PROXY MONTHLY

June 2014Volume 1, Issue 2

www.proxyinsight.com

ALL THE LATEST VOTING NEWS

POISON PILLS: DO INVESTORS REALLY HATE THEM?

BANKING REMUNERATION: THE STATS AND PIRC’S VIEW

Thank you for the very positive

feedback we received for

our first edition of Proxy

Monthly, I hope this edition will

be at least as well received.

Following the fascinating headline

interview with Jonas Kron, from

Trill ium in May, I am delighted that we

have Tim Bush from PIRC (Pensions

& Investment Research Consultants)

in the hot seat this month. PIRC has

a reputation of being hardline in its

policies and vote recommendations.

Tim tackles this head on

citing failures in compensation

policies and auditor selection.

Keeping with the compensation

theme, it will not have escaped your

notice that Say on Pay votes are very

much in the spotlight again this year

with significant levels of opposition.

Looking at the Top US and EU Banks,

the level of opposition is back to

“Shareholder Spring” levels. Our

review of shareholder voting activity

provides some surprising results.

While the Pfizer AstraZeneca deal

did not quite get off the ground,

the likely upturn in M&A activity

got us thinking about poison pills.

Analysing the Proxy Insight database

showed a major disconnect

between Japan and the rest of the

world regarding the support of such

pills. While not liked or encouraged,

73% of votes for non Japanese

poison pill resolutions were

supported, largely due to restricted

timescales and independent board

structures. However this number

crashes to just 4% when looking

solely at Japanese companies.

Conference season is well and truly

upon us and no doubt we will all be

attending one or two to do some

all-important networking and keep

up to date with the latest trends.

The Growth of Activist Investing

in Europe 2014—provided a real

insight to how mainstream Activist

Investing has become in the US

and a real taste of what is coming

for the UK and perhaps a little later

Continental Europe. The depth of

research carried out by Activists

can be staggering as they think

the unthinkable and look for areas

to achieve greater shareholder

value. The catalyst for this is

often discontent from long only

shareholders either at the ballot or

in extreme circumstances direct

albeit unofficial contact made with

friendly activists who will campaign

for change. More evidence, as if it

were needed, to understand your

shareholder base and understand

how they vote and why—might just

save a massive headache later on!

With predictions of rising activism

in 2014 there is increasing pressure

worldwide to better regulate proxy

advisory firms. The rise in activism

means an increase in the number

of contentious votes appearing

at AGMs and in turn a perceived

increase in the importance of

these firms in deciding the vote.

Companies in Australia are

calling for greater regulation and

the CSA (Canadian Securities

Administrators) has recently

released guidelines for proxy

advisors, with similar guidelines

soon expected from the SEC.

Now that the Proxy Season is coming

to an end, why not take a trial of our

online Proxy Insight database. With

nearly 20 million votes covering

over 22,000 global issuers and

over 400 corporate governance

profiles, it is the definitive source

of proxy voting intelligence.

Proxy statementNick Dawson, Co-Founder & Managing Director, Proxy Insight Limited

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73% of votes for non-Japanese poison pill

resolutions were supported”“

Investor Resolutions voted on

Votes For Investor Resolutions voted on

Votes Against

Aviva Investors 12 100% Deutsche Investment Management Americas 18 90%

TIAA-CREF 42 100% Penn Mutual Life Insurance Company 17 77%

AQR Capital 10 100% State of New Jersey Division of Investment 11 69%

SWIB 10 100% APG 13 65%

SunAmerica 13 100% F&C Asset Management 11 48%

I n recent years, there has been

something of a backlash against

shareholder rights plans, otherwise

known as poison pills, leading to a much

lower take-up by issuers. Institutional

investors often oppose them because

they limit the amount of stock they can

acquire, but also increasingly because

they render management insensitive

to shareholder pressure—especially

with the development of a new range

of pills designed to combat shareholder

activists.

However, according to new figures

from Proxy Insight, the poison pill isn’t

as unpopular as the world has been

led to believe. Since 2012, nearly 2,000

votes have been cast by investors on

poison pill resolutions at non-Japanese

companies worldwide. Of those votes,

73% have been in favor of implementing

or retaining a pill, and thirty-three

investors approved pills on every occasion.

Below, Proxy Insight highlights the

investors most likely to vote for or

against management proposals on

rights plans (having done so on 10 or

more occasions). Aviva, TIAA-CREF

and AQR Capital Management are

among those that have the most positive

approach to pills, while Deutsche

Investment Management Americas and

Penn Mutual Life Insurance Company

prove even more hostile than the likes of

CalPERS or CalSTRS.

Last October, Sotheby’s adopted a

poison pill with a trigger of 10% for

investors filing a Schedule 13D. During

activist investor Third Point Partners’

subsequent litigation of the pill, e-mails

were read out in court from the auction

house’s financial advisers suggesting

the pill be dropped if key shareholders

Blackrock and Vanguard were opposed.

According to Proxy Insight, however,

those two investors backed poison pills

in 59% and 96% of the management

proposals they voted on respectively.

The activist lost the court case, but the

Delaware judge said he was “generally

sympathetic” to arguments that pills

deterring activism at US companies

were “inherently troubling.” Had Third

Point not been heading for a likely

victory in its proxy contest anyway, the

court might have seen fit to oppose

the company’s decision (Sotheby’s

subsequently offered Third Point three

seats on the board in return for a

standstill agreement).

At Japanese companies, the picture

is radically different. Of the 4,229

proposals covered by the database,

investors voted for poison pills just 4% of

the time, suggesting that they have not

proved popular since their introduction

in 2005. With Prime Minister Shinzo Abe

promising better corporate governance

to reboot growth in the country, pills

seem unlikely to take off again.

Do investors really hate poison pills?A look at the latest research from Proxy Insight

Votes on poison pill resolutions:

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1

3

2Voting policies and contacts of each investor

Who voted and how at any shareholder meeting

How an institution typically votes on a particular issue

As simple as:

Call or visit our website to arrange a trial:

+44 (0) 20 7788 7772 • www.proxyinsight.com

Data from Proxy

Insight indicates that

the average level

of shareholder opposition

to remuneration at the world’s

largest banks has reached

highs last seen in 2012.

The results of mostly non-binding

“say on pay” votes at the annual

meetings of the top 20 banks saw

an average 13.1% of shareholders

vote against management in

2014—the same as in 2012, and a

significant increase on the

average 8.4% who voted

against management last year.

A number of high profile revolts

during this year’s proxy season

embarrassed the likes of Barclays,

JP Morgan Chase and Standard

Chartered, which all received votes

against exceeding 20% of their

shareholder base. What has been

less noted is that opposition to

bankers’ pay is more dif fuse today

than in 2012, with votes against

management exceeding 10% at ten

banks. In 2012, the remuneration

policies of f ive of these 20

banks received votes against

of 10% or more. Fig 1.

below provides further detail.

Who votes against?

Proxy Insight has analysed the

remuneration votes of major

institutional investors at each bank

during 2013 to illustrate the level of

opposition from long-term investors.

Domini, Trill ium and Green Century

opposed management on every

remuneration vote, where they

voted, as did Proxy Voting Advisor

PIRC, which has a large influence

over local authority pension funds.

Public pension funds such as

PGGM, British Columbia and APG

also voted against management on

a frequent basis. However, perhaps

more significant is that a number

of traditional asset managers

such as Aviva, Threadneedle

and Fidelity Worldwide opposed

at least half the remuneration

resolutions where they voted. The

full data are shown in Fig 2. below.

Fig 2. Shareholders/advisors who

voted against/abstained from bank

remuneration proposals:

Rank Shareholder/Advisor Against/

Abstain

1 Domini Social

Investments

100%

2 Trillium Asset

Management

100%

3 PIRC 100%

4 Green Century Capital

Management

100%

5 PGGM Investments 72.2%

6 British Columbia

Investment Management

Corporation

61.5%

7 Aviva Investors 53.3%

8 APG 50%

9 Threadneedle

Investments

50%

10 Fidelity Worldwide

Investment

50%

Revolt on bankers’ compensation spreadingA look at the latest research from Proxy Insight

Bank 2012 2013 2014 Bank 2012 2013 2014 Bank 2012 2013 2014

Citigroup 54.6 8.3 14.9 HSBC 10.2 11.0 16.1 BNP Paribas n/a n/a 6.8

UBS 36.8 15.8 11.2 JP Morgan 7.2 5.5 21.2 Bank of America 6.9 6.1 6.4

Credit Suisse 31.6 10.3 16.6 Goldman Sachs 5.1 12.3 16.5 Lloyds 2.3 4.1 12.7

Barclays 26.9 5.3 24.0 Morgan Stanley 5.2 13.2 7.3 Banco Santander 8.1 6.4 4.0

Standard Chartered 7.4 7.2 40.8 Deutsche Bank 5.8 11.3 n/a Wells Fargo 3.4 2.2 2.1

Fig 1. Top global banks—% votes against for remuneration plans:

What’s different in the banking

remuneration votes this year?

There’s a lot going on this year. The

new EU bonus cap is affecting the

way remuneration is structured and

approved. Previously, shareholders

have only voted on the directors’

remuneration report, but with the EU

bonus cap, there is also the vote on

employee pay for the first time.

Then there are the new pay regulations

from the UK government, which have

introduced binding voting on pay

policies, and an advisory vote on

disclosure. There seems to have been a

lot of lobbying by companies behind the

scenes to avoid the embarrassment of

losing the binding vote, with companies

calling up shareholders and asking

them to change their votes already cast.

And disappointingly some will have

changed their votes, no doubt about it.

What sort of concerns has PIRC been

raising about compensation in the

banking sector?

PIRC looks at three things; the

appropriateness of the pay policy

as a reward system, whether the

contract is too weighted in favour of the

employee (including Golden Hello’s),

and how remuneration is disclosed.

A company arguably could have a

good remuneration policy, but if it isn’t

transparent, by definition shareholders

can’t tell whether it’s a good policy.

PIRC has a reputation as a hardliner

on corporate governance and

compensation. Are you comfortable

with that reputation?

You say it is hardline, but PIRC’s

positions have increasingly been proved

to be right over time. Back in 1993,

PIRC was the first in the UK to focus on

pay, calling for a shareholder vote even

then. Even as late in 2008, I was on a

public platform with people in banking

regulation who were totally dismissive of

the idea that pay could pose a systemic

risk in the way banks were run. The

PIRC position is now the mainstream

asset owner view.

Then there are non-audit fees, where

we have seen a very relaxed approach

from the UK regulator barely dealing

with the disclosure of non-audit fees.

However, pending the EU directive,

some types of non-audit work are now

prohibited from being carried out by a

company’s auditor. There is also a cap

on fees for non-audit work to not exceed

70% of the value of audit fees. PIRC has

recommended removing auditors on

these grounds, but the legislation will

go one step further and actually make

it unlawful.

Do you think more auditors will be

removed by shareholders in future?

Hopefully they will be at least on quality

grounds. The Financial Reporting

Council has finally decided after the Co-

Op Bank scandal [where a large capital

hole was discovered by the PRA last

year] that there is a systemic problem

with banking audits. PIRC is increasingly

looking at the past record of auditors,

and to some extent, directors of failed

banks in this regard. For instance,

PIRC recommended voting against the

appointment of KPMG as auditors at

HSBC because the lead audit partner,

Guy Bainbridge, was also the auditor at

HBOS. You may call it hard line, but it’s

based on risk and analysis.

Tim Bush is the Head of

Governance and Financial Analysis

at Pension & Investment Research

Consultants Limited, Europe’s

largest independent corporate

governance and shareholder

advisory consultancy.

Hardline? How about insightful?An interview with Tim Bush, PIRC

You may call it hard line, but it’s based on risk and

analysis”“

6

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TH

CII seeks more regulation from the SEC

on golden leashes

With activism on the rise compensation

arrangements between activists and

their board nominees, known as

golden leashes, have come under

greater scrutiny. The Council of

Institutional Investors (CII) recently

wrote a letter to the SEC expressing its

concerns regarding the transparency

of compensation paid in golden

leash arrangements. Golden leash

arrangements occur when a shareholder

activist privately offers to compensate its

nominee directors in connection with

the nominees’ service as a director

of a target company. CII said in its

letter that “disclosure rules that apply

to contested proxy solicitations fail to

sufficiently address compensation. CII’s

suggestions include “the existence of any

compensatory arrangements between

a board nominee and a nominating

shareholder relating to the nominee’s

candidacy or board service; the specific

components of any compensatory

arrangements; and disclosure regarding

any conflicts of interest presented by

such compensation arrangements.”

CII’s request for greater transparency

regarding third party compensation is

most likely an effort to align it with the

disclosure required for other forms of

director compensation.

Shareholders vote against compensation

at Chipotle

Chipotle saw the greatest level

of opposition to its executive

compensation, for any company so

far this year, with 77% of shareholders

voting against. Chipotle increased stock

awards by 15% this year, despite co-

CEOs, Steve Ells and Monty Moran,

receiving $25.1 million and $24.4

million, respectively in 2013. ISS and

Glass Lewis both recommended a vote

against compensation at the company.

Shareholders also rejected a further

increase of 2.6 million shares to its

existing stock-incentive plan. Calls for

refreshment of the board were reflected

by support for a shareholder resolution

reducing the requirement for the removal

of directors from a supermajority to a

majority.

Two strike rule increasing influence of

proxy advisors

With the strict two strike rule now in

full force in Australia, companies are

calling for greater regulation of proxy

firms. The two strike rule means that if

25% of shareholders vote against the

remuneration report for two consecutive

years then the shareholders will vote at

the same AGM to determine whether

all the directors will need to stand

for re-election at a spill meeting. If a

majority of shareholders support this

resolution then the board has to be

subject to an election within 90 days. A

consequence of this rule is that proxy

advisors recommendations can have

very significant effects. Companies are

requesting that if advisors recommend a

vote against proposals at a company’s

AGM then the advisor should have to

alert the company ahead of the meeting

so they can address any concerns.

Trend of activism set to continue in 2014

Investors predict a trend of activism

this year to rival that of the shareholder

spring of 2012 with many shareholders

opposing proposals at big companies

like Barclays, AstraZeneca, National

Express and Standard Chartered.

Glass Lewis rated compensation

as “poor” at a number of big banks

including Morgan Stanley, Goldman

Sachs, UBS and Credit Suisse. The

EU is looking at legislation that would

enforce say on pay in all of its countries.

Compensation is not the only issue that

shareholders are angry about. Glencore

Xstrata came under fire after remaining

the only member of the FTSE 100 not to

appoint a female director.

Wal-Mart to suffer through uncomfortable

AGM

Wal-Mart has been criticized on a range

of issues from bribery and corruption to

executive compensation by shareholders

and advisors alike. In response to

investigations into violations of the

Foreign Corrupt Practices Act in Mexico,

Brazil, China and India; ISS and Glass

Lewis have expressed their support for a

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

ISS & Glass Lewis both recommended a vote against

compensation at Chipotle”“

8

shareholder proposal seeking an annual

report on recoupment of executive pay

“as a result of a determination that the

senior executive breached a company

policy or engaged in conduct inimical

to the interests of or detrimental to

Walmart.” So far the company has

spent $450 million on the investigation.

ISS and CtW are also recommending

a vote against the company’s advisory

vote on executive compensation. Wal-

Mart’s founding family controls more

than half its outstanding shares, so the

recommendation likely won’t have any

effect. Instead investors have begun to

express displeasure with Wal-Mart via

the company’s stock. Wal-Mart’s shares

have fallen 2% over the last year.

41% of shareholder oppose Standard

Chartered compensation

ISS and Glass Lewis recommended

a vote against compensation at the

bank after changes to its pay structure

this year meant a significantly larger

proportion of variable pay is now based

on single-year targets. This goes against

government efforts to encourage banks

to focus compensation on longer

term targets in an attempt to avoid the

excessive risk taking that contributed

to the financial crisis. 75% of CEO

Peter Sands’ total variable pay for 2014

will be based on performance in that

year alone. A significant increase over

the 42% in 2013, when the majority of

his variable pay was based on targets

spread over three years. Longer-term

performance targets make up about

two-thirds of variable pay at other UK

banks, according to Glass Lewis.

Nabors governance failures raise ire of

advisors

ISS and Glass Lewis are recommending

a vote against executive pay at

Nabors. CEO Anthony Petrello’s 2013

compensation is valued at $68.2 million.

ISS is recommending a vote against

six out of seven of Nabors directors,

whilst Glass Lewis is recommending a

vote against the three members of the

compensation committee. Large pay

packages are only one of the governance

concerns at Nabors. The company

tried to defend itself by pointing out

improvements it has made recently such

as limited proxy access. ISS and Glass

Lewis criticized Nabors for not going far

enough with proxy access. A shareholder

proposal to permit a shareholder with at

least a 3% stake held for three years or

more to nominate competing candidates

for up to 25% of the board’s seats was

approved by shareholders in 2012 and

2013. The company has failed its say-

on-pay vote for the past three years.

In addition, Nabors didn’t accept the

resignation of directors John Yearwood

and John Lombardi after they received

less-than-majority support last year.

At this year’s AGM shareholders voted

against the entire compensation

committee. John Lombardi and John

Yearwood failed to be re-elected

again, each only receiving 46.4% votes

in favour; additionally, Michael Linn

received only 49.5% votes in favour. As

in 2013, Nabors decided not to accept

the resignation of any of the directors.

Shareholders also voted against the

company’s say-on-pay for the 4th year

in a row with 62.4% of voting against.

58.32% supported a proposal to elect

directors by a majority vote.

ISS against Target board after data

breach

ISS is recommending a vote against 7

out of 10 directors at Target in wake

of huge data breach that resulted in the

theft of 40 million credit card numbers.

ISS justified its recommendation by

saying that the company’s audit and

corporate responsibility committees,

which are responsible for risk oversight,

were not prepared for the risks of online

shopping. Target has already fired its

CEO in connection with the breach and

has said that it is reviewing its entire

risk oversight and reporting structure.

ISS is also recommending a vote for

a shareholder proposal to appoint an

independent chairman.

PIRC opposes WPP remuneration

PIRC is advising against WPP’s pay

package for its CEO, Martin Sorrell.

He will receive £29.84 million, a 40%

increase from £17.6 million in 2012,

making him the highest paid chief

executive in the FTSE 100. This is in

spite of 20% of shareholders voting

against WPP’s remuneration last year.

Shareholders reject say on pay at Staples

Shareholders at Staples voted against

the company’s say on pay after

the company created a new “2013

Reinvention Cash Award” of $500,000

to award to 4 of its top executives.

The bonus was created because poor

performance at the company meant

the executives wouldn’t qualify for their

usual bonuses. ISS and Glass Lewis

both criticized the decision with ISS

recommending a vote against say on

pay. Staples tried to justify the award

by arguing that it was designed to retain

talent after not paying a bonus in two

years and to reward the executives extra

efforts in turning the company around.

Shareholders also supported a proposal

to separate the chairman and CEO.

Shareholders vent frustrations at

Morrisons AGM

Investors expressed their displeasure

at Morrisons as more than 15.4% of

shareholders voted against re-electing

Dalton Philips as CEO, with most

directors receiving over 10% of votes

against. 26.5% of shareholders also

voted against approving the company’s

remuneration policy.

PIRC is advising against WPP’s

pay package for its CEO, Martin Sorrell”“

9

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