www.proxyinsight.com

November 2017Volume 4, Issue 10

VOTING NEWS

PROXY MONTHLY

TARGETED ACCOUNTABILITY: AN INTERVIEW WITH VOYA’S SARA DONALDSON

BOARD OF THE DEAD:AN ANALYSIS OF ZOMBIE DIRECTORS

You might expect Autumn to be

relatively calm on the corporate

governance front, as the 2017

proxy season winds to a close. However,

this November has been quite the opposite.

The Procter & Gamble proxy contest has

now swung in the direction of the activist,

with Trian Partners claiming that the latest

count suggests Nelson Peltz has won a

board seat. In reply, Procter & Gamble has

said it will wait patiently for the final results

to be released.

In a growing spat at the London Stock

Exchange, one of its shareholders, The

Children’s Investment Fund (TCI), is

claiming that chairman Donald Brydon

pressured chief executive Xavier Rolet into

resigning. TCI has therefore demanded that

Mr Brydon leave the exchange instead.

This month has also seen contentious

interventions by the US Securities and

Exchange Commission (SEC). For

example, many fear that the SEC’s new

guidelines could make it easier for issuers

to exclude shareholder proposals. These

proposals will now be assessed on their

‘economic relevance,’ which many fear will

lead to the exclusion of environmental and

social proposals on the grounds of their

apparent economic immateriality.

However, far more controversial is the

passing of a bill in the US House of

Representatives designed to regulate

proxy advisers. The bill would require them

to share their voting recommendations

with issuers before they are disclosed. In

reply, the Council of Institutional Investors,

said that the legislation “would weaken

corporate governance in the United States;

undercut proxy advisory firms’ ability to

uphold their fiduciary obligation to their

investor clients; and reorient any surviving

firms to serve companies rather than

investors.”

Proxy advisers also received flak in Australia

this month. The managing director of

Mineral Resources, Chris Ellison, called on

investors to “open their eyes” and make

their own judgements independently of

proxy adviser recommendations. Mr Ellison

was speaking after Mineral Resources

received a second strike, with 41.6 percent

of investors opposing its remuneration

report.

The push for gender diversity continues

throughout much of the English-speaking

world. The US has already surpassed

its target of 20 percent female board

representation by 2020, achieving 20.8

percent. Meanwhile, the UK is on track to

reach its target of 33 percent by the same

deadline, with the FTSE 100 currently

sitting around 28 percent.

Despite this, many in the UK investment

community seem reluctant to rest on their

laurels. Numerous institutional investors

– including Legal & General, Schroders,

Aberdeen Standard Investments and

Royal London – have declared that they

will increase pressure on UK firms over

diversity next year.

Similarly, investors in both Canada and

Australia have been pushing for greater

board gender diversity. Seven Canadian

advocacy groups have joined forces

to push for greater representation of

women in director and executive teams.

Meanwhile, down under, the Australian

Council of Superannuation Investors (ACSI)

has been voting against members of the

ASX200 that have failed to appoint women

to their boards.

Our headline interview this month is with

Voya Investment Management’s Sara

Donaldson. In the interview, we discuss

Voya’s ‘Vote Accountability Guideline’ – the

way Voya escalates its concerns through

voting – as well as how the asset manager

approaches board evaluation.

This issue’s main article looks at the

problem of zombie directors in the US. It

shows that the number of directors failing to

receive majority support for their re-election

is decreasing, a trend that may continue as

global corporate governance standards

converge. Indeed, the increasingly

widespread use of the majority-voting

system will likely be the antidote that finally

puts the zombie directors to rest.

Proxy Insight is the only tool to offer the

voting intelligence necessary to navigate

today’s investor relations market. If you are

not a client and would like to take a look,

we would be delighted to offer you a trial.

Please get in touch.

nick.dawson@proxyinsight.com.

Proxy StatementNick Dawson, Co-Founder & Managing Director, Proxy Insight Limited.

2

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Could you give us a brief overview

of how Voya approaches the

concept of proxy voting, and how

its approach has developed over

the years?

Our focus has been, and continues

to be, voting proxies in a manner

that we believe is in our clients and

shareholders’ best interest. Our

policy is global in scope; therefore,

we evaluate the distinctions in the

various markets while still respecting

our principles. As such, as the ESG

landscape evolves, we update our

policy accordingly.

For example, we recently modified

the policy to uphold our principle of

one share, one vote. We now oppose

members of the nominating or

governance committee if a company

is controlled by means of dual-class

shares with superior voting rights

and the company does not have a

reasonable sunset provision, for

example five years.

We also encourage the investment

professionals to provide their insight

on proxies for the companies for

which they are responsible, as they

have an in depth understanding of

the company.

The investment professional’s

knowledge of the company can play

an important role in our decision

to support a proposal or not. We

also increased the number of

engagements we conduct as this

too can help us inform our voting

decisions. We have found it’s also an

effective method of communicating

our expectations to the board and

understanding the company’s

perspective.

What would you say are the main

characteristics that dif ferentiate

Voya from other US asset managers?

I joined Voya in 2014 and was, and

still am, very appreciative of the

longevity, dedication and knowledge

of my proxy voting team, as well as

the group of senior leaders who

regularly collaborate, either in

person or by email, to help us make

well informed voting decisions.

Additionally, the Voya mutual fund

board of directors is also committed

to voting the funds’ proxies in our

shareholders’ best interests. They

have an active role in overseeing the

funds’ proxy voting activity, including

the ongoing enhancements of the

funds’ voting policy and procedures.

Moreover, our proxy committee

also regularly reviews the voting

decisions, the portfolio management

input and the policy enhancements.

I believe this committed active

participation is one of the main

characteristics that dif ferentiates

Voya.

In your latest proxy voting policy,

you added a section on ‘Vote

Accountability Guideline’ as a

means of escalating your concerns

through voting. Could you briefly

outline how this process works in

practice?

One of my objectives when I joined

Voya was to refine and update our

policy. While the principle of the

vote accountability guideline had

been integrated into the policy, we

wanted to make this principle more

comprehensive and transparent.

The philosophy of this principle is

to hold directors accountable for

matters or areas for which they are

responsible.

For example, we will oppose

the chair of the compensation

committee, rather than all the

members of the committee or the

board, if the company was not

responsive to their shareholders’

opposition of the previous year’s

say on pay.

If issues continue to persist, we may

oppose the entire compensation

committee and/or the lead director

or chairman the following year. We

believe this sends the appropriate

message to the directors specifically

responsible for the matter, rather

than opposing the directors who

may not have been directly involved

in the process.

Targeted AccountabilityDiscussing voting escalation with Sara Donaldson, Vice President at Voya Investment Management

4

One of the things that Voya

votes against most frequently is

restricted stock plans. Could you

explain what it is about these that

you object to?

We take a holistic view of

compensation plans; therefore,

there may not be any one thing in

particular we f ind objectionable.

However, if we look at restricted

stock in the context of general

shares and preferred stock

issuance, we of ten oppose plans

if they are excessive in terms of

dilution, or the shares are awarded

at a deep discount or there is a lack

of caps.

Additionally, if we look at RSUs

as part of the compensation

or remuneration package or a

standalone equity plan, we might

oppose it on the basis that the

share award is excessive relative to

per formance, or there is a pattern

of year-over-year increase in shares

awarded without a rationale or the

per formance to support it.

We also take issue with vesting

and per formance periods that

are shorter than the standard for

the market without a compelling

rationale. Lastly, we do not want

those who administer the plan to

be recipients, due to their potential

conflicts of interest.

Do you have an of f icial position on

the recent attempts to get the SEC

to adopt political disclosure rules

for l isted companies?

No, not on this particular matter.

Nevertheless, Congress and the

SEC are contemplating a number

of issues that may negatively af fect

shareholders, such as increasing

the ownership threshold for

submitting shareholder proposals,

repealing certain aspects of Dodd

Frank, implementing potential

onerous requirements for proxy

advisory f irms, etc.

Therefore, I think it’s important

for institutional investors to work

together to ensure we protect

our shareholder rights and to

collaborate with the SEC to

consider the ramif ications of these

various rules.

As an asset manager, how would

you expect issuers to go about

evaluating their board and ensuring

that it has the relevant skil ls?

I think it’s critical for a board to

frequently assess each board

member’s skil ls to understand if

there are any gaps relative to the

company’s risk profi le, particularly

if the company anticipates making

material changes to its business

strategy.

I also believe boards should

occasionally engage third party

consultants to assist in evaluating

each board member’s expertise

and skil ls as well as the board as

a whole.

An independent consultant has the

expertise to encourage more candid

conversations and assessments

and can assist the board in

understanding and addressing

any gaps. This information should

help boards as they develop their

pipeline of candidates for future

board members.

I think it’s also important that

boards publicly ar ticulate how they

evaluate themselves to ensure the

board has the relevant skil ls.

What expertise do you think wil l

be most important for boards to

acquire in the near future, and why?

Unfortunately, cybersecurity. These

types of threats are becoming

all too common and can af fect

most businesses in some manner

given society’s dependence on

technology. While some industries

may have a higher risk than others,

boards must assume that they are

at r isk and be able to address it

appropriately.

If Voya could introduce one reform

to the corporate governance

landscape of the US what would it

be?

In my opinion, perhaps the one

share, one vote principle. It’s

unfortunate to see the number of

companies creating dual-class or

multi-class shares prior to their

IPO.

As I mentioned earlier, we updated

our policy to oppose directors that

are accountable for allowing this

type of arrangement without a

reasonable sunset provision. Once

this type of company is publicly

traded, it makes it very dif f icult for

most investors and shareholders

to inf luence any change in the

company’s governance structure at

that point.

Thank you Sara.

5

“CONGRESS AND THE SEC ARE CONTEMPLATING A NUMBER OF ISSUES THAT MAY NEGATIVELY AFFECT

SHAREHOLDERS.”

In recent years there has been a major push

from investors and corporate governance

advocates for companies in the US to adopt

majority voting for the election of directors.

While this has proved very successful with

the largest of US companies, many smaller

firms still use a plurality voting system.

Majority voting requires that directors

receive a majority of votes to be elected.

Plurality voting, in contrast, demands that

a director merely has more votes than

a competing candidate. Therefore, if a

director runs unopposed, this means they

only need one vote to be elected, which

makes an ‘against’ vote meaningless.

Shareholders instead have the option to

express dissatisfaction with a candidate

by withholding their vote. A substantial

number of ‘withhold’ votes will not prevent

a candidate from getting elected, but it can

sometimes influence future decisions by

the board of directors concerning director

nominees.

This means that even if a majority of

shareholders refuse to vote for a director

at a company with plurality voting they can

still be elected to the board. This has led

to a phenomenon that has been termed

‘zombie directors,’ individuals who sit on

the board but are not supported by the

majority of shareholders.

As shown in Table 1, Proxy Insight has

picked up 229 cases of this happening

between 2014 and 2017 with just 41 of

these directors leaving the board. This

is not necessarily surprising in itself.

While ignoring the wishes of a majority of

shareholders is not generally accepted as

good governance, those directors have

indeed been elected under the plurality

system. What makes it particularly galling

for some investors is that a number of

companies with plurality voting have

adopted a director resignation policy as a

compromise.

Under this system, if a director does

receive less than 50 percent of votes they

have to submit their resignation to the

board. However, the board is under no

obligation to accept this resignation, and

will frequently choose not to. This is shown

in Table 1 by the fact that more than 80

percent of directors who received less than

50 percent support remained on the board.

Sometimes, the reasons for a director

failing to get re-elected are clear and the

board takes steps to address this. For

example, at AvalonBay Communities the

board said they thought Ronald Havner

failed to be re-elected because he sat on

three other board seats, and that since the

meeting he had agreed to step down from

the board of one of the other companies.

Board of the DeadThe strange case of Zombie Directors, who remain on board despite technically being voted off

7

Table 1 Source: Proxy Insight

0 50 100 150 200 250

2014

2015

2016

2017

Total

Directors Failing to Receive Majority Support

Zombie Directors Left Board

8

“MORE THAN 80 PERCENT OF DIRECTORS WHO RECEIVED LESS THAN 50 PERCENT SUPPORT REMAINED ON THE

BOARD.”

However, this is not always the case.

For example, John Harrington failed to

get 50 percent support at Hospitality

Properties Trust. Calvert’s rationale

outlines a number of arguments against

his re-election. These include various

hurdles shareholders must overcome

in order to amend by-laws or nominate

directors and the fact that the board

had re-classified itself. Despite these

concerns, the board said it had

“considered certain arguments against

the election of Mr. Harrington” and had

nonetheless decided his re-election “to

be in the best interests of the Company.”

Looking at the year-on-year data in Table

1, it seems that the number of directors

failing to receive majority support

has been falling since 2015. This may

be because companies’ corporate

governance has generally been

improving over this period, so investors

do not find grounds to oppose a director

so frequently. Even so, the percentage

of directors who remain on the board

when this does happen has remained

fairly consistent. With the exception of

2015, the number has hovered around

84 percent each year.

Using rationales from Proxy Insight, it

is possible to gain some insight into

investors’ reasoning for not supporting

these directors. Table 2 reveals that the

most common reasons are the issues

that could be considered investor ‘red

lines.’ Attendance is the most common,

with investors readily opposing directors

who failed to attend at least 75 percent

of board meetings. Independence is the

second most common reason given.

Investors object when the board as a

whole is failing to meet a certain level of

independence or when non-independent

directors sit on key committees. Often,

this discontent is expressed by voting

against non-independent directors.

Compensation is not currently among

the most common reasons for a director

being rejected. However, this may well

be something that increases as investors

adopt new policies. Increasingly,

investors are willing to escalate their

concerns about compensation by voting

against not just the say-on-pay proposal,

but the members of the compensation

committee as well.

It highlights the lack of shareholder

support for zombie directors that the

Top 10 investors in Table 3 supported

them on average just 29 percent of the

time, compared to 93 percent support

for all directors in the US on average.

It is perhaps surprising that there has

not been more pushback on plurality

voting from investors, especially when

you consider the fact that until recently

this practice was used in conjunction

with a complete lack of proxy access

rights. If shareholders are not able to

nominate their own candidates to the

board the only scenario in which a

director’s election would be contested,

short of a full proxy contest, would be

if the company decided to put forward

two directors for the same board seat.

This seems unlikely.

As corporate governance globally

converges towards common

standards, it highlights the disparity in

rights between US shareholders and

other developed countries. This may

lead US companies to continue to

adopt majority voting at an increasing

rate, thus preventing zombie directors

from coming back to life.

Table 2 Table 3 Source: Proxy Insight

Attendance19%

Independence18%

S/H Proposal17%

Diversity11%

Overboarding11%

Compensation11%

Classified Board6%

Poison Pill5%

Auditor2%

Zombie Director Rationale Breakdown

0.0 20.0 40.0 60.0 80.0 100.0 120.0

Wellington Management CompanyNorges Bank Investment Management

Legal & General Investment ManagementGoldman Sachs Asset Management LP

BNY MellonJPMorgan Investment Management, Inc.

Fidelity Management & Research Co. (FMR)SSgA Funds Management, Inc. (State Street)

Vanguard Group, Inc.BlackRock

Top 10 Investors' Voting on Zombie Directors

% For % Against/Withhold

Monthly

The definitive resource on activist investing globally.

State Street expands gender diversity

efforts

State Street Global Advisors (SSgA) has

announced that it will expand its recent

efforts to push for gender diversity on

company boards. The asset manager

will begin putting pressure on boards in

Canada and Japan next year.

State Street’s push for women on boards

began in March, and initially targeted

issuers in the UK, US and Australia. In

the US, SSgA voted against director

candidates at 400 companies which

currently have no women at all on their

boards.

Expanding into Canada and Japan adds

roughly 1,200 companies to the scope

of State Street’s diversity push. These

two countries were chosen due to their

relatively low level of representation

for women at board level, SSgA said.

Currently, around 40 percent of companies

on the Toronto Stock Exchange and 55

percent of Japan’s Topix 500 have no

female directors at all. This compares to

only about a quarter of the Russell 3000.

BlackRock wants engagement over

activist deals

BlackRock has recently declared that

issuers should talk to it before they

make deals with activist investors. The

world’s largest fund manager has said

that it is worried that some companies

are agreeing to the demands of activists

without talking to other shareholders.

Although BlackRock frequently

comes under fire for its supposedly

passive approach to proxy voting,

the asset manager usually retorts

that its fiduciary duties also include

its engagement activities. Indeed,

BlackRock has often asked issuers for

more frequent engagement.

As a result, BlackRock hopes that

this engagement will prevent some

activists from gaining control of the

agenda and receiving a louder voice

than their holdings would generally

allow.

Investment Association reveals its pay

priorities for next year

The Investment Association (IA) has

revealed the priorities of its members

on pay issues for 2018. The IA’s latest

guidance was detailed in a letter sent

to the boards of FTSE 350 companies.

As well as a crackdown on relocation

benefits, which was revealed ahead

of time, the IA’s new guidelines

encourage companies to “adequately

justify” executive pay. Large increases

in remuneration, the letter said, should

take the “wider social context” into

account. The IA also expressed

concerns about “a substantial

increase in overall remuneration” as

a result of automatic boosts to salary

and incremental increases to bonuses.

The IA asked for the disclosure of targets

for annual bonuses within a year of the

payout being awarded. On top of this, if the

bonus exceeds base salary then a portion

of it should be deferred, the letter said. The

updated guidance also covered issues

such as pay ratio disclosure and the linking

of incentives to longer-term strategy.

ISS Releases 2018 Policy Updates

ISS recently unveiled its final policy updates

for 2018. The changes are largely in line

with the draft updates released in October,

but with some revisions following investor

comments and feedback.

In the US, ISS is cracking down on

excessive remuneration for non-executive

directors (NEDs). When there is a

“recurring pattern... of excessive NED pay,”

ISS will recommend against the board

or committee members responsible for

setting compensation. Other changes to

the proxy adviser’s US policy include a

harsher stance on poison pills that have

not been approved by shareholders, and

a case-by-case approach to gender pay

gap proposals.

One of the changes made since

last month’s draft updates relates to

overboarding in Canada. In the drafts, ISS

set the maximum number of acceptable

board mandates at four. However, in line

with suggestions from investors, the proxy

adviser has decided to apply the same

standard as in the US and increase this

limit to five.

10

News summaryA round-up of the latest developments in proxy voting

11

“A VICTORY FOR THE PROXY ADVISER WOULD LIKELY DO MUCH TO CEMENT IIAS, AND SIMILAR FIRMS, AS VIABLE

ACTORS IN THE INDIAN CORPORATE LANDSCAPE.”

Another update to ISS’ Canadian policy

relates to board gender diversity. ISS will

now vote against the chair of the nominating

committee at Canadian companies which

have no female directors and no written

gender diversity policy.

IiAS sued by Indian conglomerate over

supposed ‘defamation’

India’s leading proxy adviser, Institutional

Investor Advisory Services (IiAS), is

currently being sued by the conglomerate

in charge of WelcomHotels and Gold Flake

cigarettes, ITC Ltd. The conglomerate

contends that IiAS defamed ITC by

criticizing the remuneration given to its

board of directors and chairman. This is

despite the fact that the chairman’s pay

was supported by 85 percent of ITC’s

shareholders.

According to disclosed court documents,

ITC is demanding 10 billion rupees

(US$155 million) as compensation on the

grounds that IiAS’ criticisms of ITC’s pay

arrangements damaged its reputation.

Proxy advisory services are still an

embryonic industry in India. As a result,

much rides on the outcome of the charges

against IiAS. A victory for the proxy adviser

would likely do much to cement IiAS, and

similar firms, as viable actors in the Indian

corporate landscape. However, a loss

could strangle the Indian proxy adviser

industry in its infancy.

MSCI temporarily blocks new companies

with unequal voting rights

MSCI declared this month that it will

temporarily block new companies with

unequal voting rights from listing on two

of its indices – the MSCI ACWI Investible

Market index and the MSCI US Investible

Market 2500 index. In addition, the index

provider has decided to expand its earlier

discussion on shares with no voting rights

to also encompass the validity of unequal

voting structures.

According to new documents, for the

time being any new firm intending to

list on these two indices will not be able

to join “if it belongs to a company that

has multiple classes of equity securities

and that exhibits any of the following

characteristics: shareholder voting rights

are not proportionate to their economic

interest, any share class has restrictions

on voting on agenda items and voting

rights for any share class are conditional

upon certain events.” These requirements

do not apply to issuers already listed on

these two indices.

MSCI’s temporary ban comes

approximately three months after S&P

Dow Jones declared that companies with

dual-stock structures will no longer be

able to list on its indices.

Mineral Resources receives second strike

as MD blasts proxy advisers

Mineral Resources has received a second

strike after 41.5 percent of shareholder

votes were cast against the company’s

remuneration report at its annual meeting.

In reply, Mineral Resources’ managing

director, Chris Ellison, has lambasted proxy

advisers, calling on investors to “open their

eyes” and assess issuers independently

from proxy adviser recommendations.

In 2016, the firm received its first strike, with

49.2 percent of shareholders opposing

its report. As the company received a

second strike this year, Mineral Resources’

investors had to vote on a spill resolution,

which could have forced the company’s

entire board to undergo re-election in the

near future. However, the spill resolution

failed, with over 99 percent of shareholder

votes cast against its implementation.

Despite the first strike in 2016, Mr

Ellison’s remuneration continued to

swell. Mineral Resources’ managing

director received AU$5.2 million in pay

in 2017, a 70 percent increase on last

year. This is in contrast to many other

Australian firms, which have been

curtailing their executive remuneration

at a time of increasing scrutiny and

stringency.

US regulation of proxy advisers passes

in the House

This month, the US House of

Representatives passed a bill regulating

proxy advisers, which requires them to

share their voting recommendations

with issuers before they are disclosed.

The bill was supported by all

Republican representatives and 6 of

the 26 Democrats. However, the bill

still needs to pass through the Senate

before it can become law.

The bill has been opposed by numerous

investors, including the members of the

Council of Institutional Investors (CII). In

a letter written to the Chairman of the

House Financial Services Committee,

Jeb Hensarling, the CII declared that

the bill “appears to be based on several

false premises, including the erroneous

conclusion that proxy advisory firms

dictate proxy voting results and that

institutional investors do not drive or

form their own voting decisions.”

The letter went on to say that “the

pending legislation... would weaken

corporate governance in the United

States; undercut proxy advisory

firms’ ability to uphold their fiduciary

obligation to their investor clients; and

reorient any surviving firms to serve

companies rather than investors.” The

letter was signed by 45 investors and

investment bodies.