Engagement and settlements between shareholders and the executives and directors of their portfolio companies altered the landscape of the 2014 U.S. proxy season. Negotiations enabled boards to curtail contentious contests at high-profile targets (such as Abercrombie & Fitch and Sotheby’s), to repel repeat rows over shareholder resolutions or executive pay (such as JP Morgan Chase‘s 2013 battle over an independent chair resolution) and to dodge debates over strategic direction at eBay (Carl Icahn’s call for a PayPal spinoff). The 2014 proxy season also brought numerous examples of reversals of fortunes–companies that engaged successfully, and managed to greatly improve their voting outcomes compared to the previous year. It also brought examples of what can happen to a board that refuses to take shareholder feedback to heart.

ISS and the IRRC Institute published an updated study of shareholder-issuer engagement in the United States in April 2014 (Defining Engagement: An Update on the Evolving Relationship Between Shareholders, Directors and Executives). To no one’s surprise, the mandate for regular say-on-pay votes has been a key driver of increased engagement, and the 2014 proxy season provides numerous examples of companies that engaged successfully and, by doing so, were able to achieve majority support for their MSoPs this year after failing to do so in 2013.

Alexandria Real Estate Equities set the bar for MSoP ballot box turnarounds in 2014. In 2013, ARE’s say-on-pay proposal received the lowest level of support (8.7 percent) of any U.S. company. In response to that overwhelming thumbs down, ARE embarked on a robust engagement road show that involved holders of some 60 percent of the company’s outstanding shares. Using investors’ feedback, ARE made multiple changes to its compensation program including a switch to multiyear performance periods for its long-term incentive plan, enhanced annual bonus program disclosure, the elimination of a retesting feature from performance-based awards, and the addition of a payout cap on performance-based long-term incentive awards. These efforts paid off at the company’s 2014 annual meeting as support soared to 86.8 percent of the votes cast.

In 2013, Boston Properties, Inc. received less than 20 percent support for its say-on-pay proposal after agreeing to award its outgoing CEO a $17.8 million “golden goodbye” package of cash and equity. In the wake of the vote, members of the company’s compensation committee engaged with shareholders owning more than 40 percent of outstanding shares, and they agreed to make a number of changes sought by shareholders to improve the alignment of pay and performance. These enhancements included a shift in the mix of equity awards from primarily time-based to primarily performance-based awards, and the discontinuation of stock option grants; the adoption of a clawback policy; and a limitation on the scope of future tax gross-up payments. Although concerns with compensation at Boston Properties remain, primarily regarding the discretionary nature of the annual incentive program, the changes made by the committee were sufficient for the company to garner 95 percent support for its MSoP in 2014–an improvement of more than 75 percentage points compared to 2013.

Another compensation engagement success story was Kilroy Realty Corp. Entering 2013 as a two-time MSoP loser after havingfailed to win majority support in 2011 and 2012, Kilroy suffered its third consecutive setback on say-on-pay and its compensation committee members also failed to win majority support in 2013 based on their lack of responsiveness to shareholders’ concerns. Following the 2013 annual meeting, the committee chair and other Kilroy representatives reached out to holders of more than two-thirds of the company’s outstanding shares. Changes made in response to shareholder feedback included the disclosure of the performance metrics to be used in the annual incentive program (though not the relative weightings of the various metrics); a de-emphasis on short-term cash compensation in favor of long-term equity compensation; and an increase in the percentage of equity awards subject to performance conditions. These changes enabled Kilroy to achieve 86.5 percent support for its 2014 say-on-pay proposal; while the returning comp committee members saw support for their reelection increase by some 50 percentage points.

Engagement success stories are not limited to say-on-pay. Companies now often engage with the sponsors of shareholder proposals, as evidenced by the fact that the number of withdrawn proposals this season appears to have exceeded the number of proposals excluded through the no-action process.

A prominent example of this trend is JPMorgan Chase & Co., which had faced shareholder proposals in 2012 and 2013 calling for the chairman of the board to be an independent director. Although the language of the 2013 proposal explicitly stated that the “independence requirement shall apply prospectively so as not to violate any contractual obligation at the time this resolution is adopted,” the proposal was widely viewed as a referendum on James Dimon’s performance in the dual chairman/CEO role. The bank was reported to have lobbied shareholders intensively to ensure defeat of the proposal in 2013, but received a similar proposal, from a different proponent, for its 2014 meeting. This time, however, JPMC was able to persuade the proponent to withdraw the proposal, after strengthening the role of the lead independent director and agreeing to continue discussions on issues related to the chairman and CEO roles. The bank also reconstituted its Risk Policy Committee, after three members received less than 60 percent support in 2013, and two of those directors resigned from the board. In 2014, no director received less than 96 percent support.

At Walt Disney Co., engagement likewise resulted in the withdrawal of a shareholder proposal, though some investors might disagree that this counts as a success story. The sponsors of a proxy access proposal at Disney agreed to withdraw that proposal in exchange for a promise by the company to include a written statement in the proxy, when the roles of chairman and CEO are combined, explaining why the board had chosen not to separate them. Given the controversy that ensued when Disney gave CEO Robert Iger the additional role of chairman in 2012, and given that a similar proxy access proposal had received 40 percent support in 2013, some Disney shareholders would no doubt have preferred another chance to vote on proxy access, over a non-specific promise to provide additional justification for what some shareholders view as the breach of an earlier commitment to separate the roles.

While the cases discussed above demonstrate the benefits to companies from shareholder engagement, Commonwealth REIT shows the consequences of stonewalling. Commonwealth had long frustrated shareholders with its governance practices, including supermajority vote requirements, a classified board, and a non-shareholder-approved poison pill with a dead-hand provision. In February 2013, the REIT announced an equity offering resulting in dilution of some 40 percent, at a price which many shareholders believed was too low. Two of those shareholders, Corvex Capital Management and Related Fund Management, offered to buy 100 percent of Commonwealth at a price significantly higher than the REIT’s offering price for new shares, an offer which the board rejected. They also announced that they would attempt to remove all of Commonwealth’s trustees through a consent solicitation, which the board attempted to prevent by amending the bylaws. An arbitration panel ruled that the bylaw amendments were invalid, but required the dissidents to begin the consent solicitation process anew. When that process finally went forward in March 2014, over 80 percent of shareholders backed the dissidents’ call to remove the entire incumbent board. Although the board had promised in the wake of the arbitration panel’s ruling to enact certain governance changes, including the phase-out of the classified board structure, the removal of the poison pill, and the appointment of additional independent trustees–subject to shareholder support for retaining the incumbent trustees–shareholders apparently doubted the sincerity of the board’s deathbed conversion.–Marc Goldstein, Governance Institute

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Europe, Middle East, and Africa

2014 Voting Season Review: Germany, Austria, and Switzerland

Proposed Amendments to the Swiss Code of Best Practice
The Swiss Business Federation economiesuisse published a draft revision of the Swiss Code of Best Practice for Corporate Governance on June 5. The draft represents the first revision of the Code since 2007. The revised code is scheduled to come into effect in September 2014 following a public consultation period in June.

The Swiss Code, originally intended as a market standard for public company governance practices and a flexible, voluntary alternative to legislation being contemplated at the time it was launched in 2002, has become increasingly sidelined in the face of stricter laws–most notably the Ordinance Against Excessive Remuneration at Listed Companies–and improving practices at larger Swiss companies. Many of the proposed amendments to the Swiss Code are intended to take this new reality into account.

Beyond this, the proposed revision includes a series of new recommendations and features. These include:

• The revised Swiss Code would have a comply-or-explain obligation similar to other European best practice codes. While Swiss companies would not be required to follow the code, those that do would be expected to explain any deviations from the code in an appropriate manner.
• The Swiss Code would explicitly state a preference for the separation of the board chairman and chief executive functions, which reflects prevailing market practice (when the original Swiss Code was passed in 2002, the boards of many large Swiss companies–including Nestle, Novartis, and Roche–were still headed by chief executives with double mandates).
• Whereas the current Swiss Code does not make a specific recommendation on a minimum level of independence for a company’s board of directors, the revised version would recommend majority board independence. The revised Swiss Code would also recommend that each audit committee be exclusively composed of independent non-executive directors.
• The new code would recommend that the board make sure that its members have an appropriate diversity, and that the board has both male and female members.

Quotas for Women on Boards in Germany
Under planned new laws of the German government coalition, as of 2016, approximately 110 listed companies will be required to allocate 30 percent of seats on their supervisory boards to women. The rules would apply to the biggest companies in Germany that are listed on the stock exchange and are required to have employee representation on their supervisory boards. Companies that do not meet the new requirements by 2016 are not required to overhaul their supervisory boards, but rather to phase in the new rules gradually toward meeting the quota through filling vacancies that arise.

Companies unable to appoint women to at least 30 percent of open board seats would be required to leave the seats vacant. This would also mean that if shareholders were to contest a supervisory board election that subsequently leads to a board composition of less than 30 percent females, the local court could revoke the election(s) and appoint female board members until the next AGM. Moreover, the 30-percent requirement applies to both benches of the supervisory board separately, i.e. for the shareholder representatives as well as for the employee representatives.

Up to now, fixed quotas on female board membership have not been recommended market best practice in Germany, but the German Corporate Governance Code recommends that the management board and supervisory board specify concrete objectives regarding their composition, including a stipulation on an appropriate degree of female participation. According to ISS QuickScore data, among the 30 largest companies on Germany’s blue-chip DAX index women occupied about 22 percent of the supervisory board seats and around 6 percent of management board seats at the end of 2013.

In addition, by 2015, roughly 3,500 companies, which are either listed or have employee representation on supervisory boards, will be obliged to set and publish individual, binding goals to raise the proportion of female representation on both management and supervisory boards, as well as in top management positions. In the event a company fails to meet its goals, it will have to explain why, though no penalty has been proposed so far. Within the European Union, Germany trails behind France, the U.K., and the Netherlands with regard to the proportion of women on boards, according to ISS QuickScore data.

The proposals that will be presented to parliament were announced by the family and justice ministers, who are both from the Social Democrats political party and share power with the conservatives led by Chancellor Angela Merkel. Given the coalition’s majority, it is very likely that the new law will enter into force next year.

Notable Meetings in Austria
Activist investor and owner of Cube Invest GmbH, Alexander Proschofsky, filed two shareholder proposals at Conwert Immobilien Invest SE‘s general meeting, held on May 7, 2014, nominating himself and Peter Hohlbein to the supervisory board, instead of the company’s two nominees, Martina Postl and Alexander Schoeller. According to Proschofsky, unlike the company’s candidates, he and Hohlbein would address what he said were the two main causes underlying the recent decrease in shareholder value: a lack of expertise in real estate management and a conflict of interest with Conwert’s largest shareholder, Hans-Peter Haselsteiner (24.4 percent), who has been repeatedly accused of staffing important positions with people close to him.

In November 2013, the company appointed Clemens Schneider as its new CEO, four months after the general meeting had rejected Haselsteiner’s proposal to enlarge the board in order to elect Schneider as a supervisory board member. During the two years prior to his appointment, the company’s operative business was led by former chairman of the board and personal consultant to Haselsteiner, Johannes Meran.

In the weeks leading up to the general meeting, extensive press coverage reported that Proschofsky’s rationale was largely supported by other shareholders. In a close election that went to a second round, Proschofsky won 46.9 percent of votes from the general meeting against 49.5 percent in favor of Martina Postl. Hohlbein also narrowly failed against the company’s candidate, Schoeller.

Reportedly, this only happened because, on the morning of the general meeting, the company banned a German shareholder family from voting due to their failure to file notification of their combined stake of 6.5 percent. Based on this circumstance, Proschofsky announced one month after the meeting that he had filed a nullification suit against the two elections, the success of which would automatically have his and Hohlbein’s retroactive appointment to Conwert’s supervisory board as a consequence. The proceeding is currently pending.–Matthew Roberts, Thomas von Oehsen, and Judith Braun, Germanic Research

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