Board support rising but concerns remain, study says

Shareholders have shown increasingly strong support for leadership of corporations in voting in favor of directors, while at the same time they have firmly embraced proxy access, enabling them to rebel by nominating their own members to corporate boards, a study by Ernst & Young LLP's Center for Board Matters found.

Shareholder opposition to the elections of board nominees has fallen almost steadily since 2009.

In 2015, through June 10, only 3.5% of some 15,500 nominees received opposition votes of more than 20%. That is down from 4.1% for the full year of 2014, 4.7% in 2013, 5.3% in 2012, 5.1% in 2011, 8% in 2010 and 9.8% in 2009, the farthest back the EY data go.

Boards generally consider that 20% opposition a threshold for concern, said Jamie Smith, San Francisco-based assistant director of the center, which offers thought leadership on corporate governance for corporations and institutional investors and doesn't serve any clients.

“That's the level boards are likely to want to better understand what's driving that opposition and reaching out to shareholders,” Ms. Smith said in an interview.

“Boards have gotten a lot smarter about ... a lot of factors that currently drive investor votes against directors,” Ms. Smith said, explaining the increasing shareholder support for directors.

“I think boards have cleaned up” matters of shareholder concern about “directors who don't attend 75% of meetings, or directors who are overboarded,” meaning they spread their abilities too thin by serving on many boards, she said.

“So there aren't going to be as many votes against directors for things like that.”

“Corporate performance — however investors define it — plays into whether directors are supported or not.” In 2014, the Standard & Poor's 500's total return was 13.69%.

Say on pay, or non-binding voting on the pay packages of the CEO and other top executives of companies, has taken pressure off opposition to directors, Ms. Smith said.

“Now that investors have the opportunity to cast votes on a company's executive compensation programs, there is an outlet for voting against pay instead of necessarily voting against directors over pay concerns,” she said.

Despite the strong support for directors, shareholders continue to have concerns “around board composition and accountability,” and this year have strongly supported proxy access, Ms. Smith said.

Through June 10 of this year, 40 of 82 proxy access proposals won majority support.

”The hallmark of this proxy season has been the success of shareholder proposals on proxy access,” Ms. Smith said.

The New York City Retirement Systems, whose combined assets total $163.4 billion, sponsored access proposals at 75 companies this year. Of the 63 that have come to a vote so far, 41 received a majority support, while six companies negotiated a withdrawal, either agreeing to adopt access or put forward a management-sponsored proposal next year, according to data from the retirement systems.

“Most companies that received majority support (on the access proposal) are taking a wait-and-see approach” before making a decision on whether to implement it, Ms. Smith said, declining to offer an opinion on access.

The EY report about its study, “Four Takeaways From the Proxy Season 2015,” shows a big upswing in corporate disclosure of engagement discussions with shareholders on corporate governance issues.

Some 56% of the 444 companies in the S&P 500 index filing 2015 proxy statements as of June 17 disclose engagement with shareholders. That percentage is up from 50% last year and only 6% in 2010.

“That's a massive increase in companies disclosing they are having these conversations” with shareholders, Ms. Smith said.

“Disclosure is not required,” she said. “But one of the main factors driving the disclosure is” proxy-voting advisory firms.

“It's more disclosure companies are putting out for proxy advisory firms, although some shareholders are paying attention to it,” she said.

“We do factor that (corporate engagement disclosure) in when evaluating a company's response to a low (that is under 70%) say-on-pay vote in the preceding year,” Subodh Mishra, vice president for communications, Institutional Shareholder Services Inc., Rockville, Md., said in an e-mail. “This informs our research, analysis and recommendations for the current year's say-on-pay resolution.”

“The depth of those disclosures varies widely” among companies, Ms. Smith said. “Some companies go into great detail about the meetings they've had with investors, the feedback they've gotten and how they've responded to that feedback” as well as how many investors they reached out to and how many participated.”

Of the 250 companies that disclosed engagement in 2015, 18% report board members were involved in the discussions, while 46% reported corporate changes in practices or disclosures as a result of engagement. Some 82% of those changes related to executive pay, 33% to governance and 12% to environmental or social concerns.