SEC Proposed Additional Rules for Proxy Voting Advice and Shareholder Proposals

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On November 5, 2019, the SEC issued two new proposed rules. One impacts proxy voting advice and the other impacts shareholder proposals.

Proxy Voting Advice

The proposed rule amends Exchange Act Rule 14a-2(b), which provides exemptions from the proxy rules’ filing and information requirements for certain kinds of solicitations. The amendment would call for enhanced disclosure of material conflicts of interest and would codify the August 2019 guidance’s change in the definition of “solicitation” to include proxy voting advice.

Under the proposed amendments, proxy voting advice businesses (i.e., proxy advisory firms) relying on the Exchange Act Rule 14a-2(b) exemptions from the information and filing requirements of the proxy rules would be subject to the following conditions:

  • They must include disclosure of material conflicts of interest in their proxy voting advice
  • Public companies must be given an opportunity to review and provide feedback on proxy voting advice before it is issued; and
  • Public companies may request that proxy voting advice businesses include in their voting advice a hyperlink or similar method of directing the recipient of the advice to a written statement that sets forth the public company’s views on the proxy voting advice.

The proposed amendments would permit the proxy voting advice businesses to require public companies to enter into confidentiality agreements for materials exchanged during the review and feedback period and would allow proxy voting advice businesses to rely on the exemptions where failure to comply with the new conditions was immaterial or unintentional.

The proposed rule will be subject to a 60-day public comment period.

The SEC announcement about these proposed rules changes can be found at: https://www.sec.gov/news/press-release/2019-231

Shareholder Proposals

The other rule changes that the SEC proposed involved shareholder proposals. The proposed amendments would:

  • update the criteria, including the ownership requirements, that a shareholder must satisfy to be eligible to have a shareholder proposal included in a company’s proxy statement.
  • Update the “one proposal” rule to clarify that a single person may not submit multiple proposals at the same shareholder’s meeting, whether the person submits a proposal as a shareholder or as a representative of a shareholder; and
  • Modernize the levels of shareholder support a proposal must receive to be eligible for resubmission at the same company’s future shareholder meetings

The changes to the ownership requirements represent a significant increase over the current standard. Currently, the ownership requirement is met if a shareholder hold at least $2,000 or 1 percent of a company’s securities for at least one year. The $2,000 amount is retained, provided the individual has held the shares for at least 3 years but increased to $15,000 if held for at least 2 years and increased again to $25,000 if held for at least 1 year (25 times the current ownership standard!).

Even the changes to the resubmission thresholds for proposals are being increased. The current resubmission thresholds of 3 percent, 6 percent, and 10 percent for matters voted on once, twice or three or more times in the last 5 years, respectively, would be changed to 5 percent, 15 percent, and 25 percent respectively, and an overriding provision would be added for proposals that have been previously voted on three or more times in the last five years could be excluded if (1) it received less than 50 percent of votes cast, and (2) experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote.

These proposed changes are also subject to a 60-day public comment period. It will interesting to see what comments shareholders have on these proposals as they all seem to limit the current rights of shareholders with respect to the companies in which they hold securities.

The SEC announcement about these proposed rules changes can be found at: https://www.sec.gov/news/press-release/2019-232

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.

Equilar Peer Group Submission Window Opens

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On November 28, 2018, Equilar announced that its 2019 peer submission window opened. The submission deadline is December 31, 2018. Companies have the opportunity to submit the peer companies that will be listed in a proxy to be filed between January 15, 2019, and July 15, 2019. This will help ensure that Equilar uses the correct company peers when constructing its MarketPeers for the company.

According to Equilar:

  • institutional investors use Equilar’s MarketPeers for independent validation of  company disclosed peer groups,
  • Glass Lewis uses Equilar’s MarketPeers algorithm to generate peer groups using in formulating Say on Pay recommendations for investors, and
  • The Pay for Performance (P4P) modeler in Equilar Insight’s Shareholder Engagement Center includes simulations for ISS and Glass Lewis P4P analyses based on the most recent peer group information.

The Equilar web page where companies may submit their peer groups is:

https://insight.equilar.com/app/peer_update/

Glass Lewis Issues 2019 Policy Updates

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Glass Lewis recently released its updated policies for 2019 for the U.S., Canada, Israel, and Shareholder Initiatives (See link below to access). On the compensation front, the changes impacting U.S. companies are:

  • Say-on-Pay (SOP) Vote Analysis– GL expanded its discussion of several executive compensation topics and how these factor into its SOP voting recommendations, including excise tax gross-ups, severance and sign-on arrangements, grants of front-loaded awards, clawback provisions, and CD&A disclosure for smaller reporting companies.
    • Excise Tax Gross-Up Provisions: GL will now look to see whether the company adopted a new excise tax gross-up in the past year which may factor into a negative SOP vote recommendation. GL may also recommend against board committee members that approved the excise tax gross-up, especially where the company had previously committed to not adopt such provisions.
    • Severance and Sign-On Arrangements: GL indicates that in determining whether these to be egregious or excessive (and thus cause for a negative SOP vote recommendation), it will consider general U.S. market practice, as well as the size and design of these entitlements.
    • Front-Loaded Awards: GL will take the quantum, design and company’s rationale for granting such awards into consideration.
    • Clawback Provisions: GL indicates that it is increasingly focusing on the specific terms of recoupment policies beyond whether a company maintains one that satisfies minimum legal requirements. GL believes clawbacks should be triggered, at a minimum, in the event of a restatement of financial results or similar revision of performance indicators upon which bonuses were paid. GL indicates that where a company maintains only a bare-minimum clawback, the absence of more expansive recoupment tools may inform GL’s view of the compensation program (and lead to a negative SOP vote recommendation).
    • CD&A Disclosure for Smaller Reporting Companies: GL will consider the impact of materially decreased CD&A disclosure (as permitted for certain smaller companies when in June 2018 the SEC changed the definition of “smaller reporting company” to pull in companies that previously did not comply), when analyzing the performance of a board’s compensation committee and may recommend against committee members in cases where a reduction in the disclosure substantially impacts shareholders’ ability to make an informed assessment of the company’s executive pay practices.
  • Peer Groups-GL added clarifying language regarding its approach to peer groups. GL is looking to see if the peer group is appropriate and of the correct size and that benchmarking is not set above peers.
  • Pay-for-Performance-GL added clarifying language regarding its approach to pay-for-performance, including a list of practices that may cause it to find that pay and performance are not aligned and cause it to recommend against a company’s SOP vote.
  • Use of Discretion-GL added clarifying language regarding its approach to the use of discretion. GL is looking to see if discretionary bonuses are paid when short- or long-term incentive plan targets are not achieved, which could lead it to recommend against a company’s SOP vote.
  • Director Compensation-GL added clarifying language regarding its approach to director compensation. GL believes non-employee director fees should be competitive, but excessive fees represent a financial cost to the company to the company and potentially compromise the objectivity and independence of non-employee directors. GL believes that director equity grants should not be performance-based.
  • Bonus Plans-GL added clarifying language regarding its approach to bonus plans. GL believes short-term bonus or incentives should be demonstrably tied to performance. GL believes a mix of corporate and individual performance measures is appropriate.

On the shareholder proposal front, GL has made several updates to its policies on shareholder proposals covering:

  • Special Meetings: GL has codified its policy regarding conflicting special meeting shareholder resolutions. Where both shareholders and the company put forward proposals for shareholders to call a special meeting, GL will generally recommend for the proposal with the lower threshold. Where there are conflicting proposals from shareholders and the company, and the company does not currently maintain a special meeting right, GL may recommend for the shareholder proposal. In cases where a company excluded a special meeting shareholder proposal in favor of a management proposal ratifying an existing special meeting right, GL will typically recommend against the ratification proposal as well as members of the nominating and governance committee.
  • Diversity Reporting: GL revised its policy regarding shareholder proposal seeking diversity reporting. GL will consider: (1) the industry in which the company operates and the nature of its operations, (2) the company’s current level of disclosure on issues related to workforce diversity, (3) the level of such disclosure at the company’s peers, and (4) any lawsuits or accusations of discrimination within the company.
  • Environmental and Social Issues: GL codified its approach to reviewing how boards are overseeing environmental and social issues. For large caps and where GL identifies material oversight issues, GL will review a company’s overall governance practices and identify which directors or board-level committees have been charged with oversight of environmental and/or social issues. GL will also identify where such oversight has not been clearly defined.
  • Materiality: GL formalized its consideration of materiality when reviewing and making voting recommendations on shareholder proposals. GL will place significant emphasis on the financial implications of a company adopting, or not adopting, any proposed shareholder resolution. To aid in determining financial materiality, GL will consider the standards developed by the Sustainability Accounting Standards Board.
  • Recoupment Policies: GL revised its policy concerning shareholder proposals requesting companies adopt enhanced recoupment provisions. In cases where a company has not adopted policies that provide sufficient protections for reputational and financial harm, GL may consider supporting well-crafted resolutions seeking to expand the recoupment policy.
  • Written Consent Proposals: WHere a company has adopted a special meeting right of 15% or below and has adopted reasonable proxy access provisions, GL will generally recommend against shareholder proposals asking the company to adopt bylaws to provide shareholders with the right to act by written consent.

Link to Glass Lewis’ 2019 Proxy Paper Guidelines, United States:

http://www.glasslewis.com/wp-content/uploads/2018/10/2019_GUIDELINES_UnitedStates.pdf

Link to Glass Lewis Blog Post, 2019 Policy Guideline Updates: United States, Canada, Shareholder Initiatives, Israel