Diverse Views on Universal Ballots, Retail Participation Strategies Shared at SEC Proxy Voting Roundtable

As scheduled, the SEC held a proxy voting roundtable (webcast archive available here) last Thursday that included panel discussions on universal proxy ballots and strategies for increasing retail voting - with CEO & President Darla Stuckey participating on the latter panel on behalf of the Society. 

On the universal ballot, Wachtell Lipton's David Katz explained the dangers and complexities of rulemaking in this area. Society member Sarah Teslik, SVP - Communications, Public Affairs and Governance, Apache Corporation stressed the need for more shareholder engagement, and asserted that the universal ballot was not something that the Commission should be spending time and resources on at this point.

As to retail participation, Commissioner Piwowar reportedly attributed low retail participation in part to the SEC's e-proxy rules - indicating that review of the rule's impact is long overdue. According to Broadridge, retail investors who receive a full set of proxy materials by mail vote at 41% - compared to 23% for those notified by e-mail and 18% notified by mail. Cleary Gottlieb's Alan Beller suggested that companies should be allowed to include a ballot in the notice and access package. SIFMA notes that panelists emphasized the need for retail investors to have access to independent proxy assessment information and the need to explore limitations of client-directed voting.

Comments on issues addressed at the roundtable may be submitted to the SEC through March 31, 2015. Comments submitted to date are available here.

"SEC Speaks" on 2015 Priorities, Disclosure Initiatives, SEC Processes & More

SEC Chair White, Commissioners Aguilar, Piwowar and Stein, and Investor Advocate Rick Fleming were among those who addressed PLI's "The SEC Speaks in 2015" program last week. Highlights include:

• Among other 2015 priorities, Chair White noted the disclosure effectiveness and accredited investor reviews being led by the Division of Corporation Finance, and the Commission's focus on updating the transfer agent regulatory scheme.
  
• Commissioner Aguilar urged the SEC to complete the Dodd-Frank rulemakings and continue its progress on JOBS Act implementation, and to be "more aggressive" in seeking permanent industry - and officer and director - bars, which he believes serve as a strong misconduct deterrent.
  
• Commissioner Piwowar's remarks focused on the SEC acting fairly by - among other things - abiding by the Administrative Procedures Act, and avoiding ad-hoc rulemaking via enforcement or examinations. He also addressed the recent controversy surrounding the Commission's increased use of administrative proceedings for enforcement actions rather than the federal courts - indicating that it should formulate enforcement proceeding guidelines to promote the perception and reality of fairness.
  
• Alleging that the current methods of delivering information to investors are outdated, SEC Investor Advocate Rick Fleming urged the SEC to take steps to effect layered and structured data disclosure that would enable investors to hone in on the information they deem most important and research/analyze data across companies more effectively - themes echoed by Commissioner Stein.

ISS Posts FAQs: Proxy Access Proposals, Exclusion of Shareholder Proposals, Unilateral Bylaws/Charter Amendments

Proxy Access Proposals - Last week, ISS published its long-anticipated FAQs on proxy access proposals, revealing a preference for permitting a shareholder or group of shareholders owning 3% of the company's stock for three years to nominate candidates for up to 25% of the board. Specifically, ISS will recommend a vote for management and shareholder proposals that meet these guidelines:

• Ownership threshold not greater than 3%
• Maximum ownership duration of 3 years for each member of the nominating group
• Minimal or no limits on aggregation to form a nominating group
• Cap of 25% of the board for access nominees

ISS will review for reasonableness any other proxy access restrictions, and generally recommend a vote against proposals that are more restrictive than these guidelines. If a company includes both management and shareholder proxy access proposals on the ballot, ISS will review each against its policy.

Exclusion of Shareholder Proposals - The new FAQs also address exclusion of shareholder proposals generally. In accordance with its governance failures policy, ISS will recommend a vote against one or more directors (individual directors, certain committee members, or the entire board based on case-specific facts and circumstances) - regardless of whether there is same subject matter management proposal on the ballot - if a company omits a "properly submitted" shareholder proposal without:

• Voluntary withdrawal of the proposal by the proponent;
• No-action relief from the SEC; or
• US District Court ruling that the proposal can be excluded

If a company includes both management and same subject matter shareholder proposals on the ballot, ISS will review each under its applicable policy. If the company has taken steps to unilaterally implement the proposal, ISS will factor into its assessment the degree to which it is implemented and any material restrictions.

Unilateral Bylaw/Charter Amendments - The FAQs also address the types of unilaterally adopted bylaw/charter amendments that ISS considers to "materially diminish" shareholders' rights -which trigger a recommended withhold vote against the board.

See also this Gibson Dunn blog.

Society Joins in Coalition Letter to SEC Expressing Concerns on Rule 14a-8(i)(9) Announcement

The Society - along with the NACD, SIFMA, U.S. Chamber of Commerce, Retail Industry Leaders Association and others - sent this letter to SEC Chair Mary Jo White yesterday expressing the collective concern over the SEC's recent decision to suspend its views on the application of Rule 14a-8(i)(9) during the 2015 proxy season. The letter addresses adverse implications to companies specifically, as well as to good governance generally - and our concerns about the process underlying the SEC's actions.

Shareholder Proposal Seeks to Exclude Audit Committee Members Who Previously Served at a Company Seeking Bankruptcy Protection

Hat tip to Dan Goelzer's Audit Committee and Auditor Oversight Update for alerting us to the SEC's denial of Citigroup's no-action letter request concerning a Chevedden-sponsored proposal for the board to adopt a bylaw excluding from the board's audit committee "any director who was a director at a public company while that company filed for reorganization under Chapter 11 of the federal bankruptcy law." Citigroup sought exclusion of the proposal under Rules 14a-8(i)(3) (vague or indefinite), 14a-8(i)(6) (absence of power/authority) and 14a-8(i)(8) (director elections). Goelzer comments:  

The notion that service on the audit committee of a company that files for bankruptcy reflects adversely on a director's fitness seems wrong-headed and counter-productive. At minimum, each situation would require an in-depth analysis of the reasons for the bankruptcy filing and the director's involvement, if any. Nonetheless, proposals of this nature illustrate the increased scrutiny shareholders are affording to audit committee members. This proposal may also foreshadow proposals that companies will face if public disclosure of the engagement partner's name becomes mandatory. Shareholders may seek to preclude the audit committee from using the services of an engagement partner when another client of that partner has been involved in a restatement, bankruptcy, or some other adverse financial reporting event. 

Institutional Investor Feedback Paints Picture of "Ideal" Proxy Statement

This latest Stanford Closer Look paper describes the information institutional shareholders would like to see in the "ideal" proxy statement based on data gleaned from a survey conducted by RR Donnelly, Equilar and The Rock Center for Corporate Governance at Stanford University (which we reported on last week). Highlights include:

• Context: Include context and avoid boilerplate, legal and compliance-oriented text. Specifically, explain how the company's governance choices - in particular, board composition, shareholder rights, financial targets, performance measurement and executive compensation - are informed by its strategic goals. Example: Pfizer
  
  
• Shareholder Rights: Summarize charter and bylaw provisions that address investor rights to influence the corporation, including recent changes and an explanation of why those changes were made. Provide plain-language statements of opposition to shareholder proposals and the board's process in response to shareholder engagement.
  
  
• Compensation: Provide more concise presentation of data and clearer description of how compensation is tied to long-term strategy, financial metrics and risk. Investors cited Apple and ExxonMobil as doing a "particularly good job of framing and discussing compensation practices." Specifically, investors would like to see:
  
  
  • Value of NEO compensation granted, realized, and realizable
  • Comparable data among peers or industry averages
  • Metrics, targets, and weightings used to award performance-based awards
  • Actual performance relative to targets
  • Outstanding awards and conditions under which they can be realized
  • Justification for discretionary payments
  • Ownership guidelines and levels
     
• Board composition: Describe (i) director qualifications and value each director adds to the board, i.e., how they contribute to corporate strategy and governance, (ii) process for committee assignments, director evaluations, board refreshment and succession planning, (iii) stock ownership guidelines and ownership levels. Example: Coca-Cola

Note that Society member Peggy Foran, Chief Governance Officer, VP & Corporate Secretary of Prudential, recently discussed board composition proxy disclosure tips in a Skadden webinar "What Board Members Want to Know This Season." Key takeaways are summarized in this memo, and you may access the webinar here.

Thirty Percent Coalition Targets 25 Companies for 2015 Board Diversity Proposals 

The Thirty Percent Coalition, a group of industry thought leaders (including institutional investors, e.g., AFL-CIO, CalSTRS) striving to achieve at least 30% female board representation by the end of 2015, has published a list of shareholder proponents who have filed, and the companies that have received, board diversity resolutions for the 2015 proxy season. According to the Coalition, approximately 25 such resolutions have been filed at companies with no women on their boards. Resolution sponsors include NYC Pension Funds, CalSTRS, UAW, Walden Asset Management and Trillium Asset Management. The form of resolution calls for the board to report to shareholders on its plans to increase board diversity, as well as an assessment of the effectiveness of those efforts:

Resolved: Shareholders request that the Board of Directors report to shareholders by September 2015, at reasonable expense and omitting proprietary information, on plans to increase diverse representation on the Board as well as an assessment of the effectiveness of these efforts. The report should include a description of how the Nominating and Corporate Governance Committee, consistent with its fiduciary duties, takes every reasonable step to: 

1. include women and minority candidates in the pool from which Board nominees are chosen; and
2. expand director searches to include nominees from both non-executive corporate positions and experience in non-traditional environments such as government, academia, and non-profit organizations.

These resolutions are in addition to the 24 proxy access proposals reportedly filed by the NYC pension funds at companies that purportedly "have few or no women directors and little or no apparent racial or ethnic diversity." 

Investor Association Offers Balanced Discussion of Political Spending Disclosure 

Despite differences in U.S. and Canadian laws relating to political spending, this new SHARE (Shareholder Association for Research & Education) discussion paper, which is intended to encourage dialogue among investors about corporate political spending and disclosure among Canadian corporations, is noteworthy for both companies and investors worldwide for its balanced approach to this increasingly divisive issue.  

The paper outlines the various ways Canadian companies engage in political spending and then discusses a series of relevant - but infrequently vocalized - questions including, e.g., whether it's possible to distinguish between appropriate vs. inappropriate political spending and whether there are risks or costs for investors from companies' disclosure.  

The paper acknowledges the difficulty of differentiating between appropriate vs. inappropriate spending: "Like beauty, the appropriateness of a corporation's political spending may be in the eye of the beholder." While affirming that "appropriate" corporate political spending should provide value, the paper also acknowledges differences among investors that impede a one-size-fits-all analysis:

Assessing the value of political contributions for the corporation is difficult. Using shareholder interests as a benchmark is itself difficult since shareholders vary considerably in their interests. Even their common interest in financial returns may vary depending on each investor's anticipated holding period and tolerance for risk.

Among the potential risks or costs to investors arising from political spending disclosure and raised for consideration are:

• Disclosure may deter companies from participating in the political process even where they should do so. "For example, a company could refrain from lobbying related to legislation that affects their interests, leaving the playing field open for competitors or other interests who may influence lawmaking in a manner detrimental to the corporation's value."
• Companies may feel compelled due to activist campaigns to forego or disassociate from a largely beneficial trade association membership because of a relatively minor position taken by the association.

Largest UK Asset Managers Falling Short on Stewardship Code Compliance 

According to this new report from UK-based NGO ShareAction, some of the UK's largest asset managers who are signatories to the FRC's UK Stewardship Code are failing to comply with some key Code criteria. Asset managers evaluated include global managers State Street, BlackRock, JP Morgan, Fidelity, Goldman Sachs, Morgan Stanley and UBS.  

Findings include:

• Only 64% publicly disclose a conflicts of interest policy - a core Code principle
• Only 64% disclose robust reports on their voting and engagement activities
• 18% don't disclose any voting records (compared with 17% in 2010 - barely any improvement)
• Only 42% disclose policies on how they incorporate ESG considerations into the investment process

SEC Amicus Brief Advocates Anti-Retaliation Protection for Internal-Only Whistleblower Reporting

The SEC filed an amicus brief last week in the Liu Meng-Lin v. Siemens AG case in support of its view that whistleblowers are protected from retaliation under Dodd-Frank even if they report the alleged misconduct only internally, and not to the SEC. The former employee alleged that he was retaliated against for raising concerns and reporting internally Siemens' alleged FCPA violations. As noted in this FCPA blog, the Fifth Circuit Court of Appeals has taken a contrary position - i.e., that the law's anti-retaliation provisions protect only those who report the suspected wrongdoing to the SEC.

The SEC's Chief, Office of the Whistleblower Sean McKessy, issued this statement: 

The Commission's whistleblower program both encourages whistleblowers to report wrongdoing and protects them when they do.  Today's filing makes clear that under SEC rules, whistleblowers are entitled to protection regardless of whether they report wrongdoing to their employer or the Commission.  The Commission's brief supports the anti-retaliation protections under the Dodd-Frank Act that I believe are critical to the success of the SEC's whistleblower program.

Del. Gov Markell Nominates Collins Seitz to Supreme Court

Delaware Gov. Jack Markell announced the nomination of Collins J. Seitz, Jr. to serve on the Delaware Supreme Court - filling the vacancy left by the recent retirement of Justice Henry duPont Ridgely. As reported last week, Seitz was among six applicants who purportedly applied to fill the vacancy. His nomination still needs to be confirmed by the Delaware Senate. Gov. Markell also nominated Judge Calvin Scott, Jr. for reappointment to the Superior Court.

Society to Participate in Proxy Mosaic's "Are Meaningful Shareholder Proposals a Thing of the Past?" Event

We are pleased to report that Society President and CEO Darla Stuckey will be joining Anne Simpson, Senior Portfolio Manager and Director of Global Governance, CalPERS, and Moderator John Wilcox, Chairman, Sodali, for Proxy Mosaic's Dialogue Series "Are Meaningful Shareholder Proposals a Things ot the Past? Reactions to an SEC Commissioner's Critique of Harvard Univeristy and the Whole Foods Proxy Access Situation" on March 5th at 11 am ET.

The event, which you may attend via registration for the live webcast, will address the uncertainty that is undermining the shareholder proposal process - as well as possible scenarios and desirable solutions - in the wake of the SEC's recent actions concerning Rule 14a-8(i)(9) and Commissioner Gallagher's recent accusations against Harvard Law School's Shareholder Rights Project.

This week's highlighted question from the Huddle is:

Do most companies hold board meetings prior to quarterly earnings calls, or have just the audit committee meet prior to the calls to approve the 10-Q? If the board meeting is typically held before the earnings release, do you alter the schedule for the annual shareholder meeting so that the directors only travel once for both the board meeting and annual shareholder meeting?

This question generated a lot of activity and many excellent answers (too many to note here) including:

Generally, our Board meetings are after our earnings calls. The Audit Committee will have a telephonic meeting to review and discuss the earnings release and other items, and then will have its "regular" quarterly meeting in conjunction with the Board meeting. Our regular quarterly Board meeting is scheduled to occur immediately after our annual shareholder meeting so the Board only has to make one trip (and the earnings call is generally 7-10 days prior to the annual shareholder meeting).

Check out the Society Huddle.