Update on the current board issues: February 2014

Issues in brief


Shareholder proposals for 2014

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The early read on the 2014 proxy season shareholder proposals is that the most popular topics are board declassification, independent board chair, and political lobbying disclosure. But this year new proposals being filed by shareholders ask to prohibit management and the board from getting interim vote tallies prior to the annual meeting and ignore abstentions as votes.

The “enhanced confidential voting” measure seeks to prohibit management and board from having access to interim vote tallies used for proxy solicitations. ISS reports 14 such proposals were submitted primarily from John Chevedden, an activist shareholder who has filed many proposals, according to DavisPolk. A number of such proposals are being challenged at the SEC, with the arguments that the proposal is vague and misleading and implicates ordinary business activities regarding the conduct of annual meetings. [Read DavisPolk’s governance briefing, New ISS Policy Covers Novel Proposals on Proxy Vote Tallies and Vote Counting Methods.]

Another new proposal that DavisPolk reports was sent to nine companies, asks boards to adopt an approach to vote counting for management and shareholder proposals that would ignore abstentions. The controversy over this proposal is who it would benefit in the long run – management or the shareholders filing a proposal.

According to early data from governance professionals tracking the 2014 proxy season, of 379 shareholder proposals submitted to 190 companies, board declassification leads the way with 32 followed by independent board chair with 19 and political lobbying disclosure with 19. Compensation-related proposals include stock retention requirements, “golden parachute” arrangements for executives and a proposal that would limit executive pay to 99 times that of a median worker.

For a look back at 2013 proxy season shareholder proposals, read PwC’s and Broadridge Financial Solutions’ ProxyPulse (first edition, second edition, third edition).


Independent directors and institutional investors create engagement protocol

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A group of independent directors and representatives from some of the largest long-term institutional investors, calling themselves the Shareholder-Director Exchange (SDX), has created a set of guidelines to serve as a framework for shareholder-director engagement.

Changes to the corporate governance landscape, including an increasing focus on better and more effective governance practices, the frequency and scale of activist campaigns, the increased use of proxy advisory services by shareholders, and an increased understanding of the potential benefits of direct engagement, have led institutional investors and public company boards to review their current approaches to shareholder-director engagement.

The guidelines, known as the SDX Protocol, include 10 points for boards and shareholders to follow. They include:

  • The SDX Protocol scope: Focuses on real-time, two-way interactions between non-executive directors and representatives of long-term institutional investors.
  • Adopting a clear policy for engagement: Decisions to accept an engagement will be made on a case-by-case basis for directors and investors.
  • Identifying engagement topics: Those topics must be governance-related (board composition, CEO succession, takeover defenses) for which the board is responsible.
  • Requesting engagement: Companies and investors will establish primary contacts for such engagement.
  • Selecting participants: Each side will choose two or more people to represent them during an engagement.
  • Determining how to engage: Meetings between directors and investors can be one-on-one or held as groups, such as a board committee meeting or an investor day. Meetings can be held in person or virtually.
  • Preparing for the engagement: Companies and investors will prepare for meetings by reviewing relevant materials, such as corporate governance guidelines and proxy voting policies. Prior to the meeting, participants will agree on topics, format and venue, participants, confidentiality expectations, and desired outcomes.
  • Participating in the engagement: Parties will agree to specific next steps resulting from the discussion and to communicate information about the engagement to the board, management or investors who were not present.
  • Reviewing and revising approaches to engagement: Directors and investors will review engagements and the SDX Protocol annually.
  • Customizing the SDX Protocol: Those involved in determining the protocol will modify engagement practices as warranted.

ISS targets director tenure

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Director tenure is one of several factors Institutional Shareholder Services (ISS) says will negatively impact its corporate governance rating for a company.

In the newly released QuickScore 2.0, ISS will factor into a company’s rating the number of directors with service of more than nine years, what it deems “excessive” and could potentially call into question a director’s independence. Whether or not there is a negative impact will depend on the proportion of directors with that amount of tenure.

ISS announced last year it would continue consultations about a number of issues that could result in voting recommendation policy changes in 2015, including director tenure.
Tenure was addressed in the proxy advisor’s 2013-2014 policy survey. In that survey, 84% of company respondents didn’t view director tenure as problematic, while 74% of investor respondents did. While company respondents were against director rotation for board chair and key committees, more than half of investor respondents thought it was a good idea.

The other factors ISS says could negatively impact a company’s corporate governance rating are:

  • The percentage of directors who received less than 95% shareholder support for their election;
  • A comparison of outside director compensation to the median levels of the company’s ISS peer group;
  • A three-year timeframe as the sole component of measuring alignment between compensation and total shareholder return; and
  • The level of shareholder support for the most recent say-on-pay proposal, as well as how such support compares to those experienced in the company’s industry index.

For more information on the ISS director tenure issue, read Wachtell Lipton Rosen & Katz’ client memo and Steven Hall & Partners client alert.


SEC staff issues further guidance on ‘unbundling’ rule for charter amendments

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On January 24, the SEC’s Division of Corporation Finance released three Compliance and Disclosure Interpretations (See Question 101.02) which said that it would not object to bundling a board declassification charter amendment with two unrelated amendments regarding preferred stock and the par value of common stock that are put up for a shareholder vote at the annual meeting.

The current “unbundling” rule requires proxies to identify clearly and impartially each “separate matter” that is put up for a shareholder vote.

The SEC’s interpretative guidance means that management would not have to separate out such an amendment proposal even if the other amendments were unrelated.

Specifically, the staff wrote: “While there is no bright-line test for determining materiality in the context of Rule 14a‑4(a)(3), registrants should consider whether a given matter substantively affects shareholder rights. While the declassification amendment would be material under this analysis, the amendments relating to par value and preferred stock do not substantively affect shareholder rights, and therefore both of these amendments ordinarily could be included in a single restatement proposal together with the declassification amendment.”

For more information and analysis of the SEC interpretations, read a Davis Polk & Wardwell client memo posted on the Harvard Law School Forum of Corporate Governance and Financial Regulation.