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Governance

Proxy season stung by government shutdown

SEC slowly working through backlog of company objections to proposals from shareholders

Heidi Welsh said the SEC is six weeks behind schedule and it’s tough to get information on challenges.

While many of the issues dominating shareholder proposal submissions are similar to those of recent years, albeit with some new wrinkles, the aftermath from the 35-day government shutdown has introduced uncertainty this proxy season.

"It's a mess because the SEC is six weeks behind schedule," said Heidi Welsh, founding executive director of the Washington-based Sustainable Investments Institute.

Staff members at the Securities and Exchange Commission's division of corporation finance were furloughed during the partial shutdown, which ended in late January. When a company files an objection on a given shareholder proposal, it's that SEC unit that determines if the proposal can be omitted.

As of mid-February, SEC staff allowed the omission of six proposals in the face of company challenges, fewer than the 27 omitted at the same point last year, according to a proxy preview report from non-profit shareholder advocacy group As You Sow, Proxy Impact and Sustainable Investment Institute. Companies had lodged objections to at least 52 more proposals that have yet to be decided as of March 25, according to information on the SEC's website.

Courteney Keatinge, New York-based senior director of environmental, social and governance research at proxy-voting advisory firm Glass, Lewis & Co., said the shutdown occurred during part of the busiest stretch for shareholder proposal objections, and the SEC staff is now working its way through a significant backlog.

Ms. Welsh, who co-authored the proxy preview report, said the SEC wasn't "responding to company challenges so it's hard to find out what those challenges were. The SEC is also late in issuing its responses because it wasn't there to write them."

An SEC spokeswoman declined comment when asked about the agency's response timeline.

If a company does not hear back from the SEC on a proposal it would like to omit from its proxy statement, it has a difficult decision to make: include the proposal even if it feels the proposal is out of bounds, or omit it and roll the dice that SEC won't penalize the company down the road. In the latter event, a company could be forced to reissue its proxy statement, postpone its annual meeting or be subject to shareholder lawsuits, Ms. Welsh said.

Ms. Keatinge said the companies that have contacted her have said they're going to play it safe and simply include the unresolved proposals. "There's a good chance that we may see more shareholder proposals (make it on the ballot) this year and we may see proposals that traditionally could have been excluded on certain grounds being included," she said.

Mind the gap

As of March 25, 571 shareholder proposals have been filed, compared to 875 total proposals during the entire 2018 season. Most companies hold annual meetings in April through June.

The number of proposals making it to the ballot remains to be seen, but there have been 23 voted upon and 102 proposals withdrawn as of March 25, according to ISS Analytics, the data intelligence arm of Institutional Shareholder Services Inc., Rockville, Md. In 2018, 465 proposals went to a vote and 180 were withdrawn.

Similarly to recent years, issues like climate change, political spending, board diversity/oversight and human rights have been a focus for shareholders this season, according to the proxy preview report.

Of note, in recent years, shareholders have asked companies to disclose, if any, the gap in pay between their male and female employees based on those with directly comparable jobs, and factoring in things like experience and geography.

Patrick McGurn, special counsel and head of strategic research and analysis at ISS, said proponents now are looking for the raw pay gap numbers, not based on job title or other metrics, like what is required in the U.K. Money manager Arjuna Capital has asked 12 publicly traded financial services and technology companies to disclose their median gender pay gaps, and in January, Citigroup Inc. disclosed a median gender pay gap of 29%.

There are also proposals on executive compensation, like the Association of BellTel Retirees' efforts to prohibit Verizon Communications Inc. from paying "above-market earnings on non-tax-qualified retirement savings or deferred income account balances of senior executives in the company's Senior Executive Retirement Plan." The same proposal last year garnered 27.7% support, according to an 8-K filing.

For major technology and social media companies, there have been calls in recent years to address shareholder concerns on things like privacy and hate speech. Although not a formal shareholder proposal, institutional New Zealand investors, including the NZ$41.2 billion ($28.2 billion) New Zealand Superannuation Fund and the Government Superannuation Fund Authority called on Facebook Inc., Google and Twitter Inc. to take action following the livestreaming and sharing on social media of last month's terror attack in Christchurch, New Zealand.

"We will be calling on Facebook, Google and Twitter to take more responsibility for what is published on their platforms," Matt Whineray, NZ Super Fund CEO, said in a news release. "They must take action to prevent this sort of material being uploaded and shared on social media. An urgent remedy to this problem is required."

Facebook is also the target of a shareholder proposal filed by Trillium Asset Management and co-filed by Illinois Treasurer Michael W. Frerichs, Rhode Island Treasurer Seth Magaziner, Pennsylvania Treasurer Joe Torsella and New York City Comptroller Scott M. Stringer that asks the company's board of directors to make the chairman an independent position in light of several controversies over Facebook's handling of personal data. A similar shareholder proposal presented at the company's June 1, 2017, shareholder meeting was voted down.

Unorthodox approach

The five pension funds in the $186.3 billion New York City Retirement Systems took an unorthodox approach to see that their shareholder proposal on climate change made it on TransDigm Group Inc.'s proxy ballot for a March 12 vote.

The funds sued the Cleveland-based aerospace company in December, alleging that it intended to exclude the shareholder proposal from the proxy for its 2019 annual meeting. In January, litigation was dropped after the company agreed to withdraw a complaint filed with the SEC opposing inclusion of the pension funds' proposal in the 2019 proxy materials.

The proposal said the company should "adopt a policy with time-bound, quantitative, companywide goals for managing greenhouse gas emissions, taking into account the objectives of the Paris Climate Agreement, and report, at reasonable cost and omitting proprietary information, on its plans to achieve these targets."

The proposal added that "the nature, timing and level of the goals" will be "entirely up to TransDigm's discretion. The proposal is not an attempt to micromanage but to set a guiding direction that can be assessed by shareholders."

At the TransDigm annual meeting, the proposal garnered 34.3% support, according to a company 8-K filing, which Mr. Stringer, the New York City comptroller and fiduciary for the five pension funds, took as a positive.

"We're happy that the vote got significant support, and look forward to engaging more" with the company, he said in an email. "TransDigm's board continues to be an outlier in its opposition to setting (greenhouse gas) reduction goals."

ISS' Mr. McGurn called the initial lawsuit a "shot across the bow" for public companies that do not wish to disclose certain information related to climate change.

Sustainable Investments Institute's Ms. Welsh said shareholders are now expanding their efforts on climate change-related disclosures and will continue to fight for more disclosures.

Anadarko Petroleum Corp. challenged a shareholder proposal that called for the company to issue a report describing if, and how, it plans to reduce its greenhouse gas emissions. The SEC ruled in March that it cannot exclude the proposal from the ballot.

"Climate change is the issue of our time," she said. "When the ice caps are melting, folks are going to continue to pay attention."