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Our FOUR Top Takeaways from the 2017 Annual Meeting Season

This year’s big-meeting-season brought two earthshaking changes in the overall corporate governance climate that will, we believe, alter the landscape forever. Also, there were developments on political disclosure and so-called diversity proposals that issuers should take note of as they plan for next year:

To lead off with the ‘environmentally earthshaking’ analogy, investor demand for much more robust disclosure of the likely effects of climate change on a public company’s overall business model can no longer be ignored - or answered with empty promises to do more… followed with boilerplate rather than real substance:

At Occidental Petroleum, one of the first climate change disclosure proposals to come to a vote this season, an astonishing 67% of the votes cast favored the shareholder proposal, filed by CalPers. And shame on you, Oxy, for stating in your press release that the proposal received “over 50%” - with final numbers to be reported later, when no one much was looking anymore. In the corporate governance world, there’s a mighty big difference between “over 50%” and 67% so you just looked stupid - and surely the real numbers were readily available when they spoke to the press. BlackRock noted that this was the first time they had ever voted for more climate change disclosures - and they issued a stinging rebuke, and a clear warning to issuers on their website: “When we do not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect the long-term economic interests of our clients, we will not hesitate to exercise our right to vote.”

Exxon Mobil bore the brunt of the headlines on this “hot subject” later in the month, where a big WSJ article led off with the statement that “shareholders delivered a significant rebuke to the oil giant” and noting that 62% of the votes cast were in favor. They added at the end that the Say On Pay got only 68% - down from 90% in previous years…so very much a red flag, and who knows, maybe even related to their stubbornness on climate change issues. The NY Times article reported a 62.3% yes vote - and noted that last year the proposal garnered only 38%.

Similar proposals were also approved at electrical giant PPL - and at Royal Dutch Shell, where we were surprised to discover on their website that Shell actually endorsed a shareholder resolution in 2015. Obviously, as at Oxy, investors decided that Shell had failed to deliver in a meaningful way.

So, this debate is over, we say - at least on the governance front. The official voting policies - and the actions of our largest institutional investors - have shifted markedly this year. Public companies would be wise to strive for much more robust and meaningful disclosure in their proxy statements rather than writing, or promising to write special one-off “reports.”

Item-Two: Shock, awe and a previously unheard of number of sudden departures and dismissals in the C-Suite this season: Perhaps the most noteworthy and important takeaway for public companies - and it is a major gamechanger - No CEO is safe from being ousted in a heartbeat these days if performance lags activist expectations; The all-time record of sudden CEO departures started early in the year, at AIG when CEO Peter Hancock - who your editor thought had done a wonderful job of stabilizing, and growing the company again, rather than dismembering it, as activists had been calling for earlier - resigned from the board following an unexpectedly large 4th quarter loss, and reportedly under pressure from activists Carl Icahn and John Paulson. The strangest thing, however, were the AIG board communications: “[Hancock] tackled the company’s most complex issues, including the repayment of AIG’s obligations to the U.S. Treasury in full and with a profit, and is leaving AIG as a strong, focused and profitable insurance company,” said chairman of the board Douglas Steenland. Then, the press release expressed the board’s support for the very same strategic plans and programs he had forged!

Soon thereafter, at Alliance Bernstein, AXA Financial - the French insurance company that owns the money manager - ousted the Chairman - and eight other directors - and brought in six new ones, due to various “performance issues.” At aerospace parts maker Arconic (part of Alcoa, not so long ago) CEO Klaus Kleinfeld was ousted by the board about a month before their hotly-contested annual meeting was to take place, after sending a “bizarre” and vaguely threatening letter - and a soccer ball - to Elliott Management chief Paul Singer, without telling the Arconic board. (Worth a read, if only to speculate on what he thought he might accomplish with such a dumb letter. And, one has to ask, “How’d he get the CEO job in the first place?”) After postponing the shareholder meeting - then learning a few days before the new D-day that they’d likely lose at least two seats - Arconic offered a truce, agreeing to give up three directorships, put an Elliott-named director on the CEO search committee and eliminate their staggered board. (P.S. Kleinfeld also stepped down as a director at Morgan Stanley, and we’d bet his Hewlett Packard Enterprises seat will be next.) …

At Buffalo Wild Wings, activist hedge fund Marcato Capita Management elected its founder and two other of their four candidates to the board, and the sitting CEO, Sally Smith,announced she would retire at year end. Actually, both the long-term performance of the company and the future outlook seemed pretty impressive. But recent growth just wasn’t good enough - or fast enough - for anxious hedgies.

At CSX, a Pershing Square partner, Paul Hilal, whom the WSJ called “a rookie activist investor” scored what would be an unthinkable coup in ordinary times: He left Pershing in January to start his own Mantle Ridge LP - solely to replace

the CSX CEO with 72 year old Hunter Harrison. And, in a blink of an eye, he did so. The CSX board - reportedly “pushed” by Neuburger Berman - and more notably, by Fidelity - agreed to appoint Harrison and named five new directors after watching the stock gain over $10 billion on Hilal’s mere announcement of his plan. “Shareholders took a much more active role than I have ever seen before” Harrison said in an interview, adding, in what may be the understatement – and also the motto of the year - “They wanted change.” Harrison, who resigned from Canadian Pacific Railroad as CEO to run for the CSX slot (actually, he walked, usually toting an oxygen bottle, which drew some belated investor concerns about his health, which were blithely brushed aside) will reportedly receive somewhere between $60 and $80 million to cover foregone benefits from his old job…That’s a lot of “change” for sure.

In mid-June…another bombshell: “General Electric, Under Pressure From Its Investors, Changes Chief Executive” the New York Times headline blared. Jeffrey

Immelt, who will remain as Chairman until year end was replaced immediately as CEO - following an all-day beauty pageant before the board in May of four internal candidates, where John L. Flannery was the unanimous choice. Charles Elson, the University of Delaware’s corporate governance guru summed up the long, slow, Immelt slog vs. peers precisely and succinctly; “What took the GE board so long?”

Interestingly, in a move that did not get much press attention, if any at all, Flannery has also been named as Chair-Elect and will become Chairman too on January 1, 2018.

Then came news that the number-two and number-three people at Uber had been ousted for a different kind of “performance issue” - eerily like Kleinfeld’s tone deaf social behaviors - this time due to a corporate culture that seemed to be pervasively hostile to women. And, oh yes, co-founder and CEO Travis Kalanick might be asked to take an extensive leave of absence. Then, in a flash – while Kalanick was on the road, interviewing a potential new top lieutenant (!) he received a surprise visit from two investors, including one from Fidelity, which had, traditionally, stayed out of fracases like this one. They handed him a letter demanding his resignation at once. After a quick telephone huddle with the one board member he felt he could count on, he resigned that day. Just a few nanoseconds later, came news that Whole Foods would shake up its board, after activist investors urged the company to explore a sale - with one (Neuberger Berman again, we think) hinting at calling for a second, mid-term shareholder election of directors before the regular AGM. They named a new Chairman, replaced five directors and noted that more would step down before the next shareholder meeting. “Our competitors are not standing still,” co-founder and CEO John Mackey said during the June earnings call, in maybe the second biggest understatement of the year. Indeed they weren’t. Shazam! Out of the blue and in a flash came the deal - basically an irresistible bear hug - to merge with Amazon. Any bets on how the Bezos/Mackey integration efforts will play out? Actually, they seem to have many traits and quirks in common…Stay tuned for a real food-fight, come what may – and for lots more astonishing actions on the CEO front, for sure.