As we approach this year’s proxy season, it is a good time to reflect on last year’s developments and to plan for this year’s hot topics.

A Look Back
In addition to reviewing your own shareholder voting results and takeaways from shareholder engagement efforts in 2014, a look at last season’s activity can help identify areas of current shareholder concern. During 2014, we saw areas of shareholder focus that will likely continue to be relevant this year.

Shareholder activism. While the total number of shareholder proposals in 2014 was consistent with 2013, the 2015 season could see an increase in proxy access proposals, spurred perhaps by the New York City Comptroller’s recent initiative involving 75 companies. The Comptroller’s proxy access proposals request a bylaw provision that gives shareholders who own 3% or more of a company for three or more years the right to list their director candidates, representing up to 25 percent of the board, on that company’s ballot.

More shareholder proposals went to a vote in 2014. This indicates that companies may have been excluding proposals with less frequency. However, as discussed in a recent Doug’s Note, the SEC’s Division of Corporate Finance recently announced that it will “express no views on the application of Rule 14a-8(i)(9) during the current proxy season”. As a refresher, Rule 14a-8(i)(9)  allows companies to exclude a shareholder proposal when it “directly conflicts” with a management proposal. It is standard practice for a company looking to exclude a shareholder proposal from its proxy materials to seek an SEC no-action letter as a safeguard against liability. The recent Corp Fin announcement means that any company seeking to use the “direct conflict” exclusion of Rule 14-8(i)(9) this season will not be able to obtain no-action relief.

Governance matters, such as independent board chairs and shareholder rights to act by written consent and call a special meeting, remained a common shareholder proposal theme in 2014. Head off these issues by ensuring your proxy articulates the rationale for the company’s governance practices, particularly those that are unusual or that are currently the target of shareholder attention.

Corporate political spending, executive compensation and social proposals relating to human rights and the adoption of a climate change policy continued to be prevalent last year.  In addition, environmental issues also continued to be top subjects in shareholders proposals.

Proxy readability updates. There has been a big push in recent years toward more visually-appealing disclosure containing an increased use of graphics and summary information. Companies have moved beyond providing just required information, and have added innovations like proxy summaries, descriptions of shareholder engagement efforts and letters from the board or CEO regarding governance issues. The focus has been on providing more user-friendly disclosure that guides investors toward quickly identifying strong compensation and governance practices. To get your creative juices flowing, take a look at RR Donnelley’s Guide to Proxy Design.

Virtual shareholder meetings. While virtual shareholder meetings are not yet a common practice, they have become more prevalent in recent years. In 2014, 93 companies held virtual meetings, with just over half held online only. If this is something you are considering for the future, remember that there must be capability for shareholders to see or hear the proceedings contemporaneously (if there is a physical meeting as well), vote during the meeting, and be able to ask questions or speak up in way that can be heard by the other shareholders.

A Look Ahead
Certainly, companies should continue to expect shareholder proposals regarding board declassification, majority voting and elimination of supermajority voting. There also appears to be a bigger focus than usual on strategic actions like business combinations and break-ups, as evidenced by the recent activist activity surrounding DuPont and Lear Corp. It would also not be surprising to see a rise in cybersecurity–related proposals this year.

We can also expect that board refreshment will get as much attention this proxy season as ever since shareholders are still questioning whether a “seasoned” director can truly be considered independent. Investors are focused on director tenure, industry and operational skills and diversity.  It’s worth giving director tenure a harder look this year given ISS’s addition of director tenure as one of the five governance factors it considers when calculating a company’s QuickScore. In addition, at least one large institutional investor has adopted a director tenure policy that applies to the companies whose stock it holds.  Turnover is a related topic still getting attention since healthy turnover presents opportunities for director diversity and refreshed skillsets.

Say-on-Pay. It’s important to proactively manage an upcoming say-on-pay vote. If a bad result is anticipated, the company should reach out to its top shareholders well before proxy season commences to communicate its rationale and, perhaps more importantly, provide those shareholders with the opportunity to voice concerns. Even though it is a non-binding vote, poor support usually garners some public attention. In addition, companies are required to discuss in the CD&A the extent to which compensation decisions were impacted by the prior year’s say-on-pay vote. See these Doug’s Notes for tips in establishing an effective shareholder engagement program.

Pending Dodd-Frank Rules. The SEC’s final pay ratio disclosure rules remain outstanding, but there’s been some chatter recently about them being released soon. Mary Jo White, the chairwoman of the SEC, said in November that she hoped the rule would be completed before the year ended. In sum, these rules would require public companies to disclose the median annual total compensation of all employees of the company (excluding the principal executive officer (PEO)), the annual total compensation of the PEO and the ratio of the two. Calculating the ratio is tricky for many reasons, so it’s important to start identifying what will likely be complicated issues to work through (e.g., seasonal or non-U.S. employees). While it’s probably too early to get caught up in drafting the disclosure, it may be helpful to think about the material assumptions, adjustments or estimates that will need to be involved (and disclosed).

Proactive Shareholder Engagement
Shareholder outreach and engagement is the most reliable way to know what your institutional investors and other major shareholders are thinking, and it should be a year-long effort. While it might be easier said than done, it is a good idea to proactively pursue governance or other changes through the company’s own initiatives before becoming the target of activist attention. Engage with your top shareholders early and often to identify what, if any, voting policies they have in place and what they view the company’s vulnerabilities to be. Active, long-term shareholders can provide valuable perspective before the governance proposal or strategic campaign is launched.

Dealing with Shareholder Proposals: An Update

As mentioned, the shareholder proposal landscape may be in flux. Should a shareholder proposal land on your desk this season, here are a few tips for handling it:

• If you are not already, become familiar with Rule 14a-8 and the other procedural and substantive rules and Staff guidance relating to shareholder proposals, as well as the various deadlines involved in the shareholder proposal process
• Engage with the proposal’s proponent early in the process
• Decide whether you have a basis for submitting a no-action request to the SEC (but remember that this proxy season  you will not be able to obtain no action relief relating to the “direct conflict” exclusion of Rule 14-8(i)(9))
• Keep the dialogue with the proponent and other shareholders going after proxy season.