Heading into 2018, the impending CEO Pay Ratio was at the forefront of many minds—and arguably the most talked about governance issue—as it was unexpected what the disclosures might yield. However, while the pay ratio was front and center, there were other issues that would gain more clarity in 2018, most notably shareholders and their proposals. While these proposals generally don’t pass—only 9.8% received a majority vote in 2017—they do provide the company with insight into what is important for shareholders. In turn, companies can then decide whether or not to address these shareholder concerns, regardless of whether a proposal passes or not. In the past few years, we’ve seen different subjects, such as proxy access and environmental, social and governance (ESG), take center stage in the eyes of shareholders.
In 2018, Equilar 500 companies received 351 shareholder proposals, only six fewer than the prior year. However, as Graph 1 illustrates, that total is 9.5% less than the amount of shareholder proposals received by those same companies only two years earlier.
While these proposals are all originated from the same source—the shareholders—not all of them are concerning the same topic. For the past five years, proposals falling into the environmental, social and governance (ESG) category have been the most common proposals from shareholders. These proposals can range from gender pay issues or board parity to lobbying or a company’s ability to have a positive influence on the community and environment, and have become an increasingly hot-button issue. For example, earlier this year Larry Fink of BlackRock wrote an open letter stating that his company would hold companies in which it invests accountable for having a positive impact on the world around them. That being said, 2018 actually saw the prevalence of ESG shareholder proposals wane significantly compared to the other years in the study. Though there have been only six fewer shareholder proposals in 2018 than in 2017, there have been 56—30.1%—fewer ESG-related proposals over that time frame. Instead, proposals regarding general shareholder rights saw a 56.3% increase in prevalence over those two years.
Proposals regarding “general shareholder rights” touch on a wide array of topics such as proxy access, bylaw amendments and reincorporation to name a few, yet they all center on the idea of greater shareholder involvement. While this is not necessarily something that is new, the large year-over-year increase of these types of proposals could be the next natural step in shareholder interaction and engagement.
Beginning with the Dodd-Frank Act and the subsequent Say on Pay provision in 2011, shareholders have increasingly pushed for and gained more of a voice in the workings of a company. Though Say on Pay is just an advisory vote and not binding, it has resulted in many companies altering their executive compensation strategy regardless of the advisory nature of the vote. A few years later, proxy access—the ability of shareholders to nominate their own board members in opposition to those nominated by the company—provided an avenue of direct opposition for shareholders to voice displeasure with high-level company leadership. These, along with many other examples, have played a role in the expansion of shareholder and company engagement.
Engagement with investors has become increasingly important for companies, and many have gone to greater lengths to achieve more open-door policies with shareholders. For many, the best way to do this is by spelling out the process in the best form of mass communication possible: the proxy statement. As found in the Equilar Corporate Governance Outlook 2019 report, more companies are disclosing the process in which they engage with shareholders. According to data in the report and Graph 3, 74.8% of Equilar 100 companies at least mentioned shareholder engagement, with 58.6% of those actually disclosing the complete process. This total is a 54% increase over the amount of shareholder engagement disclosures and mentions at the same subset of companies just four years earlier, showing the massive movement towards engagement.
With engagement ratcheting up and the nature of shareholder proposals shifting toward more freedom and checks and balances for investors, it would not be surprising to see 2019 become the year of shareholder engagement. We’ve seen more companies make it perfectly clear how they go about the processes, and shareholders are already aware of the power they hold when it comes to Say on Pay. ESG will still play a large part in the eyes of shareholders, but it will be in congruence with other, more shareholder-specific rights. Either way, the question is no longer, “Do shareholders really care about the processes of a company?” It’s now, “How much do shareholders care and how will companies respond to this new effort?” Only time will tell.
Alex Knowlton is the Associate Editor of C-Suite magazine and Managing Editor of Equilar reports.
Visit www.equilar.com/reports.html to learn about the Corporate Governance Outlook 2019 report.