ISS Raises the Stakes on Shareholder Proposal Votes: Will Recommend Against Electing Boards that Fail to Respond to Majority-Supported Shareholder Proposals in 2013

by Proskauer Rose LLP
Contact

Institutional Shareholder Services ("ISS") has made it much more difficult for boards to disregard advisory votes on shareholder proposals. In the proxy advisory firm's 2013 updates to its influential proxy voting guidelines released on November 16, 2012, ISS announced that, beginning in 2014, it would recommend a vote "against" or "withhold" from directors (except new nominees) if the board failed to act on a shareholder proposal that received the support of a majority of votes cast during the 2013 proxy season or subsequent years.[1] Previously, and for the 2013 transition season, ISS's policy is to recommend a negative board vote if the board fails to act on a shareholder proposal that either received the support of a majority of the shares outstanding the previous year, or that received the support of a majority of shares cast in the last year and one of the two previous years.

In October 2012, ISS had proposed adopting the new board responsiveness policy for 2013 director elections.[2] But it appears that ISS has been persuaded by commentators who criticized a 2013 implementation of the policy change that would have, in effect, retroactively penalized board inaction regarding 2012 shareholder proposal votes. Had the policy been adopted as proposed, the policy change, according to ISS, would have increased the number of companies facing a negative vote recommendation in 2013 by 24.

ISS attributes its change in policy to what it calls an evolving marketplace in the matter of board responsiveness to majority-supported shareholder proposals, in both institutional investors' expectations, and in the practices of issuers. ISS asserts that 86% of the investors that participated in its 2012-2013 policy survey "expect that the board should implement a shareholder proposal that receives support from a majority of shares cast in the previous year." At the same time, ISS observed an increasing willingness of companies to conform to majority-supported shareholder proposals. It reported that 50% of the proposals that received only one year of a majority of votes cast in 2012 were implemented, as compared to 37% in 2009.

Although it is difficult to establish a strictly causal relationship between proxy advisors' recommendations and voting outcomes, according to a 2012 study commissioned by the Investor Responsibility Research Center Institute, academic researchers have found strong correlations between proxy advisors' recommendations and shareholder voting outcomes.[3]

2012 Voting Results that Could Have Exerted Much Greater Pressure on Boards

The Conference Board's "Proxy Voting Fact Sheet,"[4] which examines shareholder proposals made during the first six months of 2012, indicates that of 719 shareholder proposals filed during that period with the Russell 3000 companies, the largest proportion of those proposals related to corporate governance—352 proposals. Even after eliminating the proposals that were withdrawn or appropriately excluded by issuers under SEC Rule 14a-8, approximately two-thirds of the 352 proposals (232) were voted on.

The results of those shareholder votes on governance proposals illustrate the potential impact of the ISS policy change on board responsiveness. On average, only 37.6% of the shares outstanding were voted in favor of the proposals, well under ISS' old standard that triggered a negative director vote recommendation only if a majority of the outstanding shares were voted for a proposal the prior year. However, the average "for" vote among all votes actually cast on shareholder governance proposals was 49.2%, a hair's breadth away from a majority vote that would put pressure on those boards to implement the related proposals.

How Can Boards Prepare for 2013 Shareholder Proposals?

In view of ISS' policy change, which goes a long way toward making mandatory those shareholder votes that are technically advisory, boards may wish to consider:

  • engaging with shareholders whose proposals appear not to fully account for important countervailing considerations,

  • mounting a campaign to actively oppose, rather than simply recommend against, shareholder proposals that are ill-advised, or

  • as appropriate, launching an alternative proposal for a vote of shareholders.

Assuming a shareholder proposal qualifies for inclusion in a company's proxy statement (i.e., it may not be excluded on any of the grounds specified in SEC Rule 14a-8), companies have the opportunity, long before the matter is actually submitted to a vote of shareholders, to persuade the proponent to withdraw its proposal. Proposals that relate to corporate social responsibility, in particular, lend themselves to productive dialogue in which companies and proponent shareholders jointly seek out paths for successfully mediating social and corporate objectives. Often, proposals are withdrawn on the basis of (a) mitigating corporate considerations that the proponent was not fully aware of prior to such dialogue, or (b) a program crafted by the issuer that meets most, if not all, of the shareholder proponent's objectives.

Barring a productive dialogue with a proponent that leads to a proposal's withdrawal, boards can choose either to campaign against the proposal or preempt it, as permitted under SEC Rule 14a-8(i)(9), by putting its own proposal to a shareholder vote.

Whatever response or sequential responses a board chooses to avail itself of – advance preparation, in most cases, led by the board's corporate governance committee – should contribute substantially to a more balanced and effective process.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Proskauer Rose LLP | Attorney Advertising

Written by:

Proskauer Rose LLP
Contact
more
less

Proskauer Rose LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.
Feedback? Tell us what you think of the new jdsupra.com!