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July 2015 Volume 2, Issue 6 www.proxyinsight.com VOTING NEWS PROXY MONTHLY NEWTON’S IAN BURGER: PRINCIPLES, NOT POLICY WHY ISS COULDN’T WIN IT FOR PELTZ
July 2015 Volume 2, Issue 6
www.proxyinsight.com
VOTING NEWS
PROXY MONTHLY
NEWTON’S IAN BURGER: PRINCIPLES, NOT POLICY
WHY ISS COULDN’T WIN IT FOR PELTZ
This month I thought it would be useful
to provide a summary of the Promoting
Stewardship Session at the UK Investor
Relations Society Conference on June
23rd.
Moderated by the Chair of the IR Society,
Sue Scholes and featuring Abigail Herron
(Head of Responsible Engagement at
Aviva Investors), Charles King (Director
of IR at SSP Group), Daniel Summerfield
(co-head of Responsible Investment at
USS) and Lorraine Young (President
ICSA UKRAIT), this session provided
a fascinating insight into Corporate
Governance from the perspectives of
Investors and Corporate Issuer.
According to Summerfield, the 2015
meeting season saw few particularly
contentious situations - perhaps
in contrast with recent years. Yet
although engagement has improved,
Summerfield argues that the process
is still not quite right. In particular, the
continued dominance of remuneration
as a topic of discussion has proven
frustrating, increasingly treated in
isolation and crowding out other
important issues.
Arguably of little help in this situation has
been the introduction of a new vote on
the remuneration policy of issuers. “No
one really wanted another remuneration
vote,” Summerfield noted. Instead,
policy makers might start from the
view that ‘less is more’, and encourage
greater clarity on the structure and
make-up of compensation. On the
issuer side, greater evidence of links to
performance would be beneficial.
Abigail Herron from Aviva described
how she spends her time speaking
to companies in which they invest in.
She highlighted the higher response
rate from issuers, but agreed with
Summerfield that there was too much
focus on remuneration. Herron was
however encouraged that the calibre
of responses had “gone up massively”
compared to a few years ago when
issuers were like a “rabbit in the
headlights” when faced with questions
on topics like diversity.
From an issuer’s viewpoint, Charles
King said the proportion of issued
capital voted had increased to around
70% despite the increase of foreign
ownership which might have suggested
a fall. He went on to say the level of
dissent is on average 3%, suggesting
it is “Harder to get all [shareholders]
happy all of the time”. This is due to
the different policies from different
investors, which he said boards just
need to get used to. That doesn’t mean
that directors will eventually get ahead
of the curve, however, as King went
on to complain that it was becoming
tougher for issuers to see what the
votes were likely to be in advance.
Indeed, King said he had seen an
increase in collective engagement, as
shareholders with smaller investments
worked together to ensure their voices
were heard.
The sheer amount of work that goes into
engagement did not go unmentioned,
with Herron noting that Aviva simply
could not speak to investee companies
where it held a less than 1 percent
stake in order to balance its resources.
The fund manager receives thousands
of letters from NGOs requesting
information on Aviva’s voting policies,
she added.
King’s advice to issuers was to consult
with corporate governance teams early
on, making sure not to forget overseas
holders and working with company
secretarial teams to ensure a joined up
response. Preparing the board for likely
issues and what to expect from each
investor had also proved valuable, he
added.
From an industry body’s perspective,
Lorraine Young encouraged ICSA
members to build meaningful
relationships with their investors
beyond the short term. She discussed
the importance of IR and secretarial
teams working together to avoid
treading on each other’s toes, although
she conceded that this is easier in
small companies. Other members of
Proxy statementNick Dawson, Co-Founder & Managing Director, Proxy Insight Limited
2
No one really wanted another remuneration vote”“
the panel suggested that HR and CSR
representatives also be included in
meetings to ensure appropriate people
from both sides are represented.
On the flip side of the communication
issue there was debate around the
use of proxy solicitation services
and the variance of quality of such
firms. Herron suggested that best
practice was for a single well-informed
call between the solicitor and the
shareholder, allowing the former to
understand the investor’s policy and
check that the vote was in accordance
with what they expected. Conversely,
calls from the same organisation
15 times in a week did not prove
conducive to a long term relationship,
she added.
How proxy voting decisions are made
varies by firm. However, at Aviva and
USS portfolio managers are involved
in the process and indeed expect
to take part. Herron in particular
suggested that asset owners are
becoming more vocal and expecting
asset managers to vote their shares
appropriately. USS, the £60 billion
pension fund for UK universities is
also unusual. Managing these funds
internally, rather than delegating to
external asset managers, and working
for just one type of client enables
Summerfield and his team to develop
their own stewardship strategy, he
explained.
Finally, Herron highlighted a relatively
new bugbear, calling out a number of
annual meetings where smartphones
had been taken off shareholders by
issuers, presumably to prevent videos
or tweeting from the floor. She sees
this as very bad practice and warned
against this becoming common place.
Two questions from the floor were
of particular interest. First up was
resistance from Non-Executive
Directors to meet investors. King
suggested this was fairly new territory
and that historically NEDs have felt
exposed - perhaps as a result of not
knowing their companies as well as
they should. There was consensus
that it was only right that investors do
meet this group in order to assess that
the board was operating in a sensible
way. Summerfield said he is seeing
increasing numbers of NEDs so this
trend seems here to stay.
Second, the panelists were asked
to predict what will have changed in
2020. There was general agreement
on the panel that in five years time all
ESG factors will be discussed in one
meeting and that remuneration will
be less of an issue than officeholders
themselves. In addition, there was the
hope for stronger relationships and
simpler disclosure.
“HARDER TO GET ALL [SHAREHOLDERS] HAPPY ALL OF THE TIME”
General agreement on the panel that in five years
time all ESG factors will be discussed in one meeting and that remuneration will be less of an issue than officeholders themselves”
“
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Almost uniquely among asset
managers, the £53 billion BNY
Mellon subsidiary Newton
Investment Management opts not to
treat its responsible investment as a
distinct entity, but instead embeds
environmental, social and governance
(ESG) issues in its investment
process. Ian Burger, who joined the
firm in 1998, leads its governance
agenda and introduced global voting
guidelines in 2001, no mean feat given
the investor never abstains.
Ian, perhaps you could start by
explaining how ESG is integral to your
investment process?
We’re looking to identify a greater
level of comfort. It’s not a screening
process, and we won’t necessarily
not invest if a stock doesn’t pass
the ESG review, but we’re looking
at how well-managed a company is,
and how ESG issues are managed.
At extractive companies, for example,
environmental issues might be the
most important, or bribery and
corruption issues. Governance issues
are less sector-specific, but we don’t
want to be disenfranchised.
How does that translate into a proxy
voting policy?
We don’t have a voting policy. Instead,
we have high-level principles, which
we make available on our website,
and we look at individual companies’
circumstances. Our approach starts
on the responsible investment team,
looking for potential risk factors. If we
find areas of controversy, we speak to
the research analyst responsible for
the stock. If appropriate, we work with
the analyst to speak to the company,
and if the company can’t explain, we
vote against the resolution.
We never abstain on a vote, and only
follow a service provider if we have a
conflict of interest.
Do your portfolio companies ever
complain that this makes it harder to
predict how you’ll vote?
[Laughs] I’ve never been accused of
being unpredictable. We’re pragmatic,
and to be honest I much prefer it if
a company explains fully why it has
taken the steps it has. Our voting
rationale is fully available, and readers
can get quite a good insight into our
approach from that.
You chair the Remuneration
Committee of the International
Corporate Governance Network
(ICGN) and compensation issues
seem to be less prominent this
year. Have companies finally learnt
their lesson from past ‘shareholder
springs’?
In the UK, there certainly seems to
be less controversy. There are repeat
controversies at certain businesses,
but on the whole we have good
discussions with UK companies. If
there is such a thing as an average UK
company, it’s fairly straightforward to
speak to the non-executive directors.
The debate in the US seems to
be moving on, and that gives us a
platform to spring into other areas.
Quantum is usually not material to
the company’s balance sheet. It’s
the structure and mechanisms we’re
interested in – things like incentives,
or the total cost against EBIT.
One thing we don’t get a good line
of sight on is remuneration below the
executive management team. That
seems quite important for companies
that cite human capital as a key factor
in their success.
Do you have a standard approach
to long-term incentive plans (LTIPs)?
There has been some debate about
whether three or five years is an
appropriate standard?
We approach it on a case-by-case
basis. Fundamentally, the five-year
LTIP makes sense, and for some
industries even longer than five years.
Marrying the company’s strategic
Principles, not policyAn interview with Ian Burger, Head of corporate governance at Newton Investment Management
4
I’ve never been accused of being unpredictable...
We’re pragmatic,”“
plan with an aligned remuneration
structure makes sense.
Your CEO (Helena Morrissey) in
particular, and Newton in general,
have been outspoken about the need
for greater diversity. Has Newton
made that part of its engagement and
voting processes?
You’re right, that has been a big topic.
We don’t deliberately enforce that
agenda in every circumstance, but it
does come up a lot in conversations
with chairmen, particularly board
diversity of gender, age and skills. It
doesn’t dictate what we do on the
desk, but we’re very supportive.
You’ve said you remain sceptical
of activist investors. Do you feel
the same is true of other European
institutional investors?
My sceptical position is based on 20
years in corporate governance, and
most in the profession are natural-
born cynics. I wouldn’t say we’re
not receptive – we always look at
the share registers of our portfolio
companies, and if an activist appears
on one we’re interested to find out
what has brought them into the stock
and what might happen.
But we are very careful about meetings
with activists. We cannot be ring-
fenced, so any discussions are part
of the investment debate. As a result,
we use a recorded phone line and
are careful to ask other shareholders
not to tell us anything about other
conversations they’ve had or provide
us with any material.
One of the things we do is try to find
out as much as possible about the
activist. A client-only website with
very little information on it makes me
slightly nervous.
Several countries are adopting or
considering stewardship codes
based on the British example. What
do you think are the best and worst
things they could copy?
We’re broadly in favour of stewardship
codes, and encouraging shareholders
to act as owners is clearly a positive.
Codes bring more accountability. On
the negative side, there is a slight
unintended consequence of investors
siding with management in the short
term, but I think this is a process of
adjustment.
What’s currently happening in Japan
is fundamentally a move in the right
direction, after the stalling we’ve
seen for a number of years. It’s
quite something to see. Identifying
shareholders as the owners of
companies is a great story, and will
only provide a greater level of comfort.
Now that you’re in the middle of
proxy season, do you have any tips
for companies on how to engage with
Newton?
If you want to engage with Newton, we
ask that it be on a material issue, that
management come ready with ideas –
not that they have to be set in stone,
but there must be more to a meeting
than intelligence-gathering – and that
they have legitimate arguments for
why they are doing X, Y, or Z.
We investors talk quite a lot, so the old
tendency of companies to ‘divide and
conquer’ happens a lot less. We want
to do companies justice, so between
March and July we will need more
time than usual, but we are very open
to companies coming in, and very
focused on the material investment
case. It’s not just box-ticking.
Thank you, Ian.
“ONE THING WE DON’T GET A GOOD LINE OF SIGHT ON IS REMUNERATION BELOW THE
EXECUTIVE MANAGEMENT TEAM”
5
If you want to engage with Newton, we ask that it be
on a material issue, that management come ready with ideas.”“
The moment most observers
thought Trian Partners’ Nelson
Peltz was in with a chance of
winning a board seat at E I Du Pont de
Nemours was when the veteran activist
investor received the support of both
of the major proxy voting advisers,
Institutional Shareholder Services
(ISS) and Glass Lewis. After all, don’t
institutional investors always follow their
recommendations?
These firms are still seen as influential
and several high-profile individuals
seem to be waging campaigns
to make investors less reliant on
their judgments—and it is true that
many votes still align with their
recommendations. Proxy Insight’s
study of contested director elections
in 2013 and 2014, revealed the top ten
institutions vote in accordance with the
recommendations of the proxy advisers
more than nine times in ten.
But this does not tell the whole story.
For one thing, ISS and Glass Lewis
do not always concur themselves.
Proxy Insight’s analysis shows that our
ten investors voted the same way as
ISS 91% of the time on average, and
Glass Lewis 94% of the time, which is
perhaps surprising, given that ISS is
seen as the more established player.
Secondly, there is a wide variation
between the institutions that make up
our analysis. Two of the ten—Wellington
and Fidelity—voted with GL on every
single occasion over the past two
years. Vanguard voted against the ISS
recommendation on 18% of resolutions.
BlackRock, JP Morgan and State Street
all diverged more than 10% of the time.
Clearly, with names like these on your
register, you would be unwise to rely on
ISS for the result of a vote.
This brings us to DuPont, where Peltz
fell just short, with 46% of the vote.
Although many funds won’t disclose
their voting until the end of August,
Proxy Insight has already captured
results from more than 120 funds,
including CalPERS, Canada Pension
Plan and TIAA-CREF (all of whom
sided with management). Interestingly,
CalPERS provided a full rationale for
their decision, which cited factors as
diverse as the company’s recent relative
performance, Moody’s warning about
the potential impact on DuPont’s credit
rating, and management’s attempts
to settle the fight as important factors
in its decision. It is also worth noting
that the pension fund was already in
talks with DuPont about introducing
proxy access, which would provide an
alternative way of changing the board.
So while Peltz received support from
the likes of AXA, CalSTRS, MFS,
Norges, OTPP, PGGM and USAA,
many key shareholders decided to
support management in spite of
advice from ISS and Glass Lewis.
We see this as another reminder that
institutional investors may be widely
subscribed to proxy voting advisers,
but continue to adopt and apply their
own policies in individual situations.
For more information about how we
capture these policies and votes, visit
proxyinsight.com.
Why ISS couldn’t win it for PeltzProxy Insight on how much influence proxy voting advisors really have.
Investor Against ISS % Against GL %
BlackRock 11% 6%
Vanguard 18% 6%
SSgA 15% 9%
Fidelity 0% 0%
BNY Mellon 14% 3%
JP Morgan 6% 12%
Capital 8% 3%
Goldman Sachs 1% 12%
Northern Trust 13% 7%
Wellington 6% 0%
Average 9% 6%
Voting in proxy contests versus proxy adviser recommendation, 2013-2014
Former ISS supervisor charged
with wire fraud
A former ISS supervisor in Boston
has plead guilty to giving confidential
information about client investors to a
proxy solicitation firm in exchange for
New England Patriots tickets and other
perks. Brian Bennett, who is also known
as Brian Zentmyer, was charged with
one count of conspiracy to commit wire
fraud in Massachusetts federal court.
According to a court filing, Zentmyer
sent information to a co-conspirator at
the solicitation firm on how particular
investors had voted on shareholder
proposals, which ISS is supposed to
keep confidential. In return, the co-
conspirator sent Zentmyer tickets to
various games and concerts, including
a Patriots-Cowboys game at Gillette
Stadium and a rock concert in Sonoma,
California.
SEC Chief promotes universal
ballot
The Security and Exchange
Commission is attentive to the
grievances of activist investors and is
working on a set of rules designed to
make their life easier. Mary Jo White, the
Commission’s Chairwoman, said at a
conference the SEC has in pipeline new
rules for universal ballot, according to
the Wall Street Journal. The adoption of
a universal ballot would allow dissident
shareholders to have their nominees
on the same proxy card as those of the
company, making the life easier for both
activists and voters.
“Like so many issues that seem to
unnecessarily have shareholders
and companies at odds, this is one
where you do not have to wait for the
commission to act,” White said. “Give
meaningful consideration to using some
form of a universal proxy ballot, even
though the proxy rules currently do not
require it.”
Activists have long pushed for the SEC
to adopt such rules, but companies
lobbied against them. Although the
universal ballot is currently allowed
under the SEC rules, both parties have to
agree on its implementation. In practice,
universal ballots are a rare occurrence,
with most contestants submitting to
shareholders two separate proxy forms.
White has not provided much detail
about how a universal ballot would work,
but said the commission is pondering
whether it would be mandatory or
optional, and whether to impose some
restrictions on investors willing to use it.
FSS considering proxy adviser
regulation
Korea’s Financial Supervisory Service
(FSS) said that it is seriously considering
the possibility of limiting the influence of
proxy advisory firms, following in the
footsteps of the U.S. Securities and
Exchange Commission (SEC). On July
1st the SEC ordered proxy advisory
firms to disclose to investors the
“significant” or “material” interests they
had “in matters that are the subject of
voting recommendations.”
Officials say as proxy advisory firms
have influence on big institutional and
foreign investors in certain cases, the
SEC’s new guidance made clear that
institutional investors have a duty to
“ascertain that the proxy advisory firm
has the capacity and competency
to adequately analyse proxy issues.”
Recommendations by proxy advisers
may have some errors due to the
lack of the time for analysis. ISS
has five employees in Korea and it
analyses between 600 and 700 Korean
companies.
National Gas Services Group
suffers compensation revolt
Shareholders have voted against the
Say on Pay resolution at National Gas
Services Group.
According to results from the company’s
annual meeting filed with the Securities
and Exchange Commission, slightly
over 52% of investors voted to reject
the policy. CEO Stephen Taylor’s pay
rose 21% from 2012 to $2.6 million in
2014.
News summaryA round-up of the latest developments in proxy voting
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Ascertain that the proxy advisory firm has the capacity
and competency to adequately analyse proxy issues”
“
Glass Lewis expands business in
Europe
Leading shareholder advisory firm
Glass Lewis has acquired German
proxy advisory firm IVOX, in a bid to
capitalize on a growing European
market. Glass Lewis already had
some operations in Europe through
its headquarters in Limerick, Ireland,
but said the IVOX acquisition would
add to the research capabilities of the
European companies.
“As part of our ongoing commitment to
providing clients with superior global
governance expertise, we are delighted
to add Dr. Alexander Juschus and his
experienced team of IVOX analysts to
Glass Lewis,” Katherine Rabin, CEO
of Glass Lewis, said in a statement.
“Together we will deliver an exceptional
set of services that reflects the depth of
our local-market expertise and breadth
of our global capabilities.”
IVOX Glass Lewis will become a
subsidiary of Glass Lewis Europe and
will continue operating from Karlsruhe.
In addition to Europe and US, Glass
Lewis has an office in Sydney, Australia
for the Asia Pacific region.
ISS opposes Sony & Sharp CEOs
Sony and Sharp are the first victims
of ISS’ new ROE policy for Japan.
The proxy adviser recommend voting
against Sharp’s CEO Kozo Takahashi
and Chairman Shigeaki Mizushima
and Sony’s CEO Kazuo Hirai after both
companies ROE’s were below a five-
year average of 5%.
This is despite a recent recovery at
Sony after years of losses that has seen
its shares surge in the past year. ISS
is also recommending shareholders
support a $1.9 billion bank-led bailout
for Sharp. ISS said it recommended
voting for the bailout because it was
necessary “to keep Sharp’s operations
afloat”.
PIRC opposes Burberry pay
A significant shareholder revolt is
expected at Burberry’s upcoming AGM
as PIRC recommends a vote against
‘excessive’ executive pay. Burberry
failed to pass its remuneration report
last year when 52% of investors voted
against it. PIRC said CEO Christopher
Bailey’s share awards are equivalent to
1185.4% of his salary and are excessive,
as is the ratio of chief executive to
average employee pay at 86:1.
PIRC has also recommended voting
against Chairman Sir John Peace,
who it said is not independent as he
was previously CEO of GUS, then a
majority shareholder of Burberry. PIRC
called into question the independence
of board members such as Sky chief
executive Jeremy Darroch and EasyJet
boss Carolyn McCall as well.
Florida State Board of
Administration provides insight
Florida State Board of Administration
(SBA) has compiled information from
its voting behaviour in proxy contests
since 2006, in a document entitled
“Valuing The Vote.” Further analysis
suggests that when the voting manager
favoured dissident directors, and they
eventually become members of the
board, the company’s subsequent
cumulative stock performance was
significantly higher in comparison to
when SBA voted for dissidents who
were unsuccessful in gaining a board
seat, when subsequent share price
performance was negative over one,
three and five year periods.
The piece, published on the firm’s
website reveals that there was a $137
million gain in the investors’ economic
portfolio when the backed nominees
gained a board seat, in comparison to a
loss of $259 million when management
won all board seats, despite SBA’s
backing of the dissident.
According to the research, SBA has
voted in 107 proxy contests since the
beginning of 2006, and of those it has
been relatively supportive of activist’s
attempts to gain board representation,
voting for at least one dissident 65% of
the time. Further analysis revealed that
SBA is likely to be swayed by ISS, with
89% of its votes correlating with the
support of the proxy adviser.
Don’t get cocky, Japan activists
told
Fidelity Worldwide’s man in Tokyo, Alex
Treves, has said that activists are in
for a rude awakening if they think the
country’s seismic changes in corporate
governance will pave the way for a
more aggressive form of activism.
“They’re making a mistake if they
assume the changes in governance
means that they can go back to their old
ways of shouting at companies,” Treves
said in an interview with Bloomberg
News. “The assertive approach to
Japanese management isn’t going to
work any better just because we’ve
got a more general improvement in
corporate governance.”
A new corporate governance code,
amendments to ISS’s voting policies
and government pressure have seen
corporations rushing to add outside
directors, open new investor relations
departments and even returning more
capital to shareholders, leading to
delight among the country’s burgeoning
activist community.
9
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