SEC Issues Proxy and Investment Adviser Guidance

SEC Issues Proxy and Investment Adviser Guidance

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On August 21, 2019, the SEC issued two sets of guidance: (1) for proxy advisors, stating that the proxy rules apply to the provision of proxy voting advice, and (2) for investment advisers, regarding their proxy voting responsibilities.

This guidance could significantly change the proxy voting landscape and impact voting process at public companies. I provide my observations about these potential impacts and summaries of the SEC guidance in this Exequity Client Alert.

ISS Releases 2019 Policy Survey

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On July 22, 2019, ISS released its 2019 Benchmark Policy Survey. The survey can be accessed at:

https://www.surveymonkey.com/r/2019-ISS-Policy-Survey

The board of director and compensation-related questions include:

  • Board gender diversity, including what might constitute a mitigating factor
  • Director overboarding
  • Combined CEO/Chair role in the U.S.
  • Display of prior GAAP metrics used prior to the proposed use of EVA in ISS’ Financial Performance secondary screen as part of its quantitative pay-for-performance analysis for Say-on-Pay vote recommendations

ISS will use the responses to this policy survey in formulating its 2020 policy updates.

As You Sow Releases 2019 Annual Report on Overpaid CEOs

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As You Sow published its annual report on the Top 100 Overpaid CEOs among S&P 500 companies on February 21, 2019. As you might expect, the report details those companies who in As You Sow’s view have overpaid CEOs.

https://www.asyousow.org/report/the-100-most-overpaid-ceos-2019/

Key findings of the report:

  • Large institutional shareholders are opposing more CEO Pay packages by voting Against Say-on-Pay votes
  • The number of companies where a large number of shares were voted Against the CEO pay package has increased
  • Companies that As You Sow’s first report 5 years ago identified as Overpayers have underperformed the S&P 500

The report also includes many helpful charts and graphs looking at institutional shareholders and how they have reacted to CEO pay and their votes against CEO pay packages.

Incentive Plan Changes Making News

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We are on the cusp of the 2019 proxy season. Reporters are getting geared up to review the proxy statements of large, household named, public companies and report what they discover. Ahh, the sweet smell of anticipation! A heady aroma of blood, sweat, tears, and a bit of nervousness?

In any event, reporters got started a bit early this year (and who could really blame them given what companies have already disclosed). There have been a number of stories that look at changes in incentive plans that have been announced by companies so far in 2019:

  • Shell–will link high-level employee pay to carbon reduction targets after engaging with shareholder activist Climate Action 100+
  • BP— will factor greenhouse gas emission reductions into rewards for 36,000 employees worldwide after engaging with Climate Action 100+
  • Chevron— plans to set greenhouse gas emissions targets and tie executive compensation and rank-and-file bonuses to the reductions
  • Facebook–plans to incorporate social issue-related metrics into its employee bonus program to reflect updated company goals; none of the factors reportedly will have pre-assigned weightings or monetary values attached to them, instead Committee will use discretion to determine performance.
  • Goldman Sachs–announced that as a result of the on-going investigation into the Malaysian investment fund if the investigation reveals information that would have impacted the company’s year-end compensation decisions, the Committee may reduce or clawback the executives’ 2018 year-end equity awards.

All of the above companies are in a similar situation–events outside of their immediate control (shareholder activists or the media) caused them to revise how they will measure compensation. As shareholder activism increases and the notion of what is good for our society under goes a shift as younger folks begin taking over key roles in society, we are likely to see this trend continue.

Consequently, companies should keep a close eye on emerging issues in their industry and the broader market, identifying those that may require changes to their compensation plans and designs, and keep a “work in progress file on how such changes potentially could be made as well as potential implications for the company of both making and not making such changes. For companies with the foresight to do such planning, they will be rewarded with the ability to better respond to changing events more rapidly, instead of floundering for a bit to find the path that best suits the company’s long-term, strategic goals.