2014 Proxy Season Shows Increased Pressure on Companies to Make Engagement Meaningful and Purpose-driven

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EY proxy season review identifies top governance developments and ongoing trends.

More companies disclosed that they engaged with shareholders on corporate governance topics this year: half of S&P 500 companies disclosed engaging with investors in 2014 compared to just 6% doing so just four years ago. Many companies also strengthened governance-related disclosures in their proxy statements through enhanced content, formatting and use of graphics. Amid this changing dynamic, some investors are concerned that companies may begin to treat engagement as a check-the-box exercise rather than a genuine effort to communicate. This increases the pressure on companies to make engagement meaningful and purpose driven. Examining this evolving landscape, EY’s Center for Board Matters released a new report – Let’s talk: governance, 2014 proxy season review– to provide boards and those who support them with timely, data-rich analysis of the key developments and top governance trends coming out of the proxy season.

“Investors applaud the efforts of some companies to engage in a meaningful way; however, the quality and scope of engagements varies widely. The message for companies is to initiate efforts with a clear agenda and purpose,” said Allie Rutherford, Director of Corporate Governance in the EY Center for Board Matters. “Another key to making engagement successful is connecting with the right people on the investor side: equity analysts and portfolio managers who are making investment decisions may not be the same individuals evaluating a company’s governance and proxy-voting decisions.”

Key developments in the 2014 proxy season include:

1.    Activist investors are becoming more active and influential. Campaigns by activist investors are increasing in scope and influence. There were more campaigns by hedge fund activists in just the first half of this year than since the 2008 financial crisis. This has been driven in part by an increase in capital allocated to these strategies. Activists are winning more board seats, in large part through reaching settlements with the companies rather than going to a shareholder vote.

2.    Attention is turning to board composition and renewal strategies. Investors and boards are placing greater attention on whether the right directors – those with qualifications aligned with the company’s strategic goals, stakeholders and risk oversight needs – are in the boardroom. They are also focused on whether boards are regularly refreshing and providing an exit for directors whose expertise is no longer relevant. Institutional investor focus in this area has mostly played out behind the scenes: in 2014 investor opposition to director nominees was at its lowest in the last six years.

3.    Company-investor dynamics are evolving as engagement becomes mainstream. Company-investor engagement on governance topics – and disclosure of these efforts in the proxy statement – continues to grow. Half of S&P 500 companies disclosed engaging with investors last year, compared with 23% in 2012 and 6% in 2010. While executive compensation remains the primary engagement driver, other topics like board and executive leadership, board composition and diversity, and sustainability practices and reporting are increasingly becoming part of those conversations.

Ongoing proxy season trends that have continued in 2014 include:

1.    Shareholder proposal submissions remain high, with a focus on environmental and social topics. In recent years, the number of shareholder proposal submissions has been at an all-time high. Like in 2013, close to one-third of all shareholder proposals submitted this year were withdrawn, and nearly 80% of those withdrawals were the result of company action and / or ongoing dialogue.

Notably, proposals on environmental and social topics accounted for the largest category of proposals submitted at 45%. Within this category, two of the more high profile proposals this year include proposals asking companies across a broad range of industries to reduce greenhouse gas (GHG) emissions and proposals focused on stranded asset risk, asking nearly a dozen companies in multiple industries to disclose risk scenario planning and potential climate change impacts to company business models.

The most common shareholder proposals submitted in 2014 were:

►    Appoint independent board chair (9% of all submitted);
►    Disclosure and oversight of political spending (8% of all submitted);
►    Disclosure and oversight of lobbying spending (7% of all submitted);
►    Report on sustainability (5% of all submitted);
►    Set and report on GHG emissions reduction targets (5% of all submitted);
►    Adopt majority vote to elect directors (5% of all submitted); and,
►    Eliminate classified board (5% of all submitted).

Shareholder proposals receiving highest average vote support in 2014 were:

►    Eliminate classified board (84% average support);
►    Allow shareholders to vote on poison pill (69% average support);
►    Eliminate supermajority vote (67% average support);
►    Adopt majority vote to elect directors (57% average support); and,
►    Allow shareholders to call special meeting (45% average support).

2.    Investor support for say-on-pay (SOP) proposals holds steady. More than 2,200 companies so far this year have gauged investor support for their compensation policies and practices through an SOP vote. Overall support for these proposals remains high, averaging 91%, and so far only about 2% have not passed.

3.    Annual director elections by majority vote and independent board leaders increase across the market. Many investors favor the annual election of all directors under a majority vote standard and want to see boards with a strong independent chair or lead director. Companies that do not have these practices, or that have lead independent directors lacking clearly defined, robust responsibilities, may be the focus of shareholder engagement or recipients of shareholder proposals.

Some large asset managers are encouraging companies to adopt annual director elections and majority voting through letters to boards and engagement conversations. Most investors are unified in their beliefs – and will support proposals across the board that implement annual elections and majority voting.

For more information and to access to Let’s talk: governance, 2014 proxy season review and other reports, visit http://www.ey.com/US/en/Issues/Governance-and-reporting.

About The EY Center for Board Matters

Effective corporate governance is an important element in building a better working world. The EY Center for Board Matters is committed to bringing together and engaging with boards, audit committee members and investors to exchange ideas and insights. Using our professional competencies, relationships and proprietary corporate governance database, we are able to identify trends and emerging governance issues. This allows us to deliver timely and balanced insights, data-rich content and practical tools and analysis to boards, audit committees, institutional investors and others interested in governance topics.

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

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This news release has been issued by Ernst & Young LLP, a member of the global EY organization that provides services to clients in the US.

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Lauren Condoluci
Ernst & Young U.S. LLP
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