ESG Viewpoint - 2019 Voting Season Review US and Canada

Our views on the key trends arising at US and Canadian companies during the 2019 voting season.
Oktober 2019

David Sneyd

Vice President, Analyst, Governance and Sustainable Investment

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Risk Disclaimer 

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

  • Investors are raising the bar for US and Canadian company directors, particularly on diversity, with female board appointees reaching a record high in the US.
  • Growing opposition to director compensation reflects market-wide misalignment and lower tolerance for poor practices.
  • Environmental and social-themed shareholder proposals continued to outnumber governance proposals, reversing a longer-term trend, with levels of support higher than ever before.
  • Meanwhile, governance proposals continued to decline in number and support, as more companies voluntarily adopt commonly recognised best practice, such as proxy access.

With nearly three quarters of the annual general meetings (AGMs) of US and Canadian issuers having taken place between April and June, we set out here our views on the key trends that arose at these companies through the voting season. These can be drawn from both the voting results of management proposals, most commonly in the form of director elections and compensation, as well as an examination of proposals filled by shareholders on different ESG topics.

Director Elections: Investors increase expectations and push for diversity

Whereas in the past, many US and Canadian companies only put their directors up for re-election periodically, it is now increasingly common to re-elect all directors annually. This is a welcome development in allowing shareholders the opportunity to express any concerns on individual directors as they arise. The practice leads to a high number of election proposals, and in 2019 the average level of support stood at above 98%, with more than 99.5% of directors being re-elected with majority support.

However, these high-level numbers hide an important trend. Investor concerns have targeted specific individual directors rather all of those on the board, with the proportion of director elections that attracted significant opposition (defined as more than 20% against) continuing to increase for the fourth year in a row. At 5.8%, the proportion of nominees with significant opposition was the highest since 2010.1

This reflects heightened expectations amongst a growing portion of the investor base on the independence, availability, diversity and accountability of the directors that sit on company boards. Interestingly, this has happened despite declining ‘against’ recommendations from the main proxy advisers, implying that more investors are using their own independent voting policies, which set higher expectations.

On gender diversity, momentum continued in 2019 in increasing the number of women that sit on company boards, with the proportion of new female director appointees reaching a new record high at 45% in the US. In July, we saw the last remaining all-male board in the S&P500 at Copart Inc. announce the appointment of a female executive to the board. However, hundreds of smaller Russell 3000 companies continue to lack diversity. In the TSX Composite, the proportion of companies that had all-male boards declined slightly to 2%, although almost half of all Canadian companies outside of this core index lack female board representation.

 

Risk Disclaimer 

The value of investments and any income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

The number of women sitting on company boards increased in 2019, with the proportion of new female director appointees reaching a new record high at 45% in the US.

Compensation: Market-wide misalignment reflecting in vote results

At US companies, we saw investors register significant opposition (defined as more than 20% against) on more say-on-pay proposals in 2019 (at 8.0% of meetings) than any other year since its mandatory introduction in 2011. Likewise, we also saw a record year for significant opposition recorded in Canada (at 10.6% of meetings)2.

The most common reason for this remained misalignment between pay outcomes and company performance. Illustrating this, the median level of CEO total pay in the S&P 500 grew year on year to reach a record high for FY2018 at over $12 million, despite the index providing a -6.6% return for investors over the same period. Alongside this, a number of ongoing poor practices such as poor target disclosure, unjustified exceptional share grants and overly generous severance arrangements continued to raise concerns, with investors themselves tightening up the requirements to get their support. As with director elections, investors’ stand against problematic compensation provisions took place against a background of declining ‘against’ recommendations by proxy advisers, implying that investors are becoming more sophisticated in how they review pay.

In Canada, where say-on-pay is currently not required for all companies, the voluntary adoption rate continued to increase, with 71% of the TSX Composite putting it on the agenda during 2019. Those remaining companies will soon be out of excuses, with the Canada Business Corporations Act (CBCA) amendments receiving Royal Assent in June. The Act will include requirements for an annual say-on-pay vote for “prescribed corporations”.

Although the scope is still to be determined, we expect to see widespread voluntary adoption next year, irrespective of the outcome.

Environmental & Social-themed (E&S) Shareholder Proposals: Established, supportable and effective

2019 confirmed a pattern established over the last three years that has seen the number of E&S shareholder proposals voted on at US AGMs significantly exceed those on governance, reversing a longer-term trend. The proposal subjects remained unchanged from last year, with political spending (93) being the most frequent, followed by environmental (64), mainly related to climate, and human capital management (54). That being said, they did change rankings, with environmental falling from first to second as the number of climate change proposals that were put to a vote falling significantly this year. This resulted from both an uptick in adoption of proponents’ requests by companies leading to these proposals being withdrawn before the shareholder meeting, as well as the US Securities Exchange Commission (SEC) approving 45% of all omission requests by companies, the highest rate in the last five years.

Overall, the withdrawal rate on all shareholder proposals reached a record high for 2019, with nearly half that were filed not being on the final ballot. This is further evidence that companies are more willing to engage proponents and negotiate terms in order to avoid the embarrassment or inconvenience of having to hold a shareholder vote on the subject.

Alongside an increase in frequency, E&S proposals are receiving more support than ever, albeit still typically short of the majority supported needed to have them pass. For 2019 nearly half received significant support (defined as more than 30% votes in favour), which is an increase on the year before and a long way from the figures in 2010, when this was the case for only one in ten proposals.

This results from two main drivers. First, E&S issues are seen as more relevant to a broader range of the investor base, with the historical stigma on supporting such proposals largely gone. Second, and linked to this, proponents are getting better at drafting proposals that are not overly prescriptive but focus on issues that are material to company performance.

Environmental and Social Majority Votes 2019
Percentage growth % Company Vote Result Management Recommendation BMO GAM Vote

Human rights reporting

GEO Group

87.9%

For

For

Lobbying disclosure

Mallinckrodt

79.7%

For

For

Opioid risk reporting

Mallinckrodt

78.9%

Abstain

For

Opioid risk reporting

Walgreens Boots Alliance

60.5%

Against

For

Political spending disclosure

Alliant Energy

54.3%

Against

For

Political spending disclosure

Cognizant Technology Solutions

53.6%

Against

For

Political spending disclosure

Macy's

53.1%

Against

For

Despite an almost doubling in the number of shareholder proposals filed in Canada this year, E&S shareholder proposals confirmed a long-term trend of receiving less support than those seen in the US. This is because proposals are more likely to be filed by interest-based social actions groups rather than established investors in the company, as well as the proposals themselves being more prescriptive as there is no securities regulator acting as referee who would otherwise disqualify them.

Governance-themed Shareholder Proposals: Entrenchment leads to few successes

2019 saw the proportion of governance-related shareholder proposals receiving significant support (more than 30% votes in favour) decline this year, albeit at 58%, which is still higher than that seen with E&S proposals (48%). Withdrawal rates (22%) were also more than half that seen with E&S proposals3.

As in previous years, the variety of governance proposals was narrower than with E&S proposals, with the most common themes for 2019 concerning independent chairs, supermajority voting and written consent. Proxy access, which dominated the agenda in 2016 and 2017, did not make the top three this year, reflecting widespread adoption by US corporates with 72% of the S&P500 now having it in place. Similarly, proposals to declassify board elections, which peaked around 2013, are now rarely seen, as more companies have implemented this request too.

The overall picture for governance shareholder proposals is that investors and companies are at a stalemate, with most of the issues that attract broader consensus amongst investors now put in place by most companies, leaving a set of issues where investors are entrenched and generally vote along ideological lines, with little movement year on year. This includes, for example, resolutions related to the appointment of an independent chair – a governance feature that we support, but continues to have many opponents in the local market.

What next for 2020?

With the voting season largely over, planning is now starting in earnest for 2020 AGMs – both by companies themselves, and by investors updating their voting policies and planning to file shareholder resolutions. Scrutiny on the quality of directors and alignment of pay will continue to increase, but our hope is that companies will have learnt from this year and proactively make changes in order to fend off further investor dissent.

One potential key feature of 2020 is the widespread adoption of integrating environmental and social issues into voting policies, not only through shareholder resolutions but also as investors start to take out their dissatisfaction on key E&S issues – particularly climate change – on the election of directors. What is clear is that as the breadth of rationale for voting against proposals increases, so too will the importance of dialogue between companies and investors, so that rather than a moment of confrontation, AGMs can be a collaborative route to progress.

How did BMO Global Asset Management vote?

Although our voting on board-related and shareholder proposals remained relatively unchanged year on year, we did see an increase in the level of opposition to compensation, reflecting an escalation of concerns over misalignment and prevailing poor practices.

 

Governance-themed Shareholder Proposals: Entrenchment leads to few successes

2018 For Against Abstain Withhold*

Board

81.9%

7.3%

0.0%

10.8%

Compensation

41.8%

58.2%

0.0%

0.0%

Governance shareholder proposals

69.6%

28.6%

1.8%

0.0%

E&S shareholder proposals

71.6%

26.2%

1.4%

0.7%

YTD 2019 For Against Abstain Withhold*

Board

78.8%

8.1%

0.1%

13.0%

Compensation

28.9%

71.1%

0.0%

0.0%

Governance shareholder proposals

69.6%

27.7%

2.4%

0.0%

E&S shareholder proposals

73.5%

20.6%

5.8%

0.0%

Source: BMO Global Asset Management, as at September 2019. *Withhold is only a valid vote option on directors in Canada

1 Source: ISS Analytics

2 Source: ISS Analytics

3 Source: ISS Analytics

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