The biggest takeaway, by far, is how much smooth sailing those proxy access proposals with 3% ownership and 3-year holding periods encountered… pretty much as we predicted. By mid-year, 67 companies adopted such provisions, with more to come, for sure. New York City Comptroller Scott Stringer, who submitted 75 proposals on their own – reported that nearly two out of three of his proposals achieved majority support so far.
We counted a half-dozen other companies– like Chipotle and Community Health Systems (both with 49.8% in favor) Exxon (49.4%), Alexion (49.2%), Peabody Energy (48.7%) and Cabot Oil (45.3%) where support was so close to 50% that companies will almost have to adopt something, or face retaliatory actions next year. And just as we were going to press, Whole Foods – which tried to float a counter-proposal on proxy access with much higher thresholds than gadfly Jim McRitchie’s 3&3 proposal – unilaterally amended its bylaws to adopt a 3&3 proposal, and asked McRitchie to withdraw. We also saw results at a company that had both its own 5&5 proposal and a proponent’s 3&3 on the same proxy cards, where the final results were mirror images: Company proposal 23% For, 77% Against; Shareholder proposal 77% For, 23% Against.
As we said in our last issue, this ship has sailed – and, much like Majority Voting proposals, will be voluntarily adopted by a large number of companies simply as a “best practice” – since a shareholder vote is not even needed - unless a company digs in its heels, or tries to float a proposal with “5 and 5” provisions vs. the 3&3 the SEC proposed way back when….The higher hurdles just ain’t gonna fly no mo’.
A few other things you should know about proxy access:
First, it really is the stupidest thing ever…that would only be invoked against the stupidest of companies, should they foolishly try to totally stiff- arm a delegation of investors with even 1% in hand…at which time it would be invoked with a vengeance – and the offending company would almost certainly loose one director – or more.
Second, trying to beat investors to the polling place, and float one’s own 5 & 5 proposal, is stupider yet…Your editor had dinner with a client the night before his shareholder meeting, who said he was considering such a move for next year. “What percentage of your outstanding shares are held by your top two investors?” we asked him. “About 2 ½ %” he said. “And how many would get you to 5%?” “Oh…I see” he said… “One more would get me to 3% and maybe only three or four more would get me to 5%…So yes, why in the world would I tick off my top five or six holders – and probably embarrass my directors too.” Case closed.
The second big development so far this season was the outcome of the DuPont-Trian proxy fight, where “opiners” have been all over the lot, but where there are several lessons to learn, we think:
First off, there seems to be little doubt that ‘retail investors’ were major factors in the outcomes here – as they are in almost every really “close election” – and who almost always vote overwhelmingly for the management slate. And, for sure, the biggest-money investors among them were DuPont officers, directors, employees, retirees, and their heirs, who have many economic, social and sentimental reasons to vote for the home team – which has produced mighty sweet returns for them over the years – and so they did.
Most surprising, however, with Train’s Peltz coming up only 77 million votes short of a win, was the extent to which only a single one of DuPont’s top-three investors could have swung the vote decidedly the other way. While a very large number of DuPont’s institutional investors were willing to “roll the dice” on adding a few new directors – to “stir up the pot” – the basic conservatism of three of DuPont’s biggest investors, Vanguard, State Street and BlackRock, and their willingness to trust, rather than second-guess the management team is worth noting…and is basically comforting to incumbent boards and management teams. If ever a case needs to be made for engaging pro-actively, and often, with one’s largest investors, this is IT.
But the final takeaway also seems pretty clear: The incumbent directors – and most especially the Chairman & CEO and the Nominating Committee members – are decidedly “on probation” now - and won’t be allowed to survive a failure to turn the recently receding economic tides mighty fast. We’d bet a quick $100 that DuPont will add at least one, and maybe two directors from the Trian slate before too long, come what may…
Another meeting we had on our radar screen was BofA’s – where the board overrode a binding bylaw resolution it had honored initially – to separate the Chairman and CEO roles: They awarded CEO Brian Moynihan the Chairman’s title almost as if it was a boy-scout medal for niceness and hard work - which he certainly exhibits, under loads of pressure - but without much advance discussion with its biggest investors. Then, yielding to screams from the activist crowd, they agreed – 48 hours before the meeting was to convene – to put it to a shareholder vote… “No later than next year’s annual meeting.” Then, they laid- low on disclosing the actual votes. Moynihan garnered a very robust 93.9% of the votes cast in favor of his election to the board. And most of the other nominees did about the same. But the Chairman of the Corporate Governance Committee got just 66.6% in favor, and the other three Governance Committee members polled just over 71% in favor…putting them all in the “danger zone” where future institutional investor votes are concerned.
There’s no doubt that these days, the Governance/Nominating Committee seats are the hottest spots to be in on a board – and that institutional investors will apply the heat big time if they feel it’s warranted.
Director Elections were mostly uneventful, as Broadridge’s mid-year Proxy Pulse summary indicated clearly: At large-cap companies, average shareholder support for directors was unchanged at 97%, compared to 92% at microcap companies — which experienced a 2 percentage point decrease from the same period last year. But oops…458 directors (just under 4% of directors up for election) failed to receive at least 70% shareholder support and 126 directors at 60 different companies failed to achieve majority shareholder support – about the same as last year.
Say-On-Pay votes also encountered mostly smooth sailing to date: Average support levels were unchanged at 90% so far this season, according to the Broadridge report, although approximately 8% of pay plans failed to surpass the 70% shareholder support level and 3% of say-on-pay votes failed to achieve majority approval.
Another thing we can say for sure, companies spent a lot of money on their “outreach” and communications efforts this year, to assure their Say-On-Pay proposals would sail by – and stay well above the 70% “danger zone” - and, ideally, above the 90% level. One company we heard about spent over $1 million on a “proxy advisor/consultant” – to assure they’d beat the 90% mark – and we’re sure there were a lot more such cases.
A few years ago, we opined that “80% is the new 50%.” Today, “90% is the new 80%” - at least where director elections and say-on-pay ratifications are concerned.
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