Proxy Season 2020

An excerpt from Top 10 Key Trends at 2020 Proxy Mid-Season by Betty Moy Huber, Joseph A. Hall, and Paula H. Simpkins, Davis Polk & Wardwell LLP (emphasis added):

1. Shift to Virtual Meetings

U.S. public companies are expected, as a result of the pandemic, to hold a record number of 1,500 virtual meetings this year as compared to only about 300 in 2019. Some investors and proxy advisors have traditionally expressed skepticism as to whether virtual meetings can provide the level of shareholder participation that physical meetings can, but this season has shown, based on reports from certain large-cap companies, that shareholder participation has in fact increased. Indeed, certain prolific shareholder proponents were able to “attend” more meetings this season with travel no longer a factor. Market participants were able to carry out the first ever contested virtual meeting. That’s good news. This virtual meeting “mass experiment,” however, has made more pronounced flaws in proxy plumbing. For companies that used multiple vendors to support their virtual meetings, vendors were asked to provide workarounds to compensate for clunky technology or privacy concerns, some of which were granted and some not, due to no fault of the providers or the companies, but to the limits of the system. We expect issuers to continue to host virtual meetings in 2021 and thereafter. When the dust settles this season, both issuers and investors will put forth best practices to try to address lingering concerns.

2. Increased Support for Certain Governance and E&S Proposals

For the first time in recent seasons, the governance proposals submitted were about equal in number to environmental, social and political (E&S) proposals. We’ve witnessed an unprecedented two independent chair proposals pass as well as increased (though not majority) support for various other independent chair proposals, with certain proxy advisory firms and investors updating and strengthening their applicable voting policies this season. Companies involved in scandals or non-governance litigation were more likely to see support for these proposals. We’ve also seen the novel use of independent chair proposals as a vehicle for an underlying E&S agenda, much like the use of majority voting proposals to further E&S goals last season. Given these successes and the difficulty in negotiating exclusions, we expect independent chair proposals to be popular next season, with possible links to COVID-19-focused agendas such as income inequality and pay practices, or workforce or human capital treatment and management.

On the E&S side, proponents have filed more than 400 shareholder resolutions so far this season with the most popular topics being climate change, political spending and gender diversity. Seven of twenty-three proposals voted on, have passed as of May 10, 2020, as compared to three of nineteen for the corresponding time period last year. E&S proposals receiving majority support covered human capital management disclosures, political contributions, employment diversity reporting, climate lobbying reporting, petrochemical- and climate-related risk disclosures, and opioid risk reporting. Issuers can be sure that proponents will assess their wins and losses this season to devise their future strategies. Based on this, the upcoming presidential election in November 2020 and any concerns about COVID-19-related political contributions and lobbying, we expect more political contributions and lobbying proposals seeking transparency to be filed for next season.

3. Resurgence of Poison Pills

At least forty companies have adopted poison pills this year as an antitakeover defense due to the sudden stock price declines caused by the pandemic. We view the significant increase in the number of pills adopted (which contrasts to the twenty-five in existence at the end of 2019) as reasonable. The majority of proxy advisory firms have issued guidance showing some leniency for pills adopted without shareholder pre-approval so long as the pill duration is less than one year and the adoption is linked to the virus. Rights plans that have a 10% or higher trigger and carve-outs for passive investors, as well as a commitment by the company to put the pill up for vote at the next annual shareholder meeting if the pill is still in place at that time, tend to be viewed more favorably. We expect more rights plans, particularly net operating loss, or NOL, plans to be adopted this year similar to those adopted post-2008 financial crisis.

4. Stock Buybacks and Dividends

Buybacks and dividends have come under enhanced scrutiny post-pandemic as evidenced by the CARES Act restrictions on businesses receiving loans and loan guarantees. Generally speaking, however, the larger passive institutional investors defer to companies on their capital allocation decisions if the rationale is reasonable, communicated and disclosed. While certain market participants strongly believe that buybacks or dividends should not be conducted at the expense of workforce pay and training, buybacks and dividends are arguably supporting retail investors who rely on dividends as a source of income.

One Comment Add yours

  1. How are buybacks “supporting retail investors who rely on dividends as a source of income”? Investors get no income from buybacks unless they sell.

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