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Article | Executive Pay Matters

Is more disclosure and governance guidance to follow SEC proxy voting interpretation?

Governance Advisory Services |Executive Compensation

By Steve Seelig and William (Bill) Kalten | September 5, 2019

The Securities and Exchange Commission (SEC) recently acted on regulating proxy advisor firms and is considering additional guidance and regulation in three other areas ranging from proxy disclosure to shareholder proposals. 

The guidance, issued on August 21, includes an interpretation that proxy voting advice provided by proxy advisory firms generally constitutes a “solicitation” under the federal proxy rules and provided related guidance about the application of the proxy antifraud rule to proxy voting advice (Note: we will report soon on this action.)

The SEC action follows comments made by SEC Chair Jay Clayton and Director of Corporation Finance (Corp Fin) Bill Hinman at a public forum earlier this summer that also addressed three other topics, of which the third was a surprise.

  1. How no-action letters work for excluding shareholder proposals
    When a company receives a shareholder proposal and management believes it is not an acceptable proposal under SEC rules, it can write to the SEC staff and request confirmation that no action will be taken if the proposal is excluded from the proxy statement. This is often the first action taken by companies that receive a shareholder proposal. During the most recent proxy season, about one-third of requests to Corp Fin generated no-action letters permitting proposals to be excluded from proxy statements, according to Mr. Hinman. About half the time, however, companies withdrew their request because the company and proponent had sufficiently engaged to resolve the issue. This pattern of resolution, which the SEC views as positive, is raising the question of whether every no-action request needs a formal SEC response, Hinman noted.
  2. Ownership thresholds for shareholder proposals
    The agency wants to ensure that a shareholder proposal proponent owns a “meaningful stake” in a company, Hinman indicated. He noted that the current ownership thresholds (percentage held and length of time) were first put in place at a time when there was little shareholder engagement, and shareholder proposals were the only avenue to get the company’s attention. For this reason, the SEC is examining both these thresholds (currently set at $2,000 of stock, or 1% of the company’s equity, held for one year), as well as the rules governing resubmission of prior proposals that received limited support.
  3. Stock buybacks
    Clayton repeated a theme that shareholders want to know more about how companies are running their businesses but that the SEC does not want to mandate how companies do it, and would follow that notion regarding stock buybacks. Hinman suggested that the SEC is looking to require more disclosure in the Form 10-K’s Management Discussion and Analysis section on Liquidity and Capital Resources, detailing the reasons why a company chose to buy back its stock rather than use its capital for other purposes. He also suggested there can be more disclosure in the Compensation Discussion and Analysis, and perhaps the tabular disclosures, detailing how the compensation committee adjusted award settlements for the impact of a buyback.

The recorded comments from the public forum can be accessed here. We’ll continue to keep track of any movement on these issues.

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