Directors at the Crossroads in 2019 Boardroom Blues
Patrick McGurn Special Counsel, ISS NDI, Oct. 25, 2018 BOARD ACCOUNTABILITY: RISK OVERSIGHT OR RISK OVERLOAD? #1 Worried Life Blues/Otis Spann
› ESG Risks Are Operational Risks › Data Security/Fake News › Equifax’s mega-hack: three directors with 30%-plus “no votes” › Facebook’s data spill: three directors with support from <70% of non-insider-held shares › Fake news proposals at Alphabet, Facebook and Twitter (36% of votes cast) › Opioids › Investors for Opioid Accountability formed in July 2017 › Majority support (62%) for shareholder proposal at Assertio Therapeutics (formerly Depomed); 41.2% at Amerisource Bergen › Firearm Safety › Majority support at Sturm Ruger (69%) and American Outdoor Brands (52%)
2 ISS SURVEY/DIRECTOR TRACK RECORD: FOR ONE OR FOR ALL? #2 Serves Me Right To Suffer (Memory Pain)/Jimmy Johnson If ISS assesses that an individual director has failed in his or her oversight responsibilities at one company and this has resulted in a negative ISS vote recommendation, do you consider it appropriate and useful for shareholders for ISS to note this in the proxy research of other firms where that director serves on the board?
84% Investors Non-investors
41% 40%
20% 13% 3%
Yes No, my organization considers a It depends (please specify) director’s service on each board on which he or she serves on a standalone basis
3 BOOSTING BOARD DIVERSITY: ENGAGEMENT OR QUOTAS? #3 Lookin’ For You/Mighty Joe Young
› Steady Progress on Boosting Gender Diversity Count of Boards By Female › Record-setting pace with women nominees accounting for more than 1/3rd of the Class of 2018 Representation › Persistent small-cap gap with >20% of R3K (ex-S&P 500) 1000 923 boards still having zero women 900 › Is Engagement Working Fast Enough? 800 › Bulk of board diversity proposals withdrawn in 2018 682 700 › Alphabet, Amazon and Facebook adopt “Rooney Rule” nominating procedures 600 510 › NYC funds’ Boardroom 2.0 campaign prods more 500 widespread use of board skills matrix 400 › California’s Proposed Board Gender Quota Law 300 265 › One-female-per-board mandate will take effect by the end 186 200 169 of 2019 (pending legal challenges) 98 99 100 44 › By end of 2021, the law calls for at least two women on 3 boards with five or fewer directors, and at least three 0 women if it has six or more seats Zero One Two Three Four or › Companies would be fined for non-compliance more S&P 500 R3K
4 ISS BENCHMARK POLICY SURVEY RESULTS
N O WOMEN ON BOARD (Repeat Question from 2017 Survey) Does your organization consider it to be problematic if there are zero female directors on a public company board?
45% 43% 37% 30% 30% 29% 26% 27% 25% 23% 24% 19% 15% 13% 8% 3%
Yes, it may indicate problems Concerns may be mitigated if Maybe, but the level of No, directors are best-suited in the board recruitment there is a disclosed concern is based on a case-by- to determining the process. policy/approach case determination composition of the board Investors 2018 Investors 2017 Non-investors 2018 Non-investors 2017
5 BOARD GENDER DIVERSITY Draft Policy Open for Review and Comment by Interested Parties The policy comment period closes on Nov. 1, 2018. Please submit comments to [email protected] • The proposed new policy would read as follows: • For companies in the Russell 3000/S&P1500, effective for meetings on or after Feb. 1, 2020, generally vote against or withhold from the chair of the nominating committee (or other directors who are responsible for the board nomination process on a case-by-case basis) at companies when there are no female directors on the board. • Mitigating factors that may be considered include: • a firm commitment, as stated in the proxy statement and/or other SEC filings to appoint at least one female director to the board in the near term (before the next annual general meeting); • the presence of at least one female director on the board at the immediately preceding annual meeting; and/or • any other compelling factors considered relevant on a case-by-case basis.
6 US MEDIAN CEO PAY PEAKS IN 2017: UP OR DOWN IN 2018? #4 Boom Boom/John Lee Hooker
› Big boost in CEO pay in fiscal 2017 Median S&P 500 CEO Pay › Median CEO pay reached all-time highs 2011-2017 in both the S&P 500 ($12.1 million) and $12.1 the remainder of the Russell 3000 ($3.5 $11.6 $11.8 $11.3 million) $11.0 $10.9 › Grant value increases of 9% at S&P 500 $10.4 firms and 10.6% at the rest of the Russell 3000 2011 2012 2013 2014 2015 2016 2017
7 SAY-ON-PAY FAILURES SPIKE IN 2018: UP OR DOWN IN 2019? #5 Don’t Start Me Talkin’/Sonny Boy Williamson
Say-on-pay failure rate nearly doubled in 2018 › Say-on-pay support falls in 2018
› Average support at Russell 3000 firms is 7.1% 8.0% 7.6% 7.9% 7.1% 7.1% 6.7% tracking at 90.9%; down from 92.1% in 6.5% 2017 › 53 failed votes so far in 2018 surpasses 2.6% 2.4% 2.4% the 34 failed votes in 2017 1.6% 2.2% 2.2% 1.5% 1.3% › Overall say-on-pay vote support dipped below 96% for the first time 2011 2012 2013 2014 2015 2016 2017 2018
Say-on-Pay Failure Rate (< 50%) Low Support for Say-on-Pay (< 70%)
8 YEAR OF THE GIANT AWARD: MEGA OR GIGA? #6 Can’t Be Satisfied/James Cotton
› Increased use of “mega-grants” in 2017-2018 but vote results on these awards were somewhat inconsistent › Walt Disney’s say-on-pay failed after $100 million grant to CEO Bob Iger (44% support) › Tesla’s $2.6 billion grant to CEO Elon Musk received 81% support in a special meeting › Axon Enterprise’s copy-cat Tesla award ($100 million) received 67% support › ISS identified more than a dozen instances of extremely large pay opportunities provided by such mega-grants, often (but not always) structured to replace multiple years of incentive awards and carrying moonshot goals
9 REGULATORY CHANGES IMPACT PAY: PERFORMANCE OR PULSE? #7 How Many More Years/Howlin’ Wolf
› 162(m) Performance-pay deduction repeal › Removal of requirement to re-approve performance metrics every five years › May lead to longer average plan duration and fewer opportunities to approve plans › 24% drop in number of companies presenting equity plan proposals › Some boards dropped performance-based compensation features, but no clear trend › Use of discretionary bonuses increased slightly › Performance-based equity award prevalence did not decline › CEO/median worker pay ratio disclosure › First year of disclosure passed with little fanfare and no discernable impact on voting › Wide range of pay ratios, with median S&P 500 CEO pay ratio coming in at 159:1 › Most investors take a “wait-and-see” approach
10 ESG OVERSIGHT: NICE OR NEED TO HAVE? #8 Right Place, Wrong Time/Otis Rush From niche and narrow to a necessary part of institutional investing and asset management.
ESG A MILLENNIAL MINDSET E S G I N THE P U B L I C E Y E Of millennials agree that ESG impact News coverage and public attention to 93% is important to investment decisions sustainability issues increasing
INVESTORS AS ESG CHAMPIONS
Average 2018 growth in UN PRI • Growth of Responsible Investment assets & strategies signatories globally from 2017 • Increasing use of UN Sustainable Development Goals as 13% roadmap to align investments with broader societal objectives • 1 in 6 PRI signatories report that they invest in assets with a focus on environmental and/or social issues $89,654 B Total AUM of PRI Signatories • Explosion of ESG-based products, particularly on climate change • Move to science-based targets
Source: The PRI in Numbers 2018 11 Location Initiative Description Owner Requirement Status Pre / Post-Paris Task force on Climate-related The TCFD have developed voluntary, consistent climate-related financial risk disclosures for use by Self governance Voluntary In place Post Financial Disclosure (TCFD) companies in providing information to investors and other stakeholders. Portfolio Decarbonization Coalition Coalition of investors committing to decarbonizing their investment portfolios Self governance Voluntary In place Pre (PDC) The Pledge allows investors to formalize commitment to the PDC, mobilizing investors to measure, disclose Montréal Pledge Self governance Voluntary In place Pre and reduce their portfolio carbon footprints. Framework and principles for assessing and reporting investments and financing activities linked to climate Global ISO 14097 Self governance Voluntary Expected Post change. Asset Owners Disclosure Project A ranking of the climate-related financial disclosures of the world’s largest pension funds, insurers, Civil Society Voluntary In place Pre (AODP) sovereign wealth funds and endowments. A five-year initiative led by investors to engage with the world’s largest corporate GHG emitters to improve Climate Action 100+ Self governance Voluntary In place Post governance on climate change, curb emissions and strengthen climate-related financial disclosures The Investor Agenda has been developed for the global investor community to accelerate and scale up the The Investor Agenda Self governance Voluntary In place Post actions that are critical to tackling climate change and achieving the goals of the Paris Agreement. Institutions for Occupational EU pensions directive with specific content on climate change requirements. Regulator Mandatory In place Post Retirement Provision (IORP) II Europe (EU) A body of 20 experts from civil society, the finance sector and academia advising the European Commission High Level Expert Group (HLEG) Regulator TBD Expected Post on how to better integrate sustainability considerations in the EU's financial policy framework Article 173 of the Energy Transition Legislation on mandatory carbon disclosure requirements for listed companies and carbon reporting for France Regulator Mandatory In place Post Law institutional investors, defined as asset owners and investment managers. Initiative to evaluate the degree to which California investors are impacted by effects of climate change on California Climate Risk Carbon Initiative Regulator Mandatory In place Post the economy. Sweden National Pension (AP) funds Co-ordination of carbon footprint reporting for investment portfolios within the AP funds. Self governance Voluntary In place Post
Switzerland Ministry of the Environment (FOEN) Invitation from the FOEN to Swiss pension funds and insurers to test the climate compatibility of portfolios. Regulator Voluntary Expected Post Platform Carbon Accounting Collaboration of 12 Dutch financial institutions to develop a carbon accounting methodology for financed Netherlands Self governance Voluntary Expected Post Financials (PCAF) emissions. This Taskforce will work with industry to accelerate the growth of green finance, and help the UK UK Green Finance Taskforce (GFT) Regulator TBD In place Post government to deliver the investment required to meet the UK’s carbon reduction targets. The CSA has developed new guidance and initiatives to educate issuers about the disclosure of climate CSA Staff Notice 51-354 Report on change-related risks, opportunities and financial impacts. Canada Climate change-related Disclosure Regulator Voluntary In place Post It also intends to consider new disclosure requirements regarding non-venture issuers’ corporate Project governance practices in relation to material business risks. Seven government agencies have collectively issued guidelines stating China’s intention to develop a ‘green Carbon emissions data mandated by China financial system’. The roadmap will have three stages, finishing in 2020 whereby all listed companies will be Regulator Mandatory Expected Post 2020 for listed companies in China required to disclose .
Bundesbank: The Role of Central Germany Conference and call for papers on the role of central banks in scaling up green finance Regulator TBD Expected Post Banks
Australian Prudential Regulatory Australia’s financial regulator has stepped-up its warning to banks, lenders and insurers, saying climate Australia Authority (APRA) climate disclosure Regulator TBC Expected Post change is already impacting the global economy, and flagged the possibility of “regulatory action”. action E&S CLAIMS LION’S SHARE OF PROPOSALS: FAD OR TREND?
#9 Little By Little/Junior Wells
E&S proposals now represent the majority of all shareholder proposals in the US: Percentage of U.S. Shareholder Proposals Relating to E&S Proposals Submitted to Companies, including Withdrawals and Omissions (as of August 10, 2018) 53.4% 54.4% 47.5% 45.4% 45.6% 44.9% 43.5% 40.0% 37.3% 33.8% 33.3% 31.1% 31.9%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD Source: ISS Analytics
13 CLIMATE RISKS TOP AGENDAS: PRIVATE OR PUBLIC ORDERING? #10 Smokestack Lightnin’/Howling Wolf
Climate change and other environment–related issues are the most prevalent shareholder proposal topics:
Top E&S Issues Number of Resolutions Filed (as of August 10, 2018) 137 137 125 121 123 110 101 90
68
41 41 35 40 40 39 36 30 28 29 32 29 31 29 29 22 24 22 17 15 15 10 5
Environment Political Spending Human Rights Labor (Human Workplace Sustainability Board Diversity Executive Pay (including Climate Capital Diversity Change) Management) (EEO/SO&GI)
2015 2016 2017 2018 YTD Source: ISS Analytics
14 RISING VOTE SUPPORT FOR MANY E&S TOPICS: PEAK OR SNEAK PEEK? #11 Scufflin’/Charlie Musselwhite
E&S Issues With High Median Support Levels: Shareholder support rises for E&S proposals:
Shareholder Resolution 2017 2018 YTD Median Vote Results for All E&S Proposals (as of Aug. 10, 2018) Sustainability Reporting 28.5% 41.4% Workforce Diversity 33.3% 36.4% Climate Change 27.5% 30.7% Political Issues 26.6% 30.5% Board Diversity 14.3% 20.7%
23.2% The number of majority-supported E&S resolutions rises to 10 in 23.4% 2018 from six in 2017. Climate-change concerns lead the way: 22.8% 22.1% 21.7% 21.7% Company Shareholder Resolution Support Kinder Morgan Report on Sustainability 60.4% Kinder Morgan Climate Risk - Two Degree Scenario 59.7% Middleby Corporation Report on Sustainability 57.2% 16.0% Genesee & Wyoming Adopt GHG Emissions Reduction Goals 57.2% Ameren Corporation Report on Coal Ash Risks 53.2% Anadarko Petroleum Climate Risk - Two Degree Scenario 53.0% Report on Methane Emissions 2012 2013 2014 2015 2016 2017 2018 Range Resources Corp. Reduction 50.3%
Source: ISS Analytics YTD
15 HUMAN CAPITAL MGMT: BOTTOM OF BARREL OR TIP OF ICEBERG? #12 I’m A Woman/Koko Taylor
› #MeToo/Harassment › CEOs out at CBS, Texas Instruments, Barnes & Noble, Rambus, Intel, Avid Technology, Wynn Resorts, Lululemon Athletica and Equinix—Sources: Exechange and media reports › Gender Pay Disparity › Most proposals (>65%) withdrawn following negotiations › CEO Pay Ratio › Placed focus squarely on global workforces and the “gig” economy › Workers on Boards › Sen. Elizabeth Warren seeks to put workers in 40% of board seats as part of Accountable Capitalism Act › New UK Code of Corporate Governance (published in July 2018 by the UK Financial Reporting Council , applying to reporting periods starting from Jan. 1, 2019 with companies required to report in 2020) makes explicit reference to board level "engagement with the workforce," with three possible actions: 1) appoint a workforce-nominate director, 2) establish a formal workforce advisory panel, or 3) designate a specific nonemployee director (NED) to fulfill this task
16 PERENNIAL GOVERNANCE CONCERNS RISE AS PROXY ACCESS FALLS
› #1 Special Meeting—88 proposals offered/40.3% of votes cast on 65 proposals/seven majority votes › Smart or Shifty? #13 You Can’t Judge A Book By The Cover/Bo Diddley › #2 Independent Chair—57/31.1% on 46 proposals/zero › IC or Lead Director? #14 Big Boss Man/Jimmy Reed › #3 Written Consent Rights—43/42.1% on 39 proposals/seven › #4 Amend Proxy Access—28/27.8% on 27 proposals/zero › #5 Adopt Proxy Access—27/42.2% on 14 proposals/four › Pause or Plateau? #15 What’s Wrong/Magic Slim
17 PERENNIAL GOVERNANCE CONCERNS RISE AS PROXY ACCESS FALLS
› #6 Simple Majority Vote—27 proposals offered/63.6% of votes cast on 13 proposals/10 › #7 Annual Board Elections—15/86.5% on six proposals/six › #8 Majority Voting—11/77.7% on six proposals/five › #9 One Share, One Vote—10/29.2% on eight proposals/zero › One or Many? #16 Come Up The Hard Way/Eddie Clearwater › Also Rans… › Term Limits—Two/3.3% on two proposals/zero › E&S Expertise on Boards—Three/13.9% on three proposals/zero
18 GLOBAL ESG HOT TOPICS: HARMONY OR GOING SOLO? #17 Sittin’ on Top of The World/Howlin’ Wolf Canada . Gender diversity and Say on Pay remain key investor Europe focus Japan . Integration and disclosure of E&S risks . Updated CG codes and ongoing consultation . Canada Business Corporations Act amendments: . FR: investor-board dialogue, individual attendance and E&S • Updated CG code: focus on legal majority voting, board and management integration capital efficiency diversity disclosure . Germany: executive compensation and independence . Investor raised concerns related . Norway: TBC to lack of transparency and . UK: Chairmanship mandate, independence, engagement with accountability with regards to the workforce performance-based and equity- . Greater ESG reporting expected based compensation . Audit quality: Kingman review in UK . More say on pay resolutions in Germany & Austria . LatAm One share one vote: new legal framework in Belgium Asia ex-Japan
. Corruption - Brazil and cross- • Audit: increased qualified opinion in China and upcoming border ME & Africa greater independence at audit committee in Taiwan . Listing rules for new listed companies with unequal voting . 2019: first year with full . Foreign ownership restrictions are being rights – Taiwan and Hong-Kong remuneration disclosure by relaxed - UAE . Greater regulation on environmental protection (Korea and Brazilian companies . CG code released in 2018 in Nigeria Australia/NZ Taiwan) – greater disclosure of ESG information (China) . Potential increase of cumulative . New Capital Market law strengthening . Consultation phase related to ASX . Updated CG codes and ongoing consultation elections investors’ protection - Egypt Governance code . China: CG code released on June 15, 2018 seeking for . Green bonds have been adopted . Regulation helping out governance rules . Call from Australian prudential public comments in Colombia, Mexico and Brazil implementation in South Africa: Regulation Authority Chair for . HK: overboarding, board diversity policy, independence . Two separate votes on better pay metrics and oversight of definition remuneration remuneration committees . Singapore : independence definition and ratio, RPTs and . Mandatory auditor rotation . Potential reform considering annual board diversity policy . Diversity policy director elections and term limits . Environmental issues gain traction
19 ARE YOU PREPARED FOR 2019?: YES OR NO? #18 So Many Roads/Otis Rush
• Boards • Boardroom risk oversight will remain in spotlight in wake of hacks and harassment • No votes and California quota may boost gender diversity amidst legal challenges • Hedge funds will remain active in challenging underperforming firms • Compensation • Big stock sales/exercises or pay-for-performance pullback may spike say-on-pay failures • Second year of CEO/median worker pay ratio disclosures will focus on year-over-year changes • ESG • Expect record number of majority votes and withdrawn proposals on E&S topics • Demand expected to rise for disclosure of climate change risks • Enhanced scrutiny by investors and index-makers of unequal voting rights • Chair Clayton under pressure to restrict shareholder proposals as SEC revisits “proxy plumbing” • Impact of Mid-Term Elections: Clean sweep or Status quo? • #19 Dust My Broom/Elmore James
20 QUESTIONS
Have A Good Time/Big Walter Horton