The Hottest Proxy Issues in 2018
Q&A with Bruce H. Goldfard, President & CEO of Okapi Partners
Q: How important are ESG issues right now? It seems like we’ve seen a lot more activity on that front, especially with Blackrock’s latest letter.
There has been a general focus on governance and diversity in the boardroom for some time and board diversity remains a critical issue in 2018, but companies in nearly all sectors will experience increasing demands from investors to address environmental and other social issues. ESG issues are viewed by some investors as impacting long-term, sustained value, and proxy votes are reflecting this view. One example was ExxonMobil’s annual meeting in May 2017. The New York State Common Retirement Fund put forth a proposal forcing the company to publish an annual assessment of the impact of global climate change policies and that was approved by more than 62% of ExxonMobil shareholders. Among the large investors believed to have supported the proposal – over the objections of the company’s board – were BlackRock, Vanguard and State Street. In light of this investor focus, Larry Fink’s recent letter should be taken seriously by companies and boards who need to address these issues right away generally as part of articulating long-term strategy or risk being open to criticism from activist investors and others. These are not fly-by-night issues, as a growing number of investors believe ESG issues are linked to long-term performance of the company.
Q: After the mega-million-dollar proxy fight at P&G, do you think that activists will still continue to mount such fights - and that their targets will continue to fight-back to the bitter end?...What advice to you have - both for activists and for public companies with respect to “fights?”
Shareholders across the board are much more receptive to ideas from activist investors, so perhaps there will not be many contests like the one at P&G. But that doesn’t mean there will be less activism. Investors are more thoughtful than ever about how they evaluate director candidates and proposals put forth by activist investors. In addition, boards and management teams are better at honing their message to shareholders. Both sides are developing innovative strategies to reach other shareholders. Whether you’re an activist running a proxy fight or a company defending yourself, you have to come well prepared with a dynamic and thoughtful strategy and be able to execute right away. Activists are now equipped with new outreach tools like social media and compelling videos that reach shareholders with their messages. Elliott Management used many of these techniques very effectively to communicate with Arconic’s retail shareholders during their proxy fight. Public companies can also learn to use creative tactics and smart messages to reach their shareholders. Limiting your communication to press releases and letters is not going to work anymore. Companies also need to know who their shareholders are, an increasingly difficult task given all the different types of investors these days. Companies need effective shareholder monitoring capabilities, as well as thorough analysis of the impact of investor turnover, especially when an activist comes knocking. Understanding how these different types of investors think and behave is one of the keys to winning proxy fights or avoiding them altogether.
Q: Retail investors seem to have become more influential in and more vocal in proxy contests - and also with respect to shareholder proposals in general. How do you reach them?
Companies and their corporate governance and IR professionals need to understand that retail shareholders are increasingly voicing their concerns through their proxy vote. Shareholder activists often considered the costs of reaching thousands of retail holders as prohibitive. But Elliot’s contest against Arconic, and then Trian’s contest against P&G, each with high price tags for outreach, changed the game. The P&G contest is likely a foreshadowing of more retail-oriented campaigns to come, particularly because technology has made it easier to get the attention of retail shareholders via content such as videos, social media outreach and other creative methods. Coupled with these methodologies, effective proxy solicitation is still a key component to winning campaigns, and companies and IR professionals must better understand who owns their shares, how to reach them effectively and adopt a proactive stance to communicating with them.
Q: A recent PwC survey of Directors revealed that 70% of them think that company officers are overpaid and 66% felt it was contributing to greater income inequality. What are your thoughts here - and specifically, do you feel that companies will have to be working harder and smarter to get decent Say On Pay numbers? What are the top-tips you have for them?
Executive compensation has been a hot topic for some time, but “say on pay” has not overwhelmingly moved the needle on this issue except to enhance engagement efforts (which is not unimportant). Companies and boards need to listen to their shareholders and be able to clearly explain their executives’ compensation in a way that makes sense to even the most unsophisticated shareholder. Compensation should be tied to performance and strategy execution. Ultimately, compensation is a board matter and diverse, independent board members should address compensation to ensure alignment with value for shareholders.
Q: How influential are proxy advisors and have they been affected by the political attention on them this year?
It’s too early to predict whether recent proposed legislation in Congress will lead to changes, but proxy voting advisors remain influential. Very large index funds and other passive shareholders have become more thoughtful and engaged in the voting process over the years as activist investing has gained prominence. In the past, it was almost a given that many of these shareholders would vote with management’s recommendations or blindly follow the advice of proxy voting advisory firms. But now, proxy voting committees have expanded, more work is being done related to voting decisions internally by investors, and the influence of the proxy voting advisors has waned a bit. That said, proxy voting advisors are still very influential in terms of providing research and need to be taken seriously in any campaign.