Is it Proxy Season Already? Lessons Learned from the 2018 Season

King & Spalding

For governance professionals, the fourth quarter of the fiscal year generally marks the kick-off for the next year’s annual meeting and proxy season.  Over the past two years, public companies have seen a sharp rise in shareholder support for environmental and social proposals, continuing focus on compensation issues extending beyond the “say-on-pay” vote, and an even greater emphasis on proactive shareholder engagement. 

This Client Alert discusses lessons learned from the 2018 proxy season and offers guidance to assist public companies in preparing for the 2019 proxy season. For additional information, see our 2018 Proxy Season Review here.

Environmental, Social and Governance Issues (“ESG”)

While governance issues have been in the spotlight for a number of years, BlackRock CEO Larry Fink’s January 2018 annual letter sent a shock wave through the governance community due to its focus on a broader spectrum of ESG issues.  Fink challenged public companies to “not only deliver financial performance, but also show how [they] make a positive contribution to society.”  He added that “Companies must benefit all of their stakeholders, including shareholder, employees, customers, and the communities in which they operate.”[i]  Once the target area of specialty investors, environmental and social issues are now a high priority for mainstream investors.  In 2017, the assets under management for investors who have committed to incorporate non-financial metrics into investment decision making was estimated at $70 trillion,[ii] and investors across all asset classes are focusing on more complex issues surrounding the linkage between ESG issues and financial performance, capital allocation and long-term planning. 

While the total number of environmental and social shareholder proposals fell from 214 proposals in 2017 to 160 proposals in 2018, shareholder support for proposals that reached a vote was strong – a record of nine ESG proposals passed in 2018 (compared to six in 2017), while another 19 ESG proposals received support of 40% or more.[iii]

In preparing for 2019, Companies should carefully review the non-financial priorities of their shareholders and consider how the company is addressing these matters.  Companies should review their existing public disclosure and take advantage of the ESG momentum to tell their stories and take credit for positive ESG initiatives.  Investors expect to see a clear articulation of the company’s strategy, how ESG risks are considered as part of that strategy and the role of the board in overseeing both execution of the strategy and management of the related risks. 

Board Composition and Expertise

Board composition and expertise remain key priorities for many leading investors.  Numerous institutional investors, led by State Street Global Investors (”State Street”) and BlackRock, continue to push for diversity—particularly gender diversity—on public company boards.  State Street recently announced it had voted against directors at 400 companies for failure to improve gender diversity at the board level.  California’s recently enacted law mandating the addition of women on the boards of public companies headquartered in California adds another element to the diversity discussion.[iv]  While the law is expected to face legal challenges, public companies headquartered in California should consider how they would respond if the law remains effective, and all public companies should consider the forces that led to the enactment of the law.

Similarly, investors are focused on board expertise.  The Office of the NYC Comptroller’s Board Accountability Project 2.0 requested 150 public companies to disclose a board matrix focusing on director skills, expertise, diversity and tenure, among other issues.  The Comptroller also requested that these companies disclose, as soon as practicable, a meaningful director qualifications matrix identifying each director’s skills, experience and attributes. 

While there is no “one size fits all” disclosure regime for describing board skills and qualifications, in preparing 2019 proxy disclosures, each public company should clearly articulate the particular skills represented on its board to give investors a “big-picture” view of the criteria the board deems appropriate in its membership .  Robust disclosure will allow a better assessment of how well-suited individual directors are for service on the board, including how the existing board composition addresses diversity.

Compensation Issues

While support for say-on-pay votes remained strong in 2018, average shareholder support trended down slightly, from 91.7% in 2017 to 90.4% in 2018 (the lowest since 2012 when it was 89.8%).  In addition, there was an increase in the number of failed say-on-pay votes for Russell 3000 companies, with 51 in 2018 compared to 35 in 2017.   These trends reflect continued focus on the use of pay metrics that support a company’s disclosed strategy and the alignment of executive pay with performance.  

Ahead of the 2018 proxy season, State Street announced that it would begin using “abstain” votes to express a more nuanced message of dissatisfaction with executive pay proposals in situations where it previously would have reluctantly voted “for” the proposal.  State Street has reported that it used this “abstain” approach for approximately 2.5% of its votes in 2018.[v]  Other investors similarly signaled the importance of pay for performance through their say-on-pay votes.  Calpers voted against 43% of compensation packages in 2018, citing “enhanced voting practice on compensation” over concerns about rising CEO pay with no corresponding investment returns for shareholders.

2018 marked the first year for most companies’ CEO pay ratio disclosures.  While the reaction to these disclosures has been relatively muted thus far, the 2018 data will serve as a benchmarking baseline for institutional investors and proxy advisory firms going forward and may be a factor in close say-on-pay votes.

Director compensation has also come under scrutiny in 2018, as compensation for non-employee directors continues to increase.  Median pay for non-employee directors of the largest 100 U.S. companies rose 3.4% in 2016, with half the largest U.S. public companies paying a typical board member $300,000 or more last year.[vi]  Recent decisions in Delaware highlight the inherent potential conflict of interest in having directors set their own compensation,[vii] and thus the importance of a careful, fully-informed process for determining director compensation. In addition, under policy updates announced in 2018, ISS will recommend against board members who approve or set director compensation if there is a pattern of “excessive” pay over multiple years without a compelling rationale.  We expect this focus to result in more thorough disclosure of the process and rationale for the determination of director compensation in 2019.

Shareholder Proposals 

The overall number of shareholder proposals in 2018 remained consistent with 2017 levels.  Of the 451 shareholder proposals submitted to Russell 3000 companies in 2018 that went to a vote, 55% were related to corporate governance, 36% were related to environmental/social policy issues and 9% were related to executive compensation.[viii]  Environmental proposals, particularly those related to climate change, continued to achieve higher levels of success in 2018, but overall support levels for shareholder proposals remained relatively low. 2018 also saw shareholder proposals on current political and social topics, including gun safety, drug price increases and the opioid crisis.  

During 2018, companies indicated more willingness to engage with shareholders on proposals, particularly on environmental and social issues.  As a result, over 50% of environmental and social proposals submitted to companies in 2018 were withdrawn.[ix]

The 2018 proxy season also saw new interpretive guidance from the SEC relating to potential exclusion of shareholder proposals.  Staff Legal Bulletin No. 14I (“SLB 14I”), issued by the SEC in November 2017, states that in assessing a company’s no-action request, the SEC may defer to a board’s determination of whether a shareholder proposal focuses on a significant policy issue with respect to the “ordinary business” exception and the “economic relevance” exception, if the company’s no-action request sufficiently discusses the board’s analysis and the “specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.”[x] While commentators initially believed that SLB 14I would bolster the ability of a public company to exclude certain shareholder proposals relating to a company’s “ordinary business operations,” only one no-action request was granted based on board analysis in the 2018 proxy season.[xi]  In October 2018, the SEC issued Staff Legal Bulletin No. 14J (“SLB 14J”) to provide additional guidance on (1) the use of board analysis to support exclusion of shareholder proposals in reliance on the “ordinary business” and “economic relevance” exceptions, (2) the scope and application of the “micromanagement” exception, and (3) the scope and application of the “ordinary course” exception for proposals that touch upon executive and director compensation matters.[xii]  SLB 14J lists several substantive factors used by boards in reaching their conclusions that the SEC found most helpful in reviewing no-action requests and also provides additional guidance on the “micromanagement” exception and certain compensation proposals. During the 2019 proxy season, we expect that this enhanced and more specific guidance may renew company efforts to seek  exclusions of shareholder proposals under the “ordinary course” exception.

Public companies should review the engagement priorities of their institutional shareholders, as well as current social and political developments impacting their industry, in order to develop talking points for shareholder engagement in the event a shareholder proposal is received.  In addition, to avoid surprises, counsel should take steps to ensure that boards are fully briefed on any shareholder proposals received as well as actions taken in response to shareholder proposals voted on at the 2018 annual meeting.  A perceived failure to adequately take action, or engage with shareholders, on a shareholder proposal that received strong support at a past meeting may result in abstentions or votes against individual directors or say-on-pay proposals at subsequent meetings.

Proxy Statement as a Marketing Tool

Proxy statements have moved beyond pure compliance documents and in many cases now serve as a company’s annual report on corporate governance.  With the increased emphasis on shareholder engagement as the “new normal”, many proxy statements proactively include disclosure on financial performance as well as key shareholder engagement topics, including diversity, board refreshment, sustainability, human capital management, and risk oversight.  Approximately 46% of S&P 500 companies included some sort of board skills matrix in their 2018 proxy statements, compared to 27% in 2017.[xiii]

In addition to content, public companies are increasingly using enhanced design features in their proxy statements to highlight key governance practices and environmental and social policies and provide information to shareholders to address particular areas of focus.  We expect to see continued enhancements in both proxy content and design in 2019.

[i] Larry Fink, Larry Fink’s Annual Letter to CEOs: A Sense of Purpose, BlackRock, (last visited Oct. 18, 2018).

[ii] Annual Report 2017, United Nations Principles for Responsible Investment (2017), (last visited Oct. 18, 2018).

[iii] Based on analysis of data provided by the Proxy Insight 2018 Proxy Scorecard as of June 30, 2018 on shareholder proposals submitted to Russell 3000 companies and included in proxy statements for annual meetings held between July 1, 2017 and June 30, 2018.

[iv] Senate Bill No. 826, California Legislative Information (Oct. 1, 2018),; see our Client Alert, “California Enacts Law Requiring Female Representation on Boards,” October 5, 2018.

[v] See Andrew Letts, CamberView Partners, Engaging with Rakhi Kumar of State Street Advisors, Harvard Law School Forum on Corporate Governance and Financial Regulation (September 11, 2018),

[vi] Theo Francis, Pay for Big Company Directors Tops $300,000, Wall Street Journal (June 28, 2018 10:00 a.m. ET),

[vii] In Re Investors Bancorp, Inc. Stockholder Litigation, No. 169, 2017, (Del. Ch. 2017).

[viii] Based on analysis of data provided by the Proxy Insight 2018 Proxy Scorecard as of June 30, 2018 on shareholder proposals submitted to Russell 3000 companies and included in proxy statements for annual meetings held between July 1, 2017 and June 30, 2018.

[ix] Source:  ISS Analytics.

[x] Staff Legal Bulletin No. 14I (Nov. 1, 2017), United States Securities and Exchange Commission,

[xi] Matt S. McNAir, No Action Letter to Dunkin’ Brands Group, Inc. (Feb. 22, 2018), United States Securities and Exchange Commission,

[xii] Staff Legal Bulletin No. 14J (October 23, 2018), United States Securities and Exchange Commission,

[xiii] See 2018 Proxy Season Review (July 2018), Ernst & Young LLP,$File/EY-cbm-proxy-season-review-2018.pdf.

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.

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