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By Krystal Gaboury Berrini, Lauren D. Gojkovich, Kathryn Hembree Night, and Rob Zivnuska
Shorter days and longer nights are a sign for many corporate secretaries and general counsel that proxy drafting season has arrived. Each year presents a new opportunity for issuers to address evolving and emerging areas of investor interest through proxy statement disclosure. Here are five topics where enhanced disclosure and clear messaging can set a positive tone for companies in the most important document of the year for governance-focused investors.
Environmental and social topics picked up considerable momentum with investors in 2017. Climate disclosure proposals that received majority support at major energy companies this spring are one measure of this shifting landscape, but even more telling is the frequency with which environmental and social topics are raised in shareholder engagement meetings. In broad terms, investors want to understand companies’ perspectives on key risks and opportunities, how they are measuring progress against goals, how these initiatives support long-term strategy and how the board oversees this area of the business. Some companies might consider more disclosure in the proxy about how the board and its committees oversee sustainability-related issues. The disclosure is most helpful if it allows investors to see the connection between sustainability goals, strategy and board oversight.
Cybersecurity, including how boards oversee risks universal to all companies operating in today’s increasingly technologically intensive environment, is likely to be the headline reputational risk issue for 2018. For companies with scant or stale proxy disclosure, now is the time to begin describing in more detail how these risks are overseen and what steps are in place to stay current in an ever-evolving environment. Companies should identify the directors whose skill sets support oversight of cybersecurity risk and the processes by which the board as a whole is integrated into the company’s cybersecurity oversight.
According to EY, the portion of S&P 500 companies disclosing shareholder engagement has grown from 6 percent in 2010 to 72 percent this past year. Disclosing who participates in engagement is also becoming more detailed: 29 percent of S&P 500 companies disclosed director participation in engagement in 2017, up from 24 percent the previous year. In a proxy statement, investors are interested in reviewing the topics discussed in engagement, investor feedback on those topics and specific actions taken in response. The movement toward providing more transparency on engagement is being matched by enhanced investor disclosure on their processes as well. In 2017, investors took a more public posture around their engagement efforts: BlackRock published six vote bulletins that describe its approach and reasoning behind high-profile votes and both Vanguard and State Street Global Advisors significantly expanded the scope of their public communications on engagement priorities. Expect the trend toward greater transparency around engagement from both issuers and investors to continue in 2018.
Investors continue to be interested in understanding how a company selects the metrics used in incentive plans, how those metrics will incentivize management to reach strategic goals, and the process the compensation committee follows to ensure those goals are sufficiently challenging. Disclosure that clearly explains why chosen metrics are appropriate for a particular company and how these measures align with business strategy can help investors more accurately evaluate compensation programs. Equally as important is disclosure that provides insight into the target setting process. In particular, companies should clearly describe when current year goals are higher than the previous year’s actuals. Where that is not the case, companies should provide a clear discussion of why circumstances at the company or broader business conditions make those targets appropriate.
The most consistent focus area for institutional investors in 2017 has been board composition and board diversity. While there is not a one-size-fits-all consensus around how much or which type of disclosure is optimal, companies should be aware that investors are eager to have better information available to assess director candidates and board process. Asset managers such as BlackRock, State Street Global Advisors and Vanguard have highlighted board composition and diversity as key engagement priorities and this fall, the New York City Comptroller’s Office began a campaign for standard disclosure of a director skills and experience matrix.
Outside of investor engagement meetings, clear and fulsome proxy statement disclosure is the most effective way to communicate to investors how board skills align with corporate needs and how boards evaluate themselves. Investors are looking for the proxy to show that the directors they are electing have the right skills and experiences to oversee the company and that strong processes are in place to ensure board composition remains appropriate over time. To meet that need, companies should consider providing enhanced disclosure around board evaluations, director succession planning and skill and experience assessments alongside a narrative of how these processes result in a highly qualified board.
Now that the SEC has issued guidance on pay ratio disclosure, it is incumbent on issuers to determine how best to disclose the ratio and the methodology behind their calculation. While large institutional investors have generally refrained from disclosing how the pay ratio will factor into their proxy voting decisions on say-on-pay or director elections, significant attention will still be dedicated to the issue in 2018. Institutional Shareholder Services Inc.’s 2017-2018 global benchmark voting policy survey showed that nearly 75 percent of investors intended to compare ratios across sectors or assess the ratio on a year-over-year basis. However, both ISS and Glass Lewis, which recently wrote on the topic, have said publicly that the figure will not be factored into their recommendations around compensation in 2018.
A previous CamberView Insight discussing recent SEC guidance on the pay ratio identified several ways for issuers to prepare for this new disclosure. Because the pay ratio will be part of a broader conversation with investors around executive compensation, many expect that 2018 will yield a range of disclosures, both in the volume of detail reported and diversity of narratives around companies’ pay ratio story. Companies should consider if additional context would be helpful to explain methodology or company-specific factors that impact their ratio. Regardless of whether a company plans to include additional disclosure in the proxy or not, governance teams should be prepared to discuss the ratio with investors and be able to clearly explain why their structure, methodology, and ratio may differ from peers.
Fall off-season engagement with investors is in full swing and with it comes an important opportunity to discuss what aspects of disclosure will be most helpful this coming proxy season. Forward-leaning companies use the proxy as a tool to incorporate positive messaging drawn from all aspects of their business. Whether outlining the link between strategy and executive compensation metrics, or conveying how board composition enables oversight of environmental and social risks, the proxy statement provides an ideal opportunity for companies to demonstrate the strong practices they have in place and why investors should support the go-forward strategy of the company.
CamberView Partners is a leading provider of investor-led advice to public companies on engagement and shareholder relations, activism and contested situations, sustainability and complex corporate governance matters.
Krystal Gaboury Berrini is a Partner at CamberView Partners. Before joining CamberView, Ms. Berrini led governance research, engagement and voting activities at Wellington Management Co. Earlier in her career, she was on the governance team at State Street Global Advisors.
Lauren D. Gojkovich is a Principal at CamberView Partners. Before joining CamberView, Ms. Gojkovich was a Vice President, Assistant General Counsel, at Goldman Sachs in the legal division’s corporate governance group. Earlier in her career, she was a corporate attorney at Wachtell, Lipton, Rosen & Katz.
Kathryn Hembree Night is a Principal at CamberView Partners. Before joining CamberView, Ms. Night was an Associate in the Mergers and Acquisitions Group at Goldman Sachs and an analyst in the firm’s Special Execution Group.
Rob Zivnuska is a Partner at CamberView Partners. Before joining CamberView, Mr. Zivnuska led investment stewardship efforts for BlackRock’s investments in the Americas. Earlier in his career, he was a corporate attorney at Skadden, Arps, Slate, Meagher & Flom.
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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