafficking and other E and S issues for their own interests, regardless of investor pressure, he adds, noting that this, combined with a growing number of E and S shareholder proposals, will lead to even more companies willingly negotiating as they’re already making disclosures.    

According to Berrini, the high rate of withdrawals among E proposals reflects that companies are already taking action on sustainability metrics they haven’t previously disclosed. The increase in off-season engagement also helps promote negotiations, she adds.

These high rates of successful negotiation are expected to continue. But getting shareholder proposals onto the ballot faces a new wrinkle going into 2020 following the announcement in September by the SEC’s division of corporation finance of a revised approach to handling companies’ requests to exclude shareholder proposals. The announcement has prompted confusion and concern among corporate attorneys, in-house teams and investors, all of whom are unsure how the agency will act in practice. They fear a wave of niche shareholder proposals, a lack of clear guidance and being forced into litigation to settle disputes.

The key aspects of the statement are the emphasis the division puts on its option not to make a decision on excluding a proposal, and its intention to respond orally in some cases. Division staff will continue to monitor correspondence and provide informal guidance to firms and proponents as appropriate. If a company wants to exclude a proposal, the division will let the proponent and the company know whether it concurs, disagrees or declines to state a view.

But from the 2019-2020 proxy season, the division may respond orally instead of in writing to some no-action requests. ‘The [division] intends to issue a response letter where it believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8,’ officials write.

If a company wants to exclude a proposal and the division doesn’t state a view, the only option for a determined shareholder proponent is to go to court, said Jonas Kron, senior vice president and director of shareholder advocacy at Trillium Asset Management, shortly after the statement was released. But he added that the effect of the division’s statement will depend on how often it declines to take a view.

‘In the current climate, where there are a growing number of shareholder proposals, companies need a referee more than ever,’ said Betty Moy Huber, counsel with Davis Polk & Wardwell, at the time. The SEC did not respond to a request for comment.

2020 talking points around the world

Canada

Bill C-25 received royal assent in 2018 but its impact is continuing to be felt, according to Patricia Rosch, president for international investor communication solutions at Broadridge Financial Solutions. Under changes to the bill, for example, shareholders of inter-listed companies can now use notice and access. A new provision that went into effect in 2019 allows shareholders to vote against directors, where previously they were able only to vote for or withhold.

UK

Stephan Costa, head of advisory for Europe, the Middle East and Africa at ISS Corporate Solutions, says the main concern in the UK is likely to be the quality of companies’ engagement – particularly regarding remuneration. In addition, 2020 will be the first year when UK companies are required to disclose the ratio of CEO pay to that of employees.

David Shammai, corporate governance director for cross-border issues at Morrow Sodali, says one of the main issues with remuneration has been investor concern that directors are getting pension deals that are superior to those of employees. He expects to see more explicit guidance from some investors in 2020 on how companies should design policies on executive compensation, including potential requirements for executives to continue holding on to shares in the company for a period after they retire.

Spain

Large Spanish companies had to comply with a new law in 2019 requiring them to produce a report on non-financial information, which must be voted on at the AGM. The report must include information such as a description of a company’s business model and key factors that may affect its development, and must address environmental, social and human rights issues, among others.

According to Borja Miranda Johansson, managing director for Iberia and Latin America at Morrow Sodali, there was a widespread lack of preparation this year that was met with understanding by investors. But he expects that to change in 2020 as more companies pay attention to ESG matters and as investor relations teams discuss these with shareholders.

Brazil

A broad anti-corruption drive in Brazil has led to many companies revising or implementing new governance practices. But domestic and international shareholders have sometimes said companies had anti-graft policies in the past that didn’t work, according to Morrow Sodali director Agnes Blanco Querido. ‘Companies are trying to take measures and tell a positive story but there is a gap between their expectations and those of the market,’ she says. She notes, however, that corruption scandals and international investor pressure on stewardship and ESG-related issues are having an impact, adding that some boards are also adopting policies intended to boost their diversity

Germany

German companies face increasing investor interest in board composition in terms of skills matrices, according to Andrea Bischoff, senior director with Morrow Sodali in Frankfurt. Shareholders are also looking for more information about how boards function – for example, how they develop compensation policies and how those policies work – and want that information to be delivered in less legalistic language, Bischoff says. In addition, investors are pushing for more frequent elections of supervisory boards, whose members currently face re-election every five years.

Italy

The law implementing SRD II in Italy will take effect in 2020. It converts the say-on-pay vote on the remuneration policy – which covers directors and senior executives – from an annual advisory vote to a triennial mandatory, though non-binding, vote. It also introduces a mandatory and binding vote on the remuneration report, which details how the policy is implemented. Andrea Di Segni, managing director for business development and founding partner with Morrow Sodali in Rome, says these changes will mean ‘investors will have more opportunities to send messages to boards.’ He expects many companies to improve their disclosures and transparency.

Although Di Segni does not expect to see ESG-related shareholder proposals, he observes growing pressure from investors during engagement with companies on specific issues such as whether CEO remuneration policies include ESG factors. He also sees growing interest in shareholder engagement programs operating outside proxy season.

France

The EU’s Shareholder Rights Directive II (SRD II) has been coming into effect across the region – and will continue to do so in 2020 – in stages as member states adopt domestic legislation. The directive creates new requirements for listed companies and others intended to promote transparency on investment strategies, directors’ remuneration, AGM voting and shareholders’ identities.

The French government introduced SRD II as part of the Loi PACTE. Under the law, companies are invited to include in their statutes a statement on their purpose. Only a handful of companies have so far chosen to adopt such a statement, but a big issue in proxy season 2020 will be whether to do so and what such statements should entail, according to Jean-Florent Rérolle, managing director with Morrow Sodali in Paris. Investors see the law as an opportunity to engage with companies about their missions and governance issues, he adds.

This article was published in the Winter 2019 issue of IR Magazine.