In light of 2019 proxy reviews, shareholders and governance experts have taken their usual look back at some of the hot topics in recent years. Certain issues like board refreshment, sustainability proposals and the aftermath of the #MeToo movement will likely surface again this year, but they won’t be relevant topics for all companies. In 2019, boards will likely have some new topics to brush up on. Director compensation, board self-evaluations, Environmental Sustainability Plan (ESP) issues, human capital, shareholder engagement, and the recent Securities and Exchange Commission (SEC) guidance will be some of the more common topics for proposals.
2019 Proxy Review: Top Issues For Boards
Here’s a look at this year’s hot topics:
Board Refreshment Disclosures
The past tells us that many companies have faced inquiries from investors about board composition. Boards quickly responded to investor concerns by voluntarily enhancing their disclosures in proxy statements about how they intend to refresh their boards. Disclosures will certainly address diversity and adding women directors to the board. California’s SB-826 is keeping this topic alive, as publicly traded companies that have their headquarters in California by the end of the calendar year in 2019 will have to comply with the new state requirements or explain why they aren’t doing so. Other states don’t require this disclosure yet. Companies that suspect shareholder activism or criticism in this area may want to get ahead of the issue and specify their plans in their disclosures.
Most companies are following best practices for governance by doing annual board self-evaluations. Investors are happy to see this practice continue. At the same time, they’d like to see things go a bit farther with asking boards to use external consultants at least every few years to preserve the integrity of the process. For the present, boards have much latitude in deciding how they conduct their self-evaluations. As a result, practices for conducting board self-evaluations vary substantially. In a nutshell, investors are looking for assurance that the self-evaluation process yields a true picture of the board’s effectiveness. Look for this topic to increase in disclosures and shareholder discussions.
Mandatory Age Limits and Term Limits
On the surface, it may seem that mandatory retirement ages and term limits are the solutions to lack of diversity and board directors who serve for too long a period to be effective. Shareholders recognize the value that some long-serving board directors bring in their expertise and experience. There remains a bit of controversy about whether a long-time director can truly be independent. Shareholders may have to consider this issue on a case-by-case basis, as not all companies with seasoned board directors also have seasoned management teams who couldn’t benefit from quality mentoring. The new philosophy is to give the issue the scope that it demands and weigh heavier with the results of the board self-evaluation in assessing board composition.
The SEC required disclosures around CEO pay ratios starting in 2018. Boards, shareholders and corporate watchdogs closely monitored the situation to see what the impact of the new rules would be. As it turned out, the disclosures didn’t yield as much controversy as was anticipated. The median CEO pay ratio for S&P 500 companies was 163:1, which is only a little more than half what some researchers had predicted. There was good news on median employee compensation as well. According to Deloitte, median employee compensation came in at $68,708, which was substantially higher than predictions.
Shareholders aren’t apt to be content with this information. About 48 union and government pension funds, along with other investors, signed a letter to all the S&P 500 companies asking for more information. They wanted more specifics like the median employee’s job and location, and additional information that relates to temporary workers, seasonal workers and the entire workforce.
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Director Participation in Shareholder Engagement
Chairs of the nominating and governance committee and the compensation committee should be on high alert as shareholders expect to see board directors at shareholder engagement meetings where governance and management compensation issues will be covered. Boards should proactively prepare to engage with shareholders by selecting independent board directors who will act as spokespeople for the board if shareholders request director participation. Mock question-and-answer sessions will help directors answer shareholder questions so that they’re in keeping with the company’s overall disclosure position.
Can your company identify the committee that is responsible for ESP matters? If not, this may be a point of contention for shareholders in 2019. Investors are likely to be making more requests for ESP issues, particularly as it pertains to sustainability. Investors are eager to learn what impact companies desire to make on society. Boards can get a jump on this issue by looking at the workloads of existing committees and taking stock of which board directors are knowledgeable about ESP issues.
Recent SEC Guidance
Recent SEC guidance revolves around the relevance of information that shareholders are seeking. The SEC supports investors asking for information that has economic relevance to the company’s business. Companies that choose to exclude shareholder proposals based on the lack of economic relevance should brush up on the latest SEC guidance on proxy issues.
Making Sure Boards Are Ready for 2019 Proxy Reviews
Board directors will need to take note of the 2019 proxy reviews so that they can engage with shareholders knowledgeably and comprehensively. Board directors are accountable for the company’s long-term value creation plan. By going into proxy season fully prepared, board directors will demonstrate that they’re being proactive about shareholder concerns.