Benchmarks Significant Developments in Shareholder Activism, Proxy Access and Compensation Governance
The 2015 proxy season was a year of continued evolution in the areas of corporate governance and compensation practices, according to the annual analysis of the largest U.S. public companies by leading global law firm Shearman & Sterling.
Shareholder activism intensified, as more companies were the targets of activist campaigns and were forced to vociferously engage with shareholders. This year, eight of what the firm calls the “Top 100 U.S. Public Companies” (as determined by revenue and market capitalization) were subject to an activist campaign, up from six companies in 2014.
“As we said in our survey, shareholder activism is here to stay,” says Shearman & Sterling Mergers & Acquisitions partner David Connolly. “Since no company is immune from shareholder activism, all companies must ensure that they are regularly engaging with shareholders and have a strategy in place to address a potential activist campaign.”
Adds Rory O’Halloran, another of Shearman & Sterling’s Mergers & Acquisitions partners, “One size never fits all, and that is certainly the case with shareholder activism. While we have seen shareholder activism in many forms—for example, pressure exerted via shareholder proposals—hedge funds and similar investment vehicles, in particular, are increasingly applying pressure on corporate Boards to attain the kinds of outsized returns they and their investors are expecting.”
Key 2015 shareholder activism findings include:
- Of the eight activist situations at the Top 100 Companies, four focused on M&A/spin-off transactions, three sought to return cash to shareholders or reduce expenses and one sought governance practice reform.
- In six of these situations, the activist used a publicly disclosed letter or presentation in the course of its campaign.
In addition to the survey of the Top 100 U.S. Public Companies, this year’s survey also includes a comprehensive drill-down on proxy access. The firm surveyed a set of 122 companies, all of which received a shareholder proxy access proposal, put forth a management proxy access proposal or adopted a proxy access bylaw in 2015 and then examined the different approaches taken by those companies and the results.
In the 2015 proxy season, the survey found a dramatic increase in the number of U.S. public companies that received shareholder proxy access proposals—from just 20 in 2014 to 112 in 2015.
“Proxy access is a part of every conversation around corporate governance,” says Shearman & Sterling Capital Markets partner Stephen Giove. “This is arguably the area, within our entire 2015 survey, of most significant change. It is no longer a question of if shareholders will seek proxy access but when.”
Key 2015 findings include:
- Nearly all shareholder proxy access proposals put forth during the 2015 proxy season received significant support, with 89 percent of these proposals receiving at least a 40 percent vote in favor.
- 59 percent of shareholder proxy access proposals passed with an average vote in favor of 54 percent.
- 37 companies adopted, or committed to adopt, a proxy access bylaw in 2015.
Board leadership and diversity
The key Board leadership issue—the separation of the offices of CEO and chairman—remains a hot button. The survey found that, despite increased attention and shareholder pressure in this area, CEOs at 63 of the Top 100 Companies also served as chair of the Board.
Board diversity remains an important issue, and the survey found that women held approximately 22 percent of the total number of seats at the Top 100 Companies in 2015—a number relatively unchanged over the past three years. In addition, of the 46 new directors added to the Boards of the Top 100 Companies, only eight (or 17.4 percent) were women.
“The issue of gender diversity has gotten a lot of attention over the past few years,” says Shearman & Sterling Capital Markets partner Danielle Carbone. “With women comprising only 17.4 percent of new Board members in 2015, it is fair to ask if companies are really moving the needle in this area.”
Key 2015 findings include:
- 16 of the Top 100 Companies have Boards composed of 30 percent or more women directors.
- The average Board tenure at the Top 100 Companies is 8.44 years.
- A woman served as the CEO at 11 of the Top 100 Companies and as CFO at 14 companies.
Always a key focus of Shearman & Sterling’s Corporate Governance Survey, findings in the areas of compensation disclosure and practice once again suggested that a considerable amount of attention continues to be focused on these issues. Driven by the SEC’s efforts to enhance compensation disclosure, 87 of the Top 100 Companies disclosed that they maintain a financial clawback policy, with 67 of those companies leaving it to the Board’s discretion as to whether to seek enforcement.
“Say-on-pay, clawbacks, compensation-related proxy disclosures, pay-for-performance rules, pay ratios—there is so much happening—and at times with some urgency—at U.S. public companies,” says Shearman & Sterling partner Doreen Lilienfeld, who leads the firm’s Compensation, Governance & ERISA practice. “It is often very difficult for companies’ compensation committees to juggle so many balls at the same time. But these are important considerations and are generally on the minds of most shareholders, so these must remain critical priorities of the Board.”
Key 2015 findings include:
- 99 percent of the companies that held a say-on-pay vote in 2015 received approval.
- The survey found that 52 of the Top 100 Companies included some form of alternative pay disclosure in their CD&A.
- 61 of the companies provide severance benefits to one or more of their NEOs (named executive officers).
- 95 of the Top 100 Companies maintain stock ownership guidelines for their directors and executives, a slight increase from 92 companies in 2014.