pulling teeth: an interview with john chevedden at … · across the atal ntci , harte hanks has...
TRANSCRIPT
www.proxyinsight.com
January 2018Volume 5, Issue 1
VOTING NEWS
PROXY MONTHLY
AT THE FOREFRONT OF STEWARDSHIP: WITH APG’S DAVID SHAMMAI
PULLING TEETH: AN INTERVIEW WITH JOHN CHEVEDDEN
This year’s largest story so far
is without doubt Larry Fink’s
annual letter to the CEOs of
corporate giants. In the letter, the chief
executive of BlackRock outlined some
of the expectations the world’s biggest
asset manager has for the coming
year, including that firms should make
“a positive contribution to society,” as
opposed to merely concentrating on
growth. Many analysts have taken the
letter as a sign that BlackRock will vote
more aggressively in the future.
In other news, governance concerns
have so far been the theme of 2018,
with numerous dramas emerging all
over the world. In the UK, this month has
been preoccupied with the liquidation of
construction giant Carillion. Speaking
on the company’s downfall, the Institute
of Directors (IoD) accused Carillion’s
directors and shareholders of failing
to provide “appropriate oversight.” In
addition, the collapse of Carillion has put
government intervention back on the
menu, with Prime Minister Theresa May
declaring that she will introduce new rules
to protect worker pension schemes and
fine companies that fail to do so.
Across the Atlantic, Harte Hanks has come
under pressure to improve its corporate
governance from its second-largest
shareholder, Fondren Management.
According to a filing with the US Securities
and Exchange Commission, the hedge
fund intends to speak to other investors
about the immediate need for a new
chairman with industry experience and a
refreshing of the board to rid it of directors
with excessive tenures.
In South Africa, the recent collapse in
Steinhoff’s share price following the
resignation of the company’s chief
executive, Markus Jooste, amid allegations
of fraud has raised questions about dual-
listing in South Africa. Indeed, Steinhoff’s
compliance with the Dutch corporate
governance code and two-tier board
structure conflicts with much of South
African standard corporate practice. This
fact has led some to demand that dual-
listed companies in South Africa adhere
to the country’s King code of corporate
governance.
Finally, in Switzerland, the PK Post pension
fund is reconsidering its membership of
the proxy voting foundation Ethos due
to concerns about the organization’s
corporate governance. The fund’s
managing director, Françoise Bruderer
Thom, held a seat on Ethos’ trustee board
until late in 2017. However, Ms Thom had
demanded the resignation of the president
of Ethos’ supervisory board, Dominique
Biedermann, due to a conflict of interest.
His wife, Yola Biedermann, is the head of
Ethos’ corporate governance department,
which puts managing director Vincent
Kaufmann in the unenviable position of
being “the boss of his boss’ wife.”
When Mr Biedermann refused to stand
down, Ms Thom herself resigned in protest
of what she deemed as governance
problems at the foundation.
This month we have two interviews. The
first is with the venerable shareholder
proponent John Chevedden. For our
US readers, Mr Chevedden needs no
introduction, as one of the country’s most
well-known advocates of improving the
governance of corporate America.
In the interview, we discuss with Mr
Chevedden the various difficulties he
has getting his proposals onto company
ballots, as well as getting a company to
fully implement them if they pass. He also
outlines his most frequent shareholder
proposals for this year’s upcoming proxy
season.
Our second interview is with David
Shammai, Senior Governance Specialist
at APG. APG plays a leading role in
Europe’s pension sector, best known for
administering the Netherlands’ enormous
ABP scheme. In the interview, we discuss
how APG strives to be at the forefront
of global best-practice, as well as what
corporate reforms David would like to see
introduced both domestically and in the
wider international context.
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.
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How do you decide which governance
practices to address each year?
Generally, we look for areas where
companies could improve their
governance and at issues which we
believe shareholders will support to a
significant extent.
There are a number of topics that we
can predict will likely receive a lot of
support – i.e. 30 to 40 percent and
more. However, we are sometimes
surprised with the level of support a
proposal receives.
For instance, shareholder proposals
asking for an independent board
chairman sometimes receive levels
of support in the 40s seemingly out
of nowhere. Indeed, levels of support
for particular proposals sometimes
jump up over the course of a couple of
proxy seasons, which can be difficult
to predict.
Of course, the reverse also happens,
where a proposal receives far lower
support than what was expected.
What are this season’s hot topics going
to be?
This year we are doing variations of
topics that we have done before. Of
course, most of the proposals have
already been submitted for this year.
As we are in the first quarter, we are
currently in the scramble over which
proposals are published and which are
not.
Beyond 2018, we have no idea what
the future corporate governance trends
will be. We plan to look at the corporate
governance profiles of companies
more intensely when the time arrives.
What are your favorite company
responses to your proposals?
Well I don’t think I have any responses
that I would describe as ‘favorites.’
Some companies are more cordial
and polite than others, but that doesn’t
mean they have any qualms about
stabbing you in the back with a no-
action request.
Very few companies have an ethical
problem with attempting to find any
small fault in a proposal they possibly
can in order to exclude it from their
meeting. Some companies even send
you a pre-no-action letter objecting to
the use of specific words in a proposal.
It goes back to the early 2000s, where
the SEC would micro-manage every
line of proposals. As a result, the
SEC would exclude a sentence if, for
example, there was a mistake over the
use of dates when quoting a source.
In the end, the SEC very soon after
decided to get out of the business
of micromanaging every little detail
of a proposal. However, the practice
of companies sending out letters
castigating proponents for every little
technicality continues today.
What are some common mistakes
companies make responding to your
proposal?
Well some companies just want to talk
for the sake of talking. They are not
serious about the proposal. As a rule
of thumb, the firms that want to talk the
most plan to do the least.
For instance, they might ask open-
ended questions, or say that they are
not going to adopt your proposal, but
maybe there is something smaller that
they can do for you in the hope that you
bid against yourself. Some companies
don’t want to do anything, but they
also want to say that they have tried,
no matter how small their reaction to
it. You can tell pretty quickly when a
company is serious about adopting a
proposal.
Companies are now arguing to the
SEC in no-action requests that they
do not need a less rigid version
of proxy access because they
have an engagement process with
shareholders. They contend that the
SEC should take the company’s word
that shareholders are happy with
the status quo. Imagine a so-called
informal engagement process taking
the place of a shareholder vote on any
important governance issue.
Pulling TeethDiscussing corporate activism with shareholder proponent John Chevedden
5
Are you as tough a negotiator as
they say?
That’s a hard question. Companies
are often reticent about the process
by which their board has discussed
a proposal put forward. I sometimes
ask for a reference to a record of
the board approving one of my
proposals as evidence, and yet
receive nothing. They merely say
that they will adopt it, and then
eagerly request that I withdraw my
proposal on that basis.
I want to avoid the excuse that
a sudden crisis conveniently
happened around the time of the
company meeting and the promised
company action lost its place in line.
Sometimes companies will say that
they have new management, and as
you will like what they are planning
to do, why not hold off on your
proposal for a year.
So, as a negotiator, I have to
get something concrete from
companies. It often feels like you’re
pulling at teeth for details, when in
reality you really are just asking for
reasonable evidence.
What do you wish the SEC would
change about the no-action
process?
Well it is not just the no-action
process that is the problem. Often
companies will put one of my
proposals forward at their meeting
safe in the knowledge that the
ancient 80 percent vote requirement
bylaws of the company will prevent it
from passing.
I had one proposal that received
around 79 percent support, but
because the bylaws of the company
required 80 percent votes in favor for
the specific changes it failed despite
an overwhelming majority of support.
There was another proposal that was
approved by a 200 to one margin on
votes cast, but failed to receive the
required 80 percent support.
Even when a proposal receives
enough investor support, that does
not mean that it will be substantially
implemented. Often when a company
takes action to address shareholder
concerns, it takes some baby steps
in the right direction. As a result, you
have to go back the year after with
the same issue in an effort to see its
full implementation. Of course, then
the company will attempt to exclude
such follow-up proposals on the
grounds that they have supposedly
already implemented it.
Therefore, if shareholders want to get
the full advantage of a certain topic,
they have to keep re-submitting the
same proposal topic year after year
to make additional progress. Even
when a proposal has been fully
implemented, companies frequently
take credit for its introduction in their
opposition statements to proposals
on subsequent topics.
What are the top-3 proposals
you submitted (ignoring no action
process) most frequently this
season?
For 2018, I have submitted a number
of proposals on the shareholder right
to call a special meeting and to act
by written consent. Also, a number of
independent board chair proposals
– especially when companies have
weak lead directors.
Thank you John.
9
“SOME COMPANIES ARE MORE CORDIAL AND POLITE THAN OTHERS, BUT THAT DOESN’T MEAN THEY HAVE
ANY QUALMS ABOUT STABBING YOU IN THE BACK WITH A NO-ACTION REQUEST.”
ICompany Meeting Date Proposal Type % For*
Cognizant Technology 06-Jun-17 Eliminate/Reduce Supermajority Vote Requirements [S] 99.78
Dana Inc. 27-Apr-17 Eliminate/Reduce Supermajority Vote Requirements [S] 80.29
Marathon Petroleum 26-Apr-17 Adopt Majority Vote as Standard [S] 72.63
Netflix Inc. 06-Jun-17 Approve Declassification of the Board [S] 62.89
BorgWarner Inc. 26-Apr-17 Right to Act by Written Consent [S] 61.93
Table 1: Key Proposals Submitted by John Chevedden in 2017 Source: Proxy Insight
*Total support based on For and Against votes only
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Could you briefly outline for us how
APG approaches its proxy voting
responsibilities?
Our proxy voting activities are integral
to our stewardship obligations. We are
committed to voting in all shareholder
meetings held by companies in which we
own shares. In practice, given technical
issues such as share blocking, this
translates to voting in well over 95 percent
of the meetings across all markets.
The voting process at APG has evolved
over the years. It has now matured to a
point where the responsibilities are very
clear to all involved. The governance
team is tasked with executing the votes,
whereas the investment teams contribute
to many of the voting decisions, depending
on the issue and on the portfolio position
of the stock.
Our voting process is therefore a
collaborative one with governance
specialists, wider sustainability
professionals as well as portfolio
managers, all involved as needed. Typically
decisions are made unanimously, but we
have a clear route for policy exceptions
and decision escalation if needed.
As the custodian of Europe’s largest
collection of pension funds, is there
anything that differentiates your
responsibilities from those of the average
Dutch asset manager?
Institutional investors in the Netherlands
are generally very mindful of their
stewardship duties and this leads to a
typically high quality of stewardship.
We work together with other investors
(Dutch and international) via a number of
initiatives. For example, Eumedion, where
we are actively involved in the work of
several committees. Such collaboration
ensures that ideas for evolving practice are
shared throughout different institutions.
Representing the largest pool of pension
funds in the Netherlands and servicing
clients that are household names
domestically – including ABP, SPW
and bpfBOUW – does, however, add
an additional layer of sensitivity for us. It
means that we have to continuously strive
to be at the forefront of evolving best
practice. A comfortable middle position is
for us just not good enough.
For example, we were one of the first
managers to start looking at the carbon
footprint of our portfolios several years
ago, and during the end of 2015 introduced
reduction targets. Having continuously
pushed the envelope of this issue working
with our clients since, we were pleased
that our efforts were acknowledged, with
the AODP awarding us top spot in their
2017 survey of global asset managers.
Is there any corporate practice globally
that APG would also like to see introduced
to the Dutch market?
Dutch corporate governance has
traditionally been at the forefront of
international developments.
Recently, the Dutch corporate governance
code was updated and again we have
seen a pioneering approach in several
areas. Examples include an emphasis
on investment for the long-term, or the
clarification that ensures the board is
responsible for overseeing management
in respect of corporate culture.
In addition, a group of Eumedion
participants is currently working on the
revision of the Eumedion best practices of
engaged share-ownership, and is looking
to develop them into a Dutch Stewardship
Code similar to that of some other markets.
The consultation period on the draft Dutch
Stewardship Code closed last month and
the draft is expected to be finalised and
come into force sometime next year.
At the same time, there have been other
developments, which at APG we were
more apprehensive about. I am referring
to the issue of expanding the scope of
takeover defences. There should be
a way to protect important industrial
interests, sustainability concerns etc, and
at the same time support the creation
of long-term value. The recently formed
Dutch coalition government (‘Rutte-
III’) agreement proposed to include a
‘reflection period’ of 250 days for Dutch
listed companies if they are faced with
proposals for a fundamental change of
strategy at the AGM.
At the Forefront of StewardshipDiscussing the Netherlands and beyond with David Shammai, Senior Governance Specialist at APG
8
However, this reflection period will not be
on top of any existing takeover defences,
such as anti-takeover preference shares
or priority shares.
As a pension asset manager, will the
EU Shareholder Rights Directive (SRD)
help you better implement your investor
activities and responsibilities?
In short, yes. There are many very positive
elements included in the SRD that bolster
minority shareholder rights, contribute
to shareholder participation in meetings
and more generally improve the quality
of stewardship. It is great to see that at
an EU level there is a continued effort to
develop this further, and we were pleased
to hear about the recent commissioning
of a group of experts on technical aspects
of corporate governance processes.
In a number of European markets we
have seen an increase in the rates of
participation in shareholder meetings.
This is a very positive development
and we welcome the efforts to improve
technical aspects, such as shareholder
identification and streamlining voting
chains. Both of these would underpin
the growing demand, in our view,
for companies to engage with their
shareholders.
What would be the main reason for your
opposition to share issuance proposals?
In most cases where we vote against
the issuance of shares it is because the
size of the authority to issue shares is too
large in our view. Generally, we accept
issuances of 20 percent with pre-emptive
rights and 10 percent without pre-emptive
rights. If the requested issue exceeds 20
percent, we expect the company to give
a justification. Although we are aware and
recognise that local laws and regulations
may permit larger issuances, we expect
companies to limit their share issuance
requests to what works for them and
what they can justify to their shareholders.
Proxy Insight data shows that APG is
considerably more aggressive when
voting on director re-election proposals
than your average global asset manager.
What would you say are the main factors
that would make you oppose the re-
election of a director?
Votes against the appointment of
directors are predominantly based on
a lack of independence of the board or
board committees. We generally expect
unitary boards to be mainly composed
of non-executive directors, a majority
of which should be independent. The
supervisory board of a company with two
governing bodies should, according to
our policy, be composed of non-executive
directors only, of which the majority
should be independent. It is critical in our
view that certain key committees – the
audit committee being a clear example –
should be fully independent.
How does your voting policy address the
specificities of regional markets?
Our corporate governance policy from
which we derive our voting policy, is
essentially global. It is a commonly
repeated observation that capital markets
are interconnected globally. Certainly
from the perspective of an international
investor we have a choice of markets
within sectors. For example, if we target
a certain level of sector exposure, this can
be achieved by investing in companies
from a number of markets.
APG is invested in over 50 markets, it
would be confusing to the companies
we are invested in if we had separate
policies for each market. In terms of broad
principles, we support the functioning of
the board, committee independence and
remuneration alignment. For us, these are
all market agnostic.
However, we do allow for certain variations.
For instance, this year we have extended
our European remuneration guidelines to
also apply to our US holdings and in doing
so we allowed for some nuances to cater
for local practice. Another example is the
way we apply some of the independence
requirements to our portfolio companies
in Asia. Again, it is not that we think that
board independence is less important in
some markets. It is just that for pragmatic
reasons we acknowledge local variations
in applying the principles.
If APG could introduce one reform to the
global corporate governance landscape
what would it be?
That is a tricky question to answer. A
few candidates could easily top the list:
one share, one vote or CEO-chairman
separation are still ongoing issues. As is
investors’ drive to improve remuneration
structures. Our top one, however, at least
at the moment, is for there to be clarity
for all investors (via stewardship) and
directors (via their legal duties) to consider
governance and sustainability in their
roles. It will contribute in our view to a
much more stable and resilient financial
system, as it will ensure that financial
markets are long-term aligned throughout
the investment chain.
Luckily though, this particular reform we
hope is also on its way, at least in Europe!
The EC commissioned the High Level
Expert Group on sustainable finance, of
which APG’s Claudia Kruse is a member,
has indicated in its interim report that it
is considering recommendations along
these lines.
Thank you David.
9
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Toyota puts the brakes on adviser
appointments
Toyota is to halt the automatic
appointment of newly-retired directors
to advisory roles. This was previously
Toyota’s standard practice for all retiring
directors, and the company currently
has just under 50 advisers and senior
advisers.
Advisers are among the more
controversial aspects of Japanese
corporate governance. Critics say that
appointing former senior managers
to adviser positions allows them to
continue to influence the company
after their retirement, with little
accountability and only loosely-defined
responsibilities.
Toyota has historically been among
the companies to employ the practice.
Presidents and vice-presidents have
been appointed to serve as senior
advisers for four years, while other
senior figures have been appointed as
advisers on one or two-year contracts.
Toyota is not writing off the concept of
adviser appointments entirely. However,
the company will cease offering adviser
roles to retired directors automatically
and will shorten the length of their
contracts. Standard and senior advisers
will now be appointed for one year, and
only with the approval of the board. A
committee, made up of 50 percent
independent directors, will be tasked
with reviewing advisers’ roles and
remuneration. Later this year, Toyota
will also begin disclosing information
on its advisers in accordance with new
Tokyo Stock Exchange rules.
The IPO struggle heats up in Asia
Following the lead of its rival in Hong
Kong, Singapore’s exchange has
recently declared that it will allow
companies with dual-stock structures
to list. Although dual-stock structures
have come under criticism from
investors who fear the dilution of their
voting rights, competition for high-
profile tech IPOs has forced Singapore
to follow suit.
The Monetary Authority of Singapore
said that it supported the decision of
the country’s exchange. However, it
also noted that it would look at the
safeguards put in place by the exchange
in order to mitigate the risks involved in
allowing dual-stock structures to list.
The exchange has also said that it
plans to go ahead with the introduction
of stock futures for large Indian firms.
This is despite the fact that The National
Stock Exchange of India Ltd. has asked
Singapore’s exchange to delay their
introduction.
Persimmon CEO defends his £110
million bonus
The CEO of UK housebuilder
Persimmon has defended the bonus
scheme which is controversially
awarding him £110 million. The award
is believed to be the UK’s largest ever,
and has drawn criticism from politicians
and campaigners.
The bonus is the result of an uncapped
share scheme put in place several
years ago. Since the scheme was
originally created, Persimmon’s share
price has rocketed as a result of
the UK government’s “Help to Buy”
scheme driving up demand for new
homes — and driving the value of
CEO Jeff Fairburn’s bonus far higher
than the board could have predicted
when creating the scheme. Around
half of those buying properties from
Persimmon are now using Help to Buy.
In defense of the award, Mr Fairburn
said: “You’ve got to put this in the
context of what has been achieved...
The scheme is about 140 individuals
and it’s always a team effort. Of course,
I’m responsible at the end of the day
and the business has done very well.”
Confusion reigns over exclusion of
shareholder proposals
A recent SEC staff bulletin said
companies could exclude shareholder
proposals that address “ordinary
business” as this is the remit of
management. However, many remain
unsure about just how far this license
will stretch.
11
News summaryA round-up of the latest developments in proxy voting
12
“IN TOTAL, LAST YEAR SAW 163 COMPANIES IN THE US HOLD FULLY-VIRTUAL MEETINGS, ACCORDING TO GLASS
LEWIS.
The bulletin initially sparked fears that
companies would have too broad a
remit to exclude valid shareholder
proposals. Last month, however,
the SEC refused such a request by
Apple. The tech giant pointed to the
bulletin in its attempt to avoid tabling
a shareholder proposal calling for the
creation of a human rights committee.
The SEC refused the request, saying
that the board had not made it clear
why they felt the proposal was not
raising an important issue.
In isolation, this might have offered
some clarity, as well as some
reassurance to those who fear that too
many proposals could be written off as
“ordinary business.” In fact, the refusal
of Apple’s request only added to the
confusion about the bulletin’s reach. On
the same day, another, similar request
from Apple was upheld. The SEC ruled
that a proposal to set zero-emission
targets for greenhouse gases “seeks to
micromanage the company by probing
too deeply into matters of a complex
nature upon which shareholders...
would not be in a position to make
an informed judgment.” According to
the proponent, similar proposals have
previously been allowed by the SEC.
Shareholders winning real victories
against virtual meetings
Shareholders who are unhappy with
virtual-only meetings are successfully
making their voices heard. A number
of companies have reversed decisions
to hold fully-online annual meetings as
a result of shareholder protests.
ConocoPhillips was one company
to receive a slap on the wrist. Last
year’s meeting was held virtually, but
shareholders were not impressed
and their objections have led the oil
company to switch back to physical
meetings. Union Pacific Corp had a
similar experience with its 2017 virtual
AGM, and will also be holding a more
traditional meeting this year.
In total, last year saw 163 companies
in the US hold fully-virtual meetings,
according to Glass Lewis. This is
up from 122 the previous year, but
many investors are not impressed. A
number of large asset managers and
investment organizations are actively
opposing the practice, including the
New York City Comptroller and the
Council of Institutional Investors.
Tim Smith of Walden Asset
Management said: “A virtual-only
meeting is a totally disembodied
event online — there’s no exchange
or opportunity for investors to look the
board in the eye.”
Duke Energy to disclose effects of 2
degrees scenario
Duke Energy has decided to report
on how its business operations will be
affected by a 2 degree rise in global
temperatures in accordance with the
2016 Paris Agreement. A shareholder
proposal asking the company to do
just that was put forward at Duke
Energy’s annual meeting last year. It
came just short of a majority, with over
46 percent support.
The proposal was put forward by
New York State Comptroller Thomas
P. DiNapoli. Following Duke Energy’s
declaration that it would report on
the operational risks posed by climate
change, Mr DiNapoli said in a news
release: “Duke Energy is listening to its
shareholders who need to know how
the company is preparing to address
the risks and opportunities presented
by the worldwide efforts to mitigate
climate change.”
In addition, a Duke spokesperson
said in an email that: “Duke Energy
recognizes that climate change is a
key issue for many of our customers
and shareholders. As we’ve met with a
variety of stakeholders, we discussed
how Duke Energy is working toward
a lower carbon future, modernizing
our system to meet the needs of our
customers and strengthening our
system against extreme weather
events. To make this information more
accessible, we plan to publish in the
first quarter of 2018 a climate report
that details our progress to date and
our strategy moving forward.”
Lloyds to keep cash bonus cap as it
returns to private ownership
Lloyds Banking Group has decided to
keep the £2,000 cap on cash bonuses
imposed on it by the UK government
despite ridding itself of its remaining
government shares last year. According
to an insider at the bank, “there are no
plans to change it” as the bank moves
back into full private ownership.
Following the 2008 financial crisis,
comprehensive reforms were put in
place, which mandated that banks pay
the majority of executive bonuses in
deferred shares. These share awards
can be clawed back up to seven
years after the point at which they
were granted – 10 years if there is an
ongoing investigation.
Many observers believe that Lloyds’
decision to keep the cap on cash
bonuses and instead pay its senior
executives mostly through deferred
share awards will put pressure on
other banks to do the same.