Trending ESG topics were climate change, certain sustainability incentives and reports, board diversity, gender pay equity, and environmental and social issue board qualifications.
Three proposals even secured majority support for the first time, marking a historic shift in investor attitudes. Aside from climate change concerns, gender pay equity and board diversity, particularly asking boards to report on and increase their diversity, also emerged as key themes. The content of shareholder proposals was not the only topic of conversation this past season. Processes and procedures of shareholder proposals were also discussed.
Under the most scrutiny were virtual-only shareholder meetings and multi-class share structures with unequal voting rights. Unequal voting structures are under fire because many investors have long held that one share should equal one vote, believing voting power in the hands of company insiders can lower board accountability, thereby increasing governance-related risks. Though virtual-only meetings have not yet become the new normal, they are still rising in popularity among public companies, and investors are similarly concerned with accountability and the opportunity to be heard.
Part of what worries investors is the lack of choice to attend a shareholder meeting in person—it is almost viewed as a fundamental right for investors to be able to confront the board face-to-face. While shareholder activism continued to receive a great deal of attention last season, proposals and proxy contests decreased compared to the same period last year.
Moreover, the average length of campaigns decreased dramatically, demonstrating that boards are increasingly negotiating with investor activists and settling faster in order to avoid a shareholder vote. In regulatory news, newly confirmed SEC Chairman Jay Clayton revealed a few of the principles that will guide his term, citing the need for the SEC to evolve with markets, promote capital formation and be conscious of the additional burdens that regulatory change creates.
Several unfinished items from Dodd-Frank are no longer being prioritized, including: pay-for-performance disclosures, clawbacks, universal proxy ballots and enhanced board diversity disclosure rules. The proxy season was marked by a series of historic firsts, including the launch of the Framework for U.
Despite this uncertainty, investors are steadfast in their commitment to higher levels of accountability, transparency and engagement, which will likely continue into the proxy season.
Note, however, these changes, except for the designation of certain securities as covered securities for purposes of Section 18 b of the Securities Act, have not been finalized.
At this time, there is no anticipated date for implementation of these proposed changes, meaning there will be no effect on filings. However, the division will now apply these analytical frameworks separately. In its SLB 14I, the division also reaffirmed their viewpoint and provided detailed guidance as to proposal proxy and images.
Going forward, companies should review SLB 14I and use it as a reference when undertaking an analysis for exclusion of a shareholder proposal. Effective September 5, , the SEC now requires companies to settle securities transactions within two business days of the transaction date, rather than three.
The final rule amendment essentially prohibits broker-dealers from executing a contract for the purchase or sale of a security other than certain exemptions that contracts for payment and delivery later than the second business day after the date of execution.
Companies should note this change for and anticipate the SEC may still further reduce the settlement cycle in the near future. On August 17, , the SEC clarified its position and prior guidance regarding what financial information both EGCs and non-EGCs can omit from their draft registration statements submitted confidentially. Smaller reporting companies, EGCs, foreign private issuers, and registered investment companies are not required to comply with this rule.
The pay ratio disclosure must be included in any filing that requires executive compensation disclosure under Item of Regulation S-K, which include registration statements, proxy and information statements, and annual reports on Form K.
There are various issues and considerations associated with complying with the CEO pay ratio disclosure rule requirements and companies must be diligent in preparation for their proxy, but the SEC has issued some interpretation and guidance. Institutional Shareholder Services ISS updated its Proxy Voting Guidelines Updates for , which include several changes and modifications, a summary of which is outlined below.
Due to the recurring pattern requirement, the update will not impact vote recommendations. If a company has a poison pill that was not approved by shareholders, then ISS will vote against or withhold its vote from all nominees.
If, however, the board adopts an initial pill with a term of one year or less, depending on the rationale and certain of other factors, ISS will adopt a case-by-case approach on the nominees. This new approach to gender pay gap shareholder proposals provides more clarity as we move into Although there is no real effect in the coming year, it is likely a precursor for future movements.
The methodology for will include the rankings of CEO total pay and company financial performance within a peer group, each then measured over a three-year period.
Though not a surprise, this test creates metrics for concern. Due to this change there are select directors who will now be considered insiders due to their controlling interests and thus moved to the Non-Independent Non-Executive Director category. Glass Lewis also recently published its Proxy Paper Guidelines, which include several changes and modifications, a summary of which is outlined below. Board Gender Diversity: Glass Lewis added to the discussion about what is considered to be gender diversity on boards of directors, but there will be no changes to proxy voting in However, beginning with the proxy season Glass Lewis will recommend shareholders vote against the chair of the nominating committee, and possibly other nominating members, for companies that have no female directors—excepting a sufficient rationale.
In furtherance of their long-standing belief, Glass Lewis introduced a number of new protective-of-shareholders policies. Virtual Shareholder Meetings: The firm voiced its awareness of the relatively small but growing contingent of companies electing to hold shareholder meetings by virtual means only and its belief that technology can be useful to expand participation but that it can also be a hindrance. There is nothing to worry about for , but in looking toward the season Glass Lewis will generally recommend withholding votes from members of the governance committee when there will be virtual-only shareholder meetings and no proxy pledge of equal voting rights.
In its update, Glass Lewis also made minor clarifications to the director overboarding policies, pay for performance mechanics and CEO Pay Ratio disclosure. The SEC adopted rules which now require public companies to use hyperlinks to exhibits listed in their exhibit index of any registration statement or report filed with the SEC.
The rules are slightly different for non-accelerated filers and smaller reporting companies, but all companies should prepare to include hyperlinks, along with certain other formatting and submission changes, in their future SEC filings.
Finally, in respect to revenue recognition and lease accounting, companies are now required to provide transition disclosures of the impact that accounting standards, when adopted, will have on their financial statements. Application of the aforementioned revenue standards applies to fiscal years that begin after December 15, Just as companies include graphics that are not expressly permitted under the disclosure rules, the staff is of the view that Rule 14a-8 d does not preclude shareholders from using graphics to convey information about their proposals.
While the staff recognized the potential for abuse in this area, it found that these potential abuses can be addressed through other provisions of Rule 14a In this regard, there may be questions about whether the eligibility requirements of Rule 14a-8 b have been satisfied. There have also been concerns raised that shareholders may not know that proposals are being submitted on their behalf. In general, the staff expects this documentation to:.
The staff believes that this documentation will alleviate concerns about proposals by proxy, and will also help companies and the staff better evaluate whether the eligibility requirements of Rule 14a-8 b have been satisfied. Where this information is not provided, however, there may be a basis to exclude the proposal under Rule 14a-8 b.
Glass Lewis , published updates to their proxy voting policies applicable to shareholder meetings held on or after February 1, , ISS or January 1, , Glass Lewis.
Below we highlight certain areas of focus in these updated proxy voting guidelines for companies to consider as they draft their proxy statements and prepare for their annual meetings.
They will, however, display pay ratio data in their research reports and proxy papers. While this will not impact voting recommendations in , negative recommendations will be triggered in subsequent years if a pattern of excessive NED pay is identified.
Gender Diversity — Board diversity remains a strong focus among institutional investors. ISS reports that companies with no female directors will receive a notation to that effect in its proxy research, but it will not make adverse vote recommendations due to a lack of gender diversity. Beginning in , however, Glass Lewis will generally recommend against the nominating committee chair of a board with no female members.
ISS generally supports proposals seeking disclosure of risks related to climate change, including financial, physical and regulatory risks. Moreover, Glass Lewis generally will recommend in favor of shareholder proposals requesting that companies in certain extractive or energy-intensive industries that have increased exposure to climate change-related risks provide information concerning climate-change scenario analyses and related considerations. Board Independence — ISS will recommend voting against or withholding from non-independent directors if: i independent directors comprise 50 percent or less of the board; ii the non-independent director serves on the audit, compensation or nominating committee; iii the company lacks an audit, compensation or nominating committee; or iv the company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee.
Board Accountability — ISS will now issue an adverse vote recommendation for directors of companies that either opt into or fail to opt out of state laws requiring classified boards. As such, ISS adopted a new policy to address shareholder proposals requesting that a company report whether there is a gender pay gap at the company, as well as on measures being taken to mitigate any existing gender pay gaps. Under the new policy, ISS will consider proposals related to gender pay gaps on a case-by-case basis, taking into account the following four factors:.
The updated guidelines reflect the growing interest of institutional shareholders in gender diversity issues and are intended to provide more clarity on how ISS will evaluate these proposals versus the ISS policies on shareholder proposals relating to diversity and equality of opportunity generally.
ISS said that it will consider: i the presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging; ii the magnitude of shares pledged, in terms of total shares outstanding, market value and trading volume; iii the disclosure of progress or lack thereof in reducing the magnitude of pledged shares over time; iv disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and v any other relevant factors.
In these cases, the EPSC score will be disclosed for informational purposes. Poison Pills — ISS will recommend against all board nominees if a company has a poison pill with a term greater than one-year that has not been approved by shareholders. The new auditor report standard includes certain formatting and disclosure changes that are effective for audits of fiscal years ending on or after December 15, , while the more significant changes will not be applicable for the upcoming proxy season.
As defined in the PCAOB standard and related amendments, CAMs is defined as any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that:. For any CAMs, the auditor must include disclosure in its auditor's report that identifies the CAM, describes the principal considerations that led the auditor to determine that the matter is a CAM, describes how the CAM was addressed in the audit, and refers to the relevant financial statement accounts or disclosures.
The SEC implemented a few form changes over the past year that companies should keep in mind in preparing Form K, including new checkboxes and hyperlinked exhibits. These changes were followed by new proposed rule amendments in October by the SEC to modernize and simplify the disclosure requirements for public companies.
The changes do not apply to certain filings, such as Forms 6-K and certain forms required to be filed by Canadian issuers pursuant to the multijurisdictional disclosure system. Hyperlink Exhibits — On March 1, , the SEC adopted rule and form amendments that were intended to make it easier for investors and other EDGAR users to find and access exhibits in registration statements and periodic reports that were originally provided in earlier filings The rule amendments became effective on September 1, , and require most companies to include a hyperlink to each exhibit listed in the exhibit index of its registration statements and its current and periodic reports subject to the exhibit requirements under Item of Regulation S-K, including Form K.
The hyperlink requirement covers both exhibits that are filed as part of a registration statement or periodic report and exhibits that are incorporated by reference to prior filings.
As a result, companies will have to identify the URLs for the exhibits that were previously filed by each in some cases decades ago , and which are incorporated by reference into its current filings. The new rules, however, do not require companies to hyperlink to an exhibit that was not filed electronically, or to refile exhibits that have previously been filed in paper.
Exhibit Index — At the same time, the SEC also revised Item a 2 to require that the exhibit index be placed before the required signatures in the registration statement or periodic report. In this regard, the SEC staff has informally indicated that companies can combine the exhibit list e. In this way, a separate exhibit index page after the signature pages is no longer required.
Any schedules or forms that are not subject to the hyperlinking requirement, such as proxy statements, may continue to be filed in ASCII. Non-accelerated filers and smaller reporting companies that submit filings in ASCII will not need to comply with these requirements until September 1, Although the SEC initially proposed to eliminate the option to use ASCII altogether, after consideration of public comments, the final amendments permit companies to continue to use ASCII for any schedules or forms that are not subject to the new hyperlink requirement.
Cover Page Changes — The SEC also made minor changes to the cover page for registration statements and current and periodic reports, including Form K.
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