Shareholder proposals are often viewed as an essential tool for maintaining corporate accountability, but what role do they play in shaping corporate governance? ISS Analytics recently published a study (the Study) that reviewed the impact of shareholder proposals on corporate governance practices among U.S. companies since 2000. The Study offers helpful insights into shifting trends in corporate governance and investor attitudes, and provides important lessons for Canadian issuers.
A brief history of shareholder proposals in the U.S.
According to the Study, after a significant surge in the number of governance proposals in the early 2000s, the number of proposals in the U.S. dealing with environmental and social (E&S) issues has, over the last two years, overtaken the number of governance proposals. This is likely as a result, at least in part, of successful adoption of such governance proposals by issuers over time. A similar trend is developing in Canada, where environmental proposals and human rights proposals were, according to Kingsdale Advisors’ 2018 Canadian Proxy Season Review, the second and third highest categories of proposals in 2018 (respectively), surpassed only by proposals relating to executive compensation.
Four types of shareholder proposals
According to the Study, there are four main categories of shareholder proposals. The first category consists of proposals with high voter support that are easily adoptable by the target company. Examples include: majority voting standard for election of directors, proxy access, and the removal of poison pills. Such proposals usually diminish in number once broadly adopted in the market. For example, in 2006 there were approximately 80 shareholder proposals on ballots relating to adoption of majority voting standard, with just 10% S&P 500 companies having such practice in place. In 2018, 91% of S&P 500 companies had adopted the practice, with virtually no majority voting standard proposals on the horizon.
The second category of proposals relate to governance practices with medium support but which may be difficult to implement. As a result, these types of proposals are often not adopted quickly. While such proposal campaigns recur year-over-year, there is usually only incremental adoption over time. For example, in 2006 there were approximately 40 proposals filed seeking an independent chair. Approximately 10% of S&P 500 companies had an independent chair in place at the time. By 2018, the number of proposals had decreased to approximately 35, but about 28% of S&P 500 companies had an independent chair in place. Despite this incremental increase, 91% of S&P 500 companies had independent board leadership in 2018, either through adoption of an independent chair or through an independent lead director (up from 68% in 2008). Many of today’s governance proposals in the U.S. appear to fall in this category.
The third category consists of proposals that have high shareholder support but are ultimately mandated market-wide, through laws, regulation or accounting standards, effectively dispensing with the need for a shareholder proposal. Finally, the fourth category consists of proposals with short life spans that fail to garner significant support from shareholders. Nonetheless, such proposals may be later revived and find more support in the future. Proxy access proposals, for example, were largely unsuccessful in the early 2000s, but are enjoying significantly more support recently in the U.S.
More governance proposals going to the ballots
The Study further observed that more governance proposals are appearing on ballots, rather than being withdrawn as a result of successful negotiation with boards of directors. The number of withdrawn proposals in the U.S. has dropped significantly recently (to 8% in 2017 and 11% in 2018, compared to a historical average of 25% between 1994 and 2016). This is likely because such proposals are less likely to receive majority support from voters, and boards are less motivated to settle as a result. Interestingly, the opposite trend is observed for E&S proposals, where a record 48% of proposals were withdrawn by proponents in 2018.
A relatively similar trend is observed in Canada. By October 2018, 11 of the 17 submitted proposals relating to executive compensation were voted on (slightly down from the 14 of the 15 that made it to a vote in 2017). In contrast, of the 18 E&S proposals submitted in 2018 in Canada, half were withdrawn.
While U.S. governance proposals over the last two decades have spanned a broad variety of governance practices, more recent governance proposals appear to be more narrow in focus, targeting practices that have not yet achieved market-wide consensus. The balance of governance proposals have either been widely adopted or discarded altogether. The increase in E&S proposals (and their mounting adoption) also demonstrates an evolution in investor attitudes, which are now increasingly advocating for environmental and social accountability.
Canadian issuers stand to benefit from taking heed of corporate governance trends demonstrated by the evolution of shareholder proposals in the U.S. Such trends may foreshadow the types of proposals, and shifting investor priorities, that could gain traction in Canada (as was the case with proxy access proposals). Observing such trends can assist Canadian issuers with better anticipating, and preparing for, incoming proposals in the future.
The author would like to thank Ahmed Labib, articling student, for his assistance in writing this legal update.