Council of Institutional Investors

CII Members Set to Address Variety of Issues in 2015 Proxy Season
Thursday, December 11, 2014
by: Rosemary Lally

Section: CII Governance Alert

Many CII members have buttoned up plans for the issues they will be addressing with companies during the 2015 proxy season, but most are not yet ready to report the names of the firms with which they are engaging. As engagement has evolved into the initial move for many institutional investors, the list of target companies remains relatively short until behind-the-scenes negotiations have drawn to conclusions.

UAW Tackles Cybersecurity Risk
One of the major focuses of the UAW Retiree Medical Benefits Trust this proxy season is cybersecurity. The trust is sending out 15 letters to corporate boards asking them to describe “the policies, processes and controls it relies on to: 1) assess the risks to the company’s business and operations from cybersecurity threats; 2) ensure robust security measures are in place to reduce the likelihood of a big data breach or cyberattack; and 3) mitigate the short- and long-term impact of a cybersecurity breach or attack should one occur.” Each of the companies receiving a letter was identified by the fund using a U.S. Department of Health and Human Services database. The database indicated that each of the companies has had security breaches in which the health information of 500 or more individuals was compromised. While some of the firms receiving letters are healthcare companies, others are data management firms or billing processors.

The letters point out that patient data is especially valuable to criminals because the detailed information collected and recorded can be used for multiple types of fraud or identity theft and, unlike credit card information, cannot be changed after there is a breach. Cambria Allen, director for corporate governance for the UAW trust, explained that cybersecurity is an emerging issue of concern for boards. “Those elements responsible for these attacks only will get more sophisticated, and as investors, we simply don’t have the luxury of waiting until companies play catch-up,” she said. While Allen said she does not expect a one-size-fits-all response by companies, she does hope to see the emergence of a bucket of best practices that cut across industries, augmented by best practices that respond to industry-specific risks. Since this is a new issue for directors, the UAW fund plans to send only letters this year and not submit any shareholder proposals asking for reporting on cybersecurity risks.

LongView Capitalizes on Previous Successes
Amalgamated Bank’s LongView Fund is playing upon some of its successes from 2014. LongView once again is submitting proposals asking companies to eliminate accelerated vesting of equity awards in changes of control. This proxy season, it is filing seven of these proposals and expanding its focus to include companies in the energy sector and restaurant industry where it hopes to curtail automatic equity acceleration upon changes-in-control terminations. Last year, the fund submitted six accelerated vesting proposals and one at Valero Energy received majority support from shareholders. Three of the proposals were withdrawn after the companies agreed to make changes.

LongView also plans to continue its push to urge board oversight of political spending from the corporate treasury, including all payments to trade associations, 501(c)(4) organizations, and lobbying expenditures. In 2014, LongView submitted three proposals on corporate political contributions. Sturm & Ruger agreed to adopt before a vote, a proposal at Smith & Wesson received the support of 56 percent of the votes cast, and one at Olin garnered a strong 40 percent vote.

In addition to the continued efforts in these areas, the fund will be pressing for increased board diversity at companies in the real estate and technology sectors (filing five proposals) and submitting proposals on core governance practices such as board declassification and majority vote standards, primarily at mid- and small-cap firms.

Florida State Board of Administration (FSBA) Targets Companies with Three Deficiencies
FSBA is sending letters to 53 Russell 3000 companies with a “trifecta” of governance issues: classified boards, plurality voting standards and high supermajority voting thresholds. The letters ask the companies to meet with the FSBA to have a dialogue on these issues. The pension fund plans to have a two-year engagement and information-sharing process with any of the companies that are amenable.

“Taken individually, these provisions limit shareowner rights and may foster less accountability from board members and company management,” say the letters. “The simultaneous implementation of all three restrictive practices is rare among U.S. corporations and raises the concern of misalignment with shareowner interests,” they add.

Tracy Stewart, senior corporate governance analyst for FSBA, notes that most of the companies on the list are smaller-caps. “I think those companies sometimes fly under the radar a little and don’t get to hear much, or very often, from investors,” she said. “Two have told us they’ve never really heard from investors at all on these issues, so we are trying to make their inaugural interaction with institutional investors a positive experience,” Stewart added. She reported that already about 25 percent of the companies have responded, with most stating that they would like to talk with the FSBA to learn more about its viewpoint. A few companies are either in the process of making changes or have agreed to talk about doing so at their next board meetings. “We’ve starting having the follow-up calls, but we expect it to be a long process, particularly since we’ve raised multiple issues,” she said.

For the past four years, FSBA has focused its activism efforts on declassifying boards, submitting many majority-vote-winning shareholder proposals through the Shareholder Rights Project.

OPERS Scrutinizes Directors, Companies Based on Best Practices
As part of its yearly preparation for the proxy season, the Ohio Public Employees Retirement System (OPERS) scrutinizes director nominees by:

• reviewing the number of boards they serve on (to ensure they are not “overboarded”);
• determining whether they are elected to an annual term;
• checking to see if they have served on the audit, governance, compensation or other similar committee and not taken steps to implement a proposal that shareowners approved or not taken steps to change executive pay after shareowners failed to ratify the say-on-pay proposal; and
• determining if the audit committee has held the non-audit fees to less than 30 percent of the overall fees paid to the external audit firm.

When examining the top holdings in its portfolio, OPERS looks at the following:

• financial performance (measured over one-year, three-year and five-year periods and against peers);
• board diversity and refreshment,
• annual election of directors,
• the appointment of a lead director if the company has a combined chair/CEO;
• executive pay and compensation measures;
• auditor rotation and non-audit fees;
• human capital management in the supply chain;
• reporting of political contributions and trade association memberships; and
• any other best practices that the company has not adopted.

OPERS staff engages companies identified in this process first and then files any shareholder proposals, on its own or in concert with peers, if engagement ceases to provide results.
As part of a longer term initiative, OPERS is examining ways in which it can engage companies and discuss retirement security issues on a state and national level.

AFL-CIO Zeros in on Executive Compensation
The AFL-CIO’s main focus for 2015 appears to be executive compensation. The labor federation is filing proposals asking companies to take the following actions:

• adopt a policy that the company will not make gross-up payments to its senior executives except for gross ups provided under an arrangement such as a relocation or expatriate tax equalization policy
• adopt a policy that in the event of a change in control there will be no acceleration of vesting of any equity awards granted to senior executives, the only exception being if a compensation committee stipulates that any unvested award will vest on a partial pro-rata basis up to the time of the executive’s termination.
• adopt a policy that all equity compensation plans that must be submitted to shareholders for approval specify that awards to senior executives will all be performance-based.

In addition to the pay proposals, the union federation plans to submit resolutions asking companies to issue annual reports on lobbying activities and requesting firms to report on the steps they are taking to reduce the risk of acute nicotine poisoning for farmworkers in their supply chain for tobacco.
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