www.proxyinsight.com
March 2017Volume 4, Issue 2
VOTING NEWS
PROXY MONTHLY
IS EXECUTIVE PAY BROKEN?: EY PROPOSES A NEW MODEL
POISONED CHALICE?: INVESTOR VOTING ON GOLDEN PARACHUTES
SEVEN FOR 17: TACTICAL APPROACHES TO PROXY SEASON 2017
This year has so far seen
the focus of corporate
governance remain in the
U.K., with various investors and
regulatory bodies putting forward
their own version of corporate
reform.
The turbulence within the U.K.
corporate landscape is perhaps
unsurprising, given the U.K.
government’s recent green paper
on corporate governance reform,
and the likely appearance of a white
paper in the near future.
Indeed, investors and issuers
alike fear the damage government
intervention could do to shareholder
value and are likely attempting to
nip it in the bud.
For instance, a binding vote on
either the U.K.’s remuneration report
or remuneration policy if a company
faces considerable opposition over
two consecutive years has been
suggested by the Confederation
of British Industry and the Investor
Association respectively.
By contrast, Fidelity International has
taken a dif ferent approach, arguing
that remuneration committee chairs
should stand down if less than 75%
of investors support a company’s
remuneration policy.
In addition, other investors, such as
Standard Life Investments, Hermes
and even the Church of England
have threatened more aggressive
voting with regards to executive pay
in advance of the upcoming proxy
season.
Naturally, issuers, including Imperial
Brands, Barclays and Thomas Cook,
have responded to such sentiments
either by removing controversial
pay proposals from their upcoming
meetings or imposing pay caps on
their senior executives.
However, U.K. corporate reform
has not only been limited to public
companies. Following, the BHS
debacle, the possibility of corporate
governance requirements for large
U.K. private companies seems
on the horizon, with the Financial
Reporting Council already offering
to take on the mantle of regulator.
Given the recent agitation
on executive pay, this month
appropriately covers a range of
compensation related issues.
An article from EY introduces
their proposed One Element Pay
Model, which moves away from the
traditional pay package and instead
suggests a far more simplif ied,
stripped down solution to executive
remuneration.
Also, with the beginning of the proxy
season, the current pay proposals
receiving high opposition include a
large number of golden parachute
proposals.
As a result, this issue’s main
article looks at Proxy Insight’s
data surrounding this controversial
proposal, as well as the various
positions of investors on golden
parachutes in their voting policies
and the numerous arguments
adopted by both their proponents
and critics.
Continuing the theme of turbulence
in the current corporate governance
landscape, this month also includes
an article from Teneo Governance,
which gives seven helpful tips to
navigate the upcoming 2017 proxy
season.
These include companies reviewing
their approach to engagement with
proxy advisory firms and keeping an
eye on any regulatory changes that
may be happening this year.
Proxy Insight is the only tool to offer
the voting intelligence necessary to
navigate today’s investor relations
market. If you are not a client and
would like to take a look, we would
be delighted to offer you a trial.
Please get in touch.
Proxy statementNick Dawson, Co-Founder & Managing Director, Proxy Insight Limited.
2
In recent months executive pay has
received an unprecedented level
of attention from a wide range of
stakeholders. While Remuneration
Committees, executives and investors
in many businesses may feel that
current pay structures are working
well and fit for purpose, the intensity
of noise we are experiencing tells us
that it is no longer reasonable for any
organisation to assume that there
is nothing it needs to be concerned
about.
First indications from the 2017 AGM
season show that in many cases the
noise in the system is now turning into
real opposition. Many would seek to
explain away this opposition as being
specific to a business, or focussed on
a discrete issue. We at EY believe that
this is now wishful thinking.
Much of the noise in the system
derives from the view held by some
that executive pay is simply too high. A
suggested solution is to regulate pay
by imposing a cap on the amount an
individual may receive. Whilst capping
executive pay would be relatively
straightforward to execute, we believe
that it will not fix the root problem and
could create considerable complexity
in itself.
That is not to say that change in
the executive pay arena would not
be welcome. There is work to be
done in several areas including
governance, communication and
alignment of interest. However, one
aspect on which stakeholders appear
to be agreed is the need for the
simplification of executive pay.
EY’s view is that this simplification
agenda cannot be addressed by
tweaking aspects of the traditional
package. This is not about the number
of performance measures used or
the length of deferral applied. It is
about acknowledging that a desire
for simplification requires agreement
on what is core to an executive
pay strategy and to focus on that
exclusively.
EY feels that many aspects of the
today’s pay structures, which have
been viewed as integral to the
traditional model, may not be the most
efficient way to deliver remuneration
or may simply be no longer relevant.
Whilst there are any number of
alternative structures and possible
approaches to improve the status
quo, EY believe the current challenges
cannot be addressed by existing
remuneration models. Accordingly we
have designed a new model, the One
Element Pay Model.
Under such a model, companies:
► Pay executives for the work they do.
► Pay them a bit more if they generate
better than expected outcomes.
► Pay them a bit less if they undershoot
expectations.
► Require that they buy shares every
year with a meaningful portion of their
remuneration.
EY believe the One Element Pay
Model for executives can offer
advantages not only to businesses of
many shapes and sizes, but also the
diverse group of stakeholders in the
executive pay debate.
For further information please contact:
Rupal Patel
Partner
RPate [email protected]
+44 20 7951 0658
David Ellis
Partner
+44 20 7980 0163
Is Executive Pay Broken?EY’s Rupal Patel proposes a new model
3
4
“IT IS ABOUT ACKNOWLEDGING THAT A DESIRE FOR SIMPLIFICATION REQUIRES AGREEMENT ON WHAT IS CORE TO AN EXECUTIVE PAY STRATEGY AND TO
FOCUS ON THAT EXCLUSIVELY.”
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So far this year, many of the proposals
most firmly opposed by shareholders
have related to “golden parachutes” –
large payments made to a company’s
top executives if they lose their position
after a takeover. This is at least partly
because merger approvals, which
require a vote on golden parachute
plans, are one of the reasons a
company might call a special meeting.
These special meetings dominate the
agenda and bring issues like golden
parachutes to the fore, even though
they are relatively rare compared to,
for example, Say on Pay votes.
U.S. companies have been required to
submit golden parachute proposals to
a shareholder vote since 2011 under
the Dodd-Frank act. When a company
calls a meeting for the approval of
a merger, the law demands that
executive compensation plans be
disclosed and an advisory shareholder
vote on those plans be taken.
A Contentious Issue
Golden parachutes can be divisive
to say the least. Their supporters
argue that they make it easier to hire
and retain top executives, especially
in industries where mergers are
common. Proponents also believe
that, by softening any concerns
about dismissal, these payments help
executives to remain impartial if the
company does become the subject of
a takeover or merger. On top of this,
it is suggested that the cost of paying
out golden parachutes can form a
barrier to help discourage takeovers.
Those who oppose golden parachutes,
on the other hand, have answers to
each of these points. They argue that
executives are already offered ample
compensation and should not be
further rewarded simply for being let
go.
Such critics also point out that
executives have an inherent fiduciary
responsibility to act in the best
interests of the company and its
shareholders. A company’s executives
should not need additional financial
incentives to keep them objective. As
for the cost of compensating such
executives, opponents argue that this
is tiny compared to all the other costs
of a merger and is unlikely to form an
effective anti-takeover mechanism.
Golden Parachutes and Governance
Whether or not something is
considered good governance is often,
at least in part, defined by the policies
of major investors. When it comes
to compensating executives after a
merger, we have analyzed the policies
of ten key investors and found that
they mostly take a balanced position.
For example, BlackRock’s policy
says “When determining whether
to support or oppose an advisory
vote on a golden parachute plan,
BlackRock normally support the plan
unless it appears to result in payments
that are excessive or detrimental to
shareholders.”
In all the cases we looked at where an
investor’s policies take a case-by-case
position, there were specific, defined
issues that could lead to a vote against
the recommendations. The issues
most commonly included are:
► Benefits paid that exceed three times
salary and bonus.
► Single-trigger plans.
► Tax gross ups.
Single-trigger plans are golden
parachutes that do not require the
termination of the executive in order
to pay out. This means an executive
may keep their job in the newly-
combined company and still receive
compensation, so it is not hard to see
why investors take a dim view of these
provisions.
Data from Proxy Insight finds that investor voting on Golden Parachutes is not what it seems, with some investors voting in favor
of controversial proposals, despite their voting policies saying otherwise.
Poisoned Chalice?An analysis of investor voting on Golden Parachutes
6
Tax gross ups are increases to payouts
in order to compensate individuals for
money lost in tax.
For example, if an executive is
promised a payout of $1,000,000 and
the applicable tax rate is 20%, the
company would increase the payment
to $1,250,000. After the 20% tax has
been paid, the executive is left with the
promised $1,000,000 in full. Critics of
tax gross ups argue that if an executive
is fortunate enough to receive a multi-
million dollar payout, it should not also
be the company’s responsibility to foot
their tax bill.
The Voting Data
Using data from Proxy Insight, it is
possible to compare the policies
of investors with their actual voting
record.
While investors typically oppose the
priciple of golden parachutes, caveats
in their policies often result in much
higher support for the issue than might
be expected.
This is highlighted in Table 1, where
8 out of 10 investors supported more
than half of all golden parachute
resolutions they voted on, indicating
that there are at least some investors
paying lip service to good governance
through their policies, yet taking a very
different approach in practice.
This could help to explain the fact
that, despite their divisive nature and
tendency to provoke a fair amount
of shareholder opposition, golden
parachute proposals still rarely fail. Of
the 438 golden parachute proposals
that Proxy Insight has collected, all
but 30 proved to be successful with
the average level of support for these
being 83%.
As public opinion on executive pay
has turned increasingly sour, fund
managers have sought to appease
critics with assurances that they will
hold companies to account. The votes,
however, show a tendency to defer to
management.
The data in Table 1 also highlights just
how divisive golden parachutes can
be. The average level of support for
management among the ten investors
we analysed is 90%, but the average
level of support for golden parachutes
is only 68%.
Two examples of investors taking
a stand against golden parachutes
were particularly striking. Firstly,
Vanguard are normally very passive,
supporting management 95% of
the time. However, when it came to
golden parachutes they are far more
aggressive, supporting only 40% of
proposals. Even more militant are T.
Rowe Price. They normally support
management 93% of the time, but
voted in favor of golden parachutes
just 14% of the time.
2017 will likely see further escalation
of investor backlash against executive
pay generally. As this process
continues, it will be interesting to
keep an eye on golden parachutes to
see if wider discontent will result in
even more aggressive opposition to
executive compensation proposals.
“INDICATING THAT THERE ARE AT LEAST SOME INVESTORS PAYING LIP SERVICE TO GOOD GOVERNANCE
THROUGH THEIR POLICIES.”
7
Investor Votes For (%) Vote Against (%)
AllianceBernstein LP 70 30
BlackRock 93 7
BNY Mellon 66 34
Dimensional Fund Advisors, Inc. 68 27
Fidelity Management & Research 68 31
Goldman Sachs Asset Management LP 73 17
Northern Trust 99 1
SSgA Funds Management, Inc. (State Street) 90 7
T. Rowe Price 14 83
Vanguard Group, Inc. 40 59
Table 1: Investor voting on Golden Parachute proposals Source: Proxy Insight
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As most public companies approach
the start of Proxy Season 2017, investor
voting policies and the hottest trends
in corporate governance are important
content that highlight issues companies
will face at their annual meetings.
Equally important are the practical
considerations for how to navigate the
proxy advisors, engage with investors,
react to activists and position boards for
successful voting outcomes.
The landscape has changed in 2017.
Most of the fundamental views in
governance are out on the table. Say
on Pay as a ballot item is over five years
old, director independence has been
around over a decade, and Sarbanes-
Oxley drove significant changes in audit
committees nearly fifteen years ago.
What has evolved recently is the way
in which companies interact with the
governance community. A thoughtful
approach and clear messaging to the
various constituents that will influence
proxy season outcomes are as
important as the issues underlying the
narrative.
Here are “seven for seventeen” –
seven helpful hints for the 2017 proxy
season, along with do’s and don’ts for a
successful season.
1. Revisit your proxy advisor outreach
plan
Both ISS and Glass Lewis have new staff
in key roles, with changes in research
leaders over the past year. As the
governance community has expanded
and many proxy advisory leaders have
served in their roles for over a decade,
departures have accelerated and will
likely continue.
In addition, ISS has undergone several
ownership changes in recent years, and
the focus on being a governance data
provider has become a different value
proposition for both customers and
employees. Institutional knowledge and
opinions may not carry the same weight
as in the past, and you may, in some
cases, be meeting with less experienced
staff than you did last year.
Don’t rely on your past messaging to
resonate with proxy advisory firms. With
new staff at both major proxy advisors,
do review and refresh your narrative
to ensure the messaging is clear and
concise.
2. Leverage the benefits of potential
regulation to engage with ISS and Glass
Lewis
With the new Trump Administration,
regulation of proxy advisors may gain
traction. Proxy advisors have more
incentive to engage actively with the
governance community, especially
corporations, so they don’t alienate
companies and add fuel to the arguments
supporting regulation.
Don’t assume that proxy advisors are
not open to thoughtful discussion on the
issues. Do understand and participate
in their engagement channels. ISS has
many approaches to engaging with its
research team, and it is important to
understand what works and what is not
as effective when reaching out to their
staff.
3. Laser-focus your investor approach
Many investors are pressed for time and
struggle with the resources to engage.
Even the large investors have staffing
constraints and must increasingly
quantify which engagement requests
to accept. Their willingness to engage
may also be influenced by their portfolio
holdings and their policy interests.
Don’t treat engagement casually or
assume that what worked in the past
is optimal. Do establish year-round
communication channels, make your
reasons for engagement clear, and follow
up on any agreed-upon action items.
Dr. Martha Carter and Karla Bos of Teneo outline seven useful hints for public companies preparing themselves for the upcoming
2017 proxy season.
Seven for 17Tactical Approaches to Proxy Season 2017
9
4. Be ready to pivot on regulation
Changes are coming at the SEC. With
vacancies at the Commission and
the departure of Mary Jo White, new
personnel and regulatory changes are
forthcoming.
The Republican Congress and the Trump
Administration already have Dodd-Frank
in their sights to repeal or amend key
provisions, including the CEO Pay Ratio
Disclosure, with general industry advice
to carry on for the moment and prepare
for inclusion of the ratios in the 2018
proxy material.
Don’t be caught off guard if new
regulations are implemented or
repealed, or if expectations for rolling
back provisions in Dodd-Frank do not
materialize. Do stay on top of changes
at the SEC.
5. Think activism every day
Activists have had mixed success, with
much coverage of the winners and
losers from the past year. Both groups
remain highly incentivized, and they will
remain part of the landscape.
An activist attack is not only an
opportunity for the activist to create
change, but it will be used as a calling
card for them to gain more investors
for their funds. Investor backlash to
excessive share buybacks and quick
settlements for board seats is trending
in 2017, and investors expect boards
to carefully consider any actions in a
strategic context.
Don’t settle too quickly. Do consider all
activist approaches seriously, ensuring
that a vulnerabilities assessment and
scenario planning are included in the
board’s must-have toolkit.
6. Invest in your board
Board vulnerabilities abound. Serving as
a board member is a part-time job that
requires a full-time commitment, and
can lead to exposure to law suits from
cyberattacks, audit issues or a multitude
of other risk factors.
Directors must have access to the
requisite resources, information, and
support needed to fulfill their fiduciary
duty while recognizing that in some
cases, this includes knowing how
to communicate most effectively in
meetings with investors and proxy
advisors.
Don’t exclude directors from engagement
meetings, since the meetings can be
more successful with the participation
of articulate, independent directors.
Do work with directors, particularly
board leaders, to be more visible in the
governance community.
7. Monitor social media
Monitor the messaging – it matters.
Beyond the traditional journalists and
news outlets, social media can influence
the voting outcome in profound ways,
not just the Presidential election or the
new Administration’s penchant for late
night Twitter messages.
It is important to remember that the
information being disseminated by
other parties does not have to be true;
it just has to be compelling for a social
media audience. Don’t assume that
the traditional news outlets tell the
whole story. Do track social media, and
consider that your investors and proxy
advisors will be exposed to its content.
Along with these tactical approaches
to Proxy Season 2017, investors and
proxy advisors will expect that all of
the engagement and disclosure will
tie back to strategic imperatives and
the creation of long-term value for
shareholders, particularly in a year when
the geopolitical climate is anything other
than what was anticipated.
BlackRock CEO, Larry Fink, was clear in
his 2017 letter to CEOs of BlackRock’s
portfolio companies: “As BlackRock
engages with your company this year, we
will be looking to see how your strategic
framework reflects and recognizes the
impact of the past year’s changes in the
global environment.”
With the continuous impact of political
changes, market developments,
regulatory attention and intensified
shareholder demands, the challenges
for CEOs and boards to navigate Proxy
Season 2017 will be intense. But agile
adaptation, with a focus on both the
strategic and the tactical, can go a
long way towards leveraging the new
challenges and changes to benefit
companies and their shareholders.
Dr. Martha Carter is a Senior Managing
Director and Head of Teneo Governance.
She leads Teneo’s corporate governance
division, advising CEOs and boards of
public and private companies on corporate
governance best practices, activism
defense, executive compensation,
shareholder engagement, strategy, and
other matters that come to the board.
Karla Bos is a Managing Director with
Teneo Governance. Ms. Bos has over 20
years’ experience in the financial and
legal services industry, with an emphasis
on corporate governance. She has a
successful track record of developing and
managing efficient, compliant systems
within fast-paced, rapid-growth, service-
intensive companies.
“THE LANDSCAPE HAS CHANGED IN 2017. MOST OF THE FUNDAMENTAL VIEWS IN GOVERNANCE ARE OUT ON THE
TABLE.”
10
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Issuers cut executive pay
Over the last couple of months,
numerous issuers have cut their
executive pay as a direct consequence
of investor dissent.
Most recently, Safestore pulled its
remuneration policy and long-term
incentive plan after discussions
with its investors. Also in the U.K.,
Imperial Brands, Thomas Cook,
Anglo American and Barclays have all
been forced to scrap executive pay
structures – their remuneration policy,
strategic share incentive plan, share
awards and bonuses respectively –
in relation to the reality, or threat of,
shareholder resistance.
This phenonmenon has not been
exclusive to the U.K., Exelon also
recently cutting its executive pay by
5%, despite excellent performance at
the company. The cut is likely due to
last year’s shareholder revolt at the
company, where approximately 62%
of investors voted against Exelon’s
executive remuneration.
Proxy access in Canada
Last week proxy adviser ISS
recommended in favor of a proposal at
Toronto-Dominion Bank (TD) to allow
board nominations by shareowner
groups holding a 3% stake for three
years.
Canada, under its Corporations Act
and Bank Act, already allows proxy
access. However, due to its high
5% threshold, it is hardly ever used
by Canadian investors. Indeed, TD
opposed the resolution on the grounds
that it was non-compliant with the
Bank Act. Glass Lewis also agreed
with this sentiment and recommended
voting against the proposal.
Nonetheless, ISS and other Canadian
legal experts argue that the Bank Act
does not forbid lower thresholds being
used. Moreover, the Canadian Coalition
for Good Governance argued in 2015
for the threshold for proxy access to
be reduced to 3%. Unsurprisingly, this
faced strong resistance from Canadian
boards.
U.S. firms reawaken their legal
departments
A study produced by Proxy Impact,
the Sustainable Investments Institute
(Si2) and As You Sow, has found a
16 percent increase in submitted
shareholder proposals over the
January to mid-February period this
year, as opposed to last year.
However, the same period has also
seen the reawakening of various
companies’ legal departments, as
firms attempt to fend off shareholder
resolutions. Over the January to mid-
February period, U.S. companies
asked the SEC to omit 114 shareholder
resolutions, 41 of which were removed
by the commission. This represented
a 61 percent increase in company
challenges to shareholder resolutions
in comparison to last year.
Of the shareholder resolutions, 26
percent were on environmental issues
and 21 percent were on political
activity.
PIRC outlines pay ratio analysis
A data analysis conducted by PIRC has
outlined the highest and lowest pay
ratios between a company’s CEO and
its average worker for the FTSE 350.
The companies with the lowest pay
ratios were Shaftesbury, Shawbrook
and Londonmetric Property, all of
which had a ratio of 5:1. Great Portland
Estates, IG Group, Man Group, Jupiter
Find Management and Intermediate
Capital Group (ICG) also featured near
the bottom of the pay ratio table.
At the top of the pay ratio table was
BGEO Group, with a pay ratio of 731:1.
Although this may be due to the fact
that BGEO Group is based in Georgia,
which pay their workers considerably
less than U.K. employees. Sports
Direct came in second, with a pay ratio
of 400:1 Then came G4S (296:1), Evraz
(277:1) and Tesco (258:1).
12
News summaryA round-up of the latest developments in proxy voting.
BlackRock vows pressure on ESG
issues
BlackRock plans to impose new
pressure on companies to explain
themselves with regards to the risk that
climate change poses to their business
and boardroom diversity.
With regards to board diversity,
BlackRock is looking at numerous
issues including adding more women
to company boards. In one of its
documents, BlackRock wrote “diverse
boards, including but not limited to
diversity of expertise, experience,
age, race and gender, make better
decisions.”
According to Michelle Edkins, Global
Head of Investment Stewardship at
BlackRock, although some companies
have shown leadership in areas that
BlackRock considers priorities, others
are “probably not moving fast enough
given the risks to the business.”
ISS updates U.S. FAQs
Global proxy adviser ISS has updated
its frequently asked questions (FAQs)
for its U.S. proxy voting policies and
procedures. Below is a summary of the
main changes to ISS’ FAQs.
With regards to restricting binding
shareholder proposals, ISS has
clarified that it believes that amending
a company’s bylaws is a shareholder
right, and that shareholders should be
permitted to submit binding proposals.
In addition, imposing a supermajority
limit on such binding proposals will be
viewed by ISS as insufficient restoration
of the shareholder right.
If a director receives less than majority
support due to issues of attendance
with regards to board meetings,
ISS will consider a 75% attendance
rate the following year as a sufficient
response to remedy this.
Also on director attendance, ISS has
clarified its board attendance policy.
According to ISS, for companies with
three or fewer meetings per annum,
ISS will not vote against a director if
he/she miss only one meeting despite
the percentage of attended meetings
being below 75%. For new directors
who do not have advanced notification
of meetings, ISS will consider missing
a meeting due to scheduling conflicts
as an acceptable reason. If proxy
disclosure is insufficient to tell if a
director attended at least 75% of
company meetings, then ISS will vote
against that director.
Finally, ISS has clarified its position
on overboarding. According to ISS,
the boards of public companies and
mutual fund families are included
when determining if a director is
overboarded. The boards of non-profit
organizations, universities, advisory
boards and private companies are not
included.
No relationship between pay and
performance?
According to a study conducted by
University of Zurich economist Ernst
Fehr, there is no discernible relationship
between executive pay and company
performance – executives rewarding
themselves if they succeed or fail.
Mr Fehr found no relationship at
all between higher pay and greater
returns at companies, pay going up
despite how companies perform.
The data used was taken from 70 large
companies in Germany, Switzerland
and Austria.
Norway’s oil fund as a shareholder
Norway’s $905 billion oil fund, the
world’s largest sovereign wealth fund,
is one of the biggest shareholders
to vote against companies such as
Apple, Amazon, Berkshire Hathaway
and Facebook last year.
The fund, which owns on average 1.3
per cent of every listed company in
the world, revealed on Tuesday that in
2016 it opposed approximately 6,700
resolutions at annual meetings.
Although over half the oil fund’s against
votes were related to board issues,
such as overboarding and board
independence, the fund nevertheless
also voted on other topics, which
include company auditors and the
rights of minority shareholders.
FTSE Russell on Snap dilemma
The FTSE Russell has decided
to consult with large institutional
investors over whether to allow Snap
Inc. to join its various indexes despite
the fact that Snap’s shares hold no
voting rights.
Apparently, meetings with the
investors will allow the latter a chance
to express their reservations about
allowing companies that prevent their
shareholders voting on important
company issues onto the indexes.
According to Lynn Blake of State Street
Global Advisors, the structure of Snap
is “highly unusual” and its non-voting
shares are “certainly a concern.”
13
“IN THE U.K., IMPERIAL BRANDS, THOMAS COOK, ANGLO AMERICAN AND BARCLAYS HAVE ALL BEEN FORCED TO SCRAP EXECUTIVE PAY STRUCTURES.”