Companies meanwhile are responding to investor demands for increased board accountability and transparency by enhancing communications with investors to share the board’s message on governance and strategy and highlighting director qualifications and board responsiveness to investor concerns. In its analysis of its database and conversations with investors and directors, EY identified four particular trends from the proxy season.
These are that proxy access or the ability for shareholders to nominate their own directors is being adopted across the US market after long held opposition; companies are continuing to improve investor communications; board composition remains a key focus with director tenure and board leadership coming under increased investor scrutiny and shareholder proposal submissions remain high, driven by push for proxy access and environmental sustainability.
EY reported that proxy access has now been adopted by more than a third of Standard & Poor’s 500 companies within a two-years, driven largely by the submission of shareholder proposals calling for the reform. Around 60% of almost 200 companies that received proxy access shareholder proposals for 2016 annual meetings adopted proxy access bylaws before the proposal even went to a vote. The pressure on company boards to allow proxy access will continue EY and advised them to proactively raise the topic with key shareholders to better understand their views on proxy access, including around preferred terms such as their shareholders’ ability to work as a group and the number of board seats that may be filled and to confirm that communications around board composition make clear how the skill sets of individual directors are aligned with the company’s strategy and risk oversight efforts, and discuss the board’s assessment, refreshment and nomination processes.
Proxy statements have also evolved from compliance documents to communication tools that serve as an extension of company engagement with investors and a formal record of the board’s governance priorities, according to EY. Although executive pay disclosure still remains the main part of this disclosure and engagement there is now more communication on other topics too EY said. The report said that effective proxy statements are improving readability through enhanced formatting and graphics, demonstrating board engagement and effectiveness and addressing key interests of institutional investors.
Different investors have different perspectives on board composition but this remains an important area of governance EY said with particular attention being paid to length of tenure and succession planning. To satisfy investor interest in this area EY advised boards to discuss board refreshment, assessment and leadership during engagement conversations with shareholders and enhance proxy disclosures related to these topics. EY also suggested that companies should include proxy statement graphics highlighting the board’s diversity of tenure (25% of S&P 500 companies have done so this year) and letters from (or Q&As with) the lead independent director or independent chair, demonstrating the depth of their role (6% of S&P 500 companies have done so this year).
Investors continue to use shareholder resolutions to put pressure on companies on particular areas. Resolutions proposing proxy access are the largest single topic to be covered but environmental and social resolutions are the most common broad areas for shareholder proposals. EY noted that “environmental considerations appear to be moving further into the mainstream, and some proxy votes to date may reflect that shift. Average support for proposals on climate risk have jumped from 7% in 2011 to 28% so far this year, including a proposal at an oil and gas company that nearly received majority support with 49% of the votes cast.”