Trending Proxy Issues

What will be the major issues for public companies in the 2019 proxy season?  An expert panel convened by the National Association of Corporate Directors – New England on January 15 suggested these:  is your Board composition appropriately diverse, and what does diversity mean; is your audit committee competent to fulfill its obligations as they have evolved over time; has the annual shareholder selection of your auditing firm become too automatic and should this function be highlighted in the proxy statement; is the company overpaying its Board?

The panel, included a representative from the institutional advisory firm ISS.  ISS now will consider whether your board is sufficiently diverse, bearing in mind that statistics indicate that diverse boards perform better for shareholders.  ISS threatens adverse advice starting in 2020 if there is no diversity, but diversity is not defined.  Glass-Lewis (another advisory firm) may offer negative comment during 2019, depending upon the facts.  Diversity in the past has been focused primarily on gender diversity; a robust discussion of diversity in a proxy statement might well address other kinds of diversity, and also the question of the number of diverse members.  For example, is placing only one woman on the board effective?  The panel noted that SEC disclosure requirements concerning diversity are “lame” and that most of the diversity pressure comes from the investment community.

Have auditing committees become the “dumping ground” for all sorts of complex issues?  Members of the audit committee with financial expertise may not be the right people to deal with all sorts of risks, notwithstanding the New York Stock Exchange manual assigning risk evaluation to that committee (a requirement the panel says is typically ignored).  Why for example does cyber risk or reputational risk or political risk end up with the audit committee?  A suggestion was made that the proxy statement might provide more granular disclosure, indicating which committees are evaluating which types of risks, and how?

The panel then held an inconclusive discussion concerning auditor selection, suggesting that proxy disclosure might benefit from discussing the decisional process.  It was noted that large companies run both higher costs and certain risks in replacing established auditing firms, given complexity and the lack of familiarity with operations for a new firm.  Additionally, many large companies utilize a variety of accounting firms, one being the auditor but others being retained for tax or other advice, making replacement difficult (auditing firms cannot provide most other services to a client beyond the audit).  For example, if no change in auditors has been made, perhaps the proxy statement ought to explain why.  In candor, this issue to my mind is not ripe for proxy statement inclusion, given that the average public company proxy statement now is about 100 pages already.

The year 2018 saw an increase in negative shareholder votes on “say on pay.”  While the absolute number of “no” votes was still low (an increase from 2017 to 2018 from 34 to 53), the panel suggested that shareholder rejection rates might increase, particularly if the stock market continues to lose ground, causing investor satisfaction to decline.

Lastly, it was suggested that this is the year to completely readdress proxy Risk Factors, rather than simply repeating them.  With market developments in terms of valuation, tariffs, political risk, cyber risk, LIBOR, regional and global tensions, a complete redrafting of Risk Factors may be in order.


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