BoardroomDirect: Issues in brief

Update on the current board issues: July 2014

Issues in brief


SEC staff issues proxy advisory firm guidance

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On June 30 the staff of the SEC’s Divisions of Investment Management and Corporation Finance issued guidance in the form of a 13-question Q&A that relates to the proxy voting responsibilities of investment advisers, the use of proxy advisory firms, and the use of exemptions to the federal proxy rules used by proxy advisory firms.

In essence, the guidance said that asset managers who use proxy advisory firms to help them make decisions on behalf of investors should review the advisors’ voting recommendation policies to ensure they are acting in the best interests of the investors.

Some excerpts from the Q&A include:

  • What steps could an investment adviser take to seek to demonstrate that proxy votes are cast in accordance with clients’ best interests and the adviser’s proxy voting procedures?
    • Periodically sample proxy votes to review whether they complied with the investment adviser’s proxy voting policies and procedures.
    • Review, no less frequently than annually, the adequacy of its proxy voting policies and procedures to make sure they have been implemented effectively.
  • What are some of the considerations that an investment adviser may wish to take into account if it retains a proxy advisory firm to assist it in its proxy voting duties?
    • The adequacy and quality of the proxy advisory firm’s staffing and personnel
    • The robustness of its policies and procedures regarding its ability to (i) ensure that its proxy voting recommendations are based on current and accurate information and (ii) identify and address any conflicts of interest.
  • What are an investment adviser’s duties when it retains a proxy advisory firm with respect to the material accuracy of the facts upon which the proxy advisory firm’s voting recommendations are based?
    • It is the staff’s position that an investment adviser that receives voting recommendations from a proxy advisory firm should ascertain that the proxy advisory firm has the capacity and competency to adequately analyze proxy issues, which includes the ability to make voting recommendations based on materially accurate information.
  • When is a proxy advisory firm subject to the federal proxy rules?
    • When it engages in a ‘solicitation,’ which is defined under Exchange Act Rule 14a-1(l) to include “the furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.”
    • When it provides recommendations that are reasonably calculated to result in the procurement, withholding, or revocation of a proxy. Exchange Act Rule 14a-2(b) provides exemptions from the information and filing requirements of the federal proxy rules that a proxy advisory firm may rely upon if it meets the requirements of the exemptions.

The SEC’s guidance follows the Commission’s December 2013 roundtable on the roles and responsibilities of proxy advisory firms. [For more information about the roundtable, visit the SEC Proxy Advisory Services Roundtable web page or read November 2013 BoardroomDirect Issues in brief (SEC roundtable to address proxy advisory firm issues).]


ISS 2015 proxy voting policy survey available

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Institutional Shareholder Services’ (ISS) 2015 proxy voting policy survey includes questions on board risk oversight in relation to damaging incidents and board adoption of bylaw amendments without shareholder approval.

The survey poses nine questions to institutional investors, corporate issuers, corporate directors and other market constituents. The results are used by the proxy advisor to formulate its 2015 proxy season voting recommendation policies. [For more details about the survey, read the ISS press release.]

The questions on board risk oversight were included because of the recent occurrences of board risk failures, such as investment losses, product recalls, bribery and data breaches, according to ISS. The bylaw amendment questions are about provisions that would require shareholders losing a lawsuit to pay a company’s legal fees and the adoption of exclusive venues for shareholder lawsuits. Additionally, the survey covers the evaluation of equity plans, board diversity, jurisdictional approaches to the application of ISS policies, and pay for performance evaluations.

The survey closes August 29 and results will be released in the middle of September for comment. In addition to its global survey, ISS will conduct a variety of regionally-based, topic-specific roundtables and conference calls to drill into local market best practices which factor into the development of ISS’ benchmark policy guidelines. The final updates to ISS’ 2015 voting recommendation policies will be published in November.


Committee on Capital Markets Regulation releases director study, makes recommendations to SEC

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The Committee on Capital Markets Regulation is a non-partisan research group created in 2006 that is comprised of 27 leaders from the corporate and investment communities as well as accounting, law and academia. It is known for its research and recommendations following the 2008-2009 financial crisis. Its most recent study involves companies’ retention of directors who have not received a majority of votes.

The committee released the study, Annual Shareholder Meetings and the Conundrum of “Unelected Directors,” which found 85% of directors of public companies that don’t receive a majority of votes are still on the board two years later.

The committee recommends that the SEC adopt regulations that would require companies to disclose why they chose not to accept a director’s resignation, if one was offered following an election where the director did not get a majority of votes. The study took into account all three voting regimes: plurality voting, plurality plus resignation voting and true majority voting. However, the committee stated that it does not favor a blanket prohibition against directors not receiving a majority of shareholder votes continuing to serve because in some cases it may be contrary to a board’s business judgment.

In a study of 60,920 director elections at Russell 3000 companies from 2010-2012, the committee found there were 176 cases where directors failed to get a majority of votes cast. As part of the study, the committee compared the 176 “losing directors” to a control group of 176 directors who had received a majority of votes. It found there wasn’t much of a difference between the number of losing directors who remained on the board and the control group of winning directors (85% vs. 90%)

Breaking down the results further, the study showed that 160 of the 176 losing directors were elected using a plurality voting regime. Of those, 4.4% offered their resignations within three months of the election, 5% within six months, 10.6% within a year, and 13.1% within two years. In the control group, 1.1% offered their resignation within three months, 2.8% within six months, 5.1% within a year, and 9.7% within two years.