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Call for Transparency and Engagement Prevails in 2016 Proxy Season

While shareholders have a wide spectrum of views on 2016 proxy season, the main focus is always on how to achieve great accountability through transparency and engagement. In recent years, the call for corporate transparency and engagement generally take three forms: proxy access, votes on executive compensation and shareholder activism. Here we highlight how the similar trends prevail in 2016.

  • Proxy Access

Proxy access is shareholders’ ability to nominate board directors, which gives shareowners a meaningful voice in corporate board elections. In November 2014, New York City Comptroller Scott Stringer and the New York City pension funds launched the Boardroom Accountability Project, which is a campaign to give shareowners the right to nominate directors at U.S. companies. The trend continues to gain momentum in 2016. For 2016, Comptroller Stringer and the New York City pension funds have submitted proxy access proposals to 72 companies, focusing on issues such as executive compensation and director diversity.

Facing the need of proxy access from shareholders, board of directors should keep updated with fast-moving proxy access developments and understand the position of key shareholders on proxy access. It is important for board members to grasp how a proxy access bylaw works and how it would fit into a company’s current corporate governance framework before the annual general meeting.

  • Executive Compensation

Over the last few years, investors continue showing concern over the lack of transparency of how CEO incentive programs are linked to company and/or individual performance. Investors are becoming increasingly vocal about their frustration.

AstraZeneca shareholders are pressing the company to tie CEO Pascal Soriot’s pay to the firm’s performance and the goals he set out in the defence against Pfizer’s acquisition attempt. As The Sunday Times reported, some investors are upset that the company’s board hasn’t done much to link Soriot’s compensation to those goals, which were a $45 billion yearly revenue target in 2023. Investors say they’ll vote against his pay structure at the firm’s annual meeting on 29 April.

According to FiercePharma, Bristol-Myers Squibb shareholders knocked the company’s executive pay, with 42% voting against their 2015 compensation packages. Now, the firm says it worked with top investors last year to craft a new set of rules for 2016.

2016 proxy season will see a high demand for responsiveness to votes against CEO compensation, including actions to adjust problematic pay practices. Therefore, compensation committees should align executive compensation programs with performance and be prepared to rectify questionable practices when questioned by stakeholders.

  • Shareholder Activism

There has been a recent trend of shareholders asserting their power as owners of the company to influence its behaviour via private discussion or public communication with corporate boards. Investor activism tends to focus on issues such as value creation and board composition. Groups like ISS and Glass Lewis are more effectively managing the interests of shareholders, influencing voting and the filing of shareholder resolutions on a range of issues.

The number of activism campaigns has risen steadily over the last five years. According to sharkrepellent.net, activist campaigns reached a record number of 355 cases in 2015. As of December 14th, 127 campaigns resulted in at least one board seat for the activist. We expect the trend to carry on in 2016.

Graph

Courtesy of sharkrepellent.net Research Spotlight (here)

Board of directors should make great efforts to understand shareholders and adopt appropriate shareholder engagement strategies accordingly. Board composition is “low-hanging fruit” from an activist’s perspective. Communicating board composition and leadership, executive succession and management performance openly will reduce the threat of activist shareholders. Nominating committees should initiate proactive approach to review the policies and practices for board composition and refreshment. The upcoming proxy statement provides a great opportunity to present the board’s considered approach to these matters.

The 2016 proxy season will see the push for corporate governance transparency and shareholder engagement continue. The shareholders are calling for boards’ enhanced responsiveness to such trends. The proxy season is the prime time for board directors to evaluate the corporate governance and make changes accordingly.

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