Update on the current board issues: January 2016

Issues in brief

US GAO: It could take 40 years for women to catch up to men on boards 

While the number of women on public company boards has regularly increased over the last eight years, equality could still be decades away, according to a new report by the US Government Accountability Office (GAO). 

In 2014, women held about 16% of board seats in the S&P 1500, an increase from 8% in 1997. However, even if equal proportions of women and men joined boards each year beginning in 2015, the GAO estimates it could take more than four decades for female representation on boards to be on par with that of men.

The GAO analyzed data from S&P 1500 company boards and conducted interviews with 19 stakeholders, including CEOs, board directors, and investors. 

Rep. Carolyn Maloney (D-NY), who asked the GAO for the study in 2014, wrote a letter to SEC Chair Mary Jo White after receiving the results in which she asked the Commission to adopt proxy statement amendments that would call for disclosure of each director nominee’s gender, race, and ethnicity. Nine large public pension funds made a similar request last year. 

In her letter, Maloney points out that only 12 of the S&P 500 (2.4%) have boards comprised of at least 40 percent women.

Political spending disclosure takes legislative, judicial hits

A recent federal court ruling and a Congressional budget bill rider may have all but guaranteed that the SEC will not issue rules requiring public companies to disclose their political spending this year.

The US District Court for the District of Columbia dismissed a two-count complaint from philanthropist Stephen M. Silberstein. The complaint asked the Court to direct the SEC to act on a petition Silberstein and the Citizens for Responsibility and Ethics in Washington filed in 2014 to adopt rules requiring companies to disclose their political contributions. Silberstein filed the lawsuit to attempt to force the SEC to take action on the petition. (In September, a group of US senators sent a letter to SEC Chair White asking the Commission to consider political spending disclosure, see BoardroomDirect September 2015.)

Silberstein claimed that the SEC’s inaction was an “effective denial” of the rulemaking petition and that the Exchange Act of 1934 granted the court jurisdiction to hear the claim. The court dismissed both claims.

Meanwhile, the 2016-2017 $1.1 trillion omnibus budget appropriations bill approved by Congress and signed by President Obama in December 2015 includes a provision that precludes the SEC from issuing a rule next year that would require public companies to disclose political contributions. While the SEC previously had such a proposal on its rulemaking agenda, it was removed in late 2015. 

ISS FAQs include focus on two proxy access issues

Institutional Shareholder Services (ISS) added the following two questions to its 2016 proxy season FAQs that pertain to proxy access: 

How will ISS evaluate a board's implementation of proxy access in response to a majority-supported shareholder proposal?

ISS will evaluate a board's response to a majority-supported shareholder proposal for proxy access by examining whether the major points of the shareholder proposal are being implemented. Further, ISS will examine additional provisions that were not included in the shareholder proposal in order to assess whether such provisions unnecessarily restrict the use of proxy access. Any vote recommendations driven by a board's implementation of proxy access may pertain to individual directors, nominating/governance committee members, or the entire board, as appropriate. 

ISS may issue an adverse recommendation if a proxy access policy implemented or proposed by management contains material restrictions more stringent than those included in a majority-supported proxy access shareholder proposal with respect to the following, at a minimum: 

- Ownership thresholds above 3 percent;
- Ownership duration longer than three years;
- Aggregation limits below 20 shareholders;
- Cap on nominees below 20 percent of the board. 

PwC observation: Boards may want to review their bylaws relating to director nominations by shareholders. This process may include engaging with the shareholders who have brought a proxy access proposal forward.

How will ISS evaluate proxy access nominees? 

ISS has a policy for evaluating director nominees in contested elections, which currently applies to proxy contests as well as proxy access nominations. However, the circumstances and motivations of a proxy contest and a proxy access nomination may differ significantly. In some cases, the nominating shareholder's views on the current leadership or company strategy may be opposed to the existing board's views. 

PwC observation: Boards may want to understand how proxy advisors evaluate incumbent directors. They may also want to review their process for placing shareholder director nominees on the proxy.

While Glass Lewis has not issued FAQs on proxy access, its voting recommendations on 2016 proxy access shareholder proposals are included here.