Articles, Thought Pieces
Proxy solicitation – frequently asked questions
Boudicca works with both issuers and activist shareholders with the ultimate aim of maximising positive shareholder voting for the client. Typically, this will initially involve thorough analysis, risk assessments, shareholder identification and engagement exercises prior to a full service proxy solicitation and vote-tracking campaign. Below is a list of questions we are frequently asked:
01: Why proxy solicitation?
The use of proxy consultants serves ultimately to maximise positive shareholder voting for the client. This may be essential to ensure that quorum and majority requirements are met. Certain instances such as related-party transactions require the approval of independent shareholders that companies may be unfamiliar with compared to their major shareholders. Both on a long and short-term basis, proxy consultants can ensure that the company has an up-to-date knowledge of its shareholder base through share register analysis and facilitation of engagement with the actual vote decision makers amongst the shareholder base that will reduce their dependence on proxy adviser policies and ‘tick-box’ compliance. In an activist situation, a proxy solicitation consultant should be used not just to win but to do so by a margin that will discourage the dissenter from requisitioning another shareholder meeting and the associated management time and costs that this will incur.
In response to the ever-increasing threat of shareholder activism in the UK (accounting for half of all European activism), proxy consultants also help to monitor and provide effective rebuttals for any approaches by shareholder activists. Proxy consultants occupy a valuable place in the advisory roster especially whenever a level of focus or expertise is required to fully maximise positive shareholder voting.
02: What problems do proxy consultants solve?
Although share ownership appears relatively transparent in the UK market, understanding who the actual vote decision maker is and how their vote will get from the shareholder to the registrar is rather more complicated. Proxy consultants reduce the uncertainty that arises during a shareholder vote, through the identification of the underlying shareholders and actual vote decision makers and then determining the critical factors that influence their vote. Events such as dissenting shareholders, low quorums, mis-voted shares or negative proxy adviser (ISS, PIRC etc) recommendations can be offset through dedicated proxy solicitation campaigns to reduce the influence these negative developments have on the shareholder vote.
The consequences of having to manage a proxy fight, or an activist approach can prove emotionally and logistically draining on companies that may not possess sufficient in-house resources to achieve the desired voting outcome. Even if a company has not been subject to recent shareholder dissent or an activist approach, there may remain unknown factors which could jeopardise positive shareholder voting in the future. You may wish to use our proxy playbook to see what problems you may have that Boudicca can help you to address.
03: Our advisers already serve many of these functions. How are you different?
While companies employ registrars in order to tabulate shareholder votes and manage the voting process, they do not perform the active vote chase undertaken by Boudicca on a proxy solicitation campaign. As Boudicca’s efforts are focused on the key vote decision makers (such as fund managers and corporate governance analysts) these ensure that the critical messages are relayed to those who have the finger on the voting button in a manner that will maximise their receptiveness. Boudicca not only has contact with actual vote decision makers but is also aware of how they consume information and the process and considerations which they act on when deciding how to place their vote. While investor relations personnel and corporate brokers maintain excellent relationships with portfolio managers, and in-house PR teams manage the way a company is perceived by the market and the shareholders at large, the work Boudicca undertakes maximises the positive reaction from the actual vote decision makers.
Companies may employ third parties to do share register analysis, and while this can help to bring much of a company’s shareholder base to light, proxy consultants can enhance this analysis by breaking down the shareholder base by their voting behaviour and their usage of proxy advisers.
04: We have never had any issues with shareholder dissent. How then is proxy relevant to us?
Without a dedicated programme of engagement, it is possible that shareholder concern that did not result in shareholder dissent may be expressed at a future general meeting, for example, if there was to be a downturn in financial performance. Also, companies may plan important changes that could result in shareholder dissent in the future, such as M&A activity, operational re-structuring, capital-raising exercises or changes to remuneration. The use of proxy consultants can help to manage the risk of important changes triggering shareholder dissent. Changes to an unsupervised shareholder base will lead to a risk of more against votes or in the case of certain overseas funds non votes which will increase the effectiveness of a dissident shareholder. In any event, all shareholders will have different issues and priorities that cause them to vote differently.
05: We have a majority shareholder that ensures all votes are passed. Should we use proxy?
Certain resolutions may require the approval of independent shareholders, in which the majority shareholder cannot vote. Neglect of minority shareholders may result in an insufficiently positive vote from them. Also, the presence of a majority shareholder may not be enough to ensure the passing of special resolutions that require supermajority approval. Court meetings relating to transactions often require there to be fair representation of the shareholder base as well.
06: A lot of our shareholder base does not vote. Why is this and how can we improve participation?
Average turnout at UK AGMs has in recent years stood at between 60-70%. Low turnout is likely to be largely attributable to the nature of the shareholder base. A large presence of retail shareholders may result in a below-average turnout, as they are less inclined to vote than institutions, which are commonly obliged by their stewardship and fiduciary responsibilities to vote their holdings. If trading positions and hedge-funds account for a significant proportion of the share register, this can lower turnout as shares may be held only in the short term, and these types of shareholder lack the in-house resources to manage the voting of their holdings. Private client brokers (PCBs), who hold shares on behalf of their clients, generally on an execution-only basis, may also possess a significant percentage of the issued share capital. If there are large accounts, it is often necessary for the underlying shareholders to be actively informed, and for the custodial chain to be worked through in good time in order to ensure that the votes are valid or else this can also have a detrimental effect on turnout.
07: Do you ever find that institutions are reluctant to disclose how they are going to vote?
Institutions do vary as to disclosing how they vote, some only revealing the information after the meeting (as is the case with Blackrock), if at all. Institutions who choose to ‘go nuclear’ when pressing the voting button and vote against management may let companies know they will do so in advance (e.g. Baillie Gifford) but such advance warning cannot be guaranteed. Others in the UK are beginning to disclose their voting intentions in advance of meetings, whilst US based funds routinely disclose their voting behaviour in regulatory submissions to the Securities and Exchange Commission (SEC). However, through thorough knowledge of institutional policies and decision-making mechanisms, as well as vote-matching, Boudicca can identify how specific institutions have voted where they do not disclose voting intentions.
08: How long do you usually require to set up a shareholder campaign?
Boudicca is adept at both hitting the ground running for rapid response campaigns with only 24-48 hours to go before the proxy voting deadline, as well as long-term campaigns months in advance of general meetings. Every campaign is prepared for client and regulatory approval according to the necessary timescale, and when the situation has demanded, has on times been set up almost overnight.
09: What are the roles of custodians and PCBs in the voting process? How do you target them?
Custodians generally operate on an execution only-basis, and do not provide voting advice for their clients or make the vote decision. Custodians are targeted in order to persuade them to inform clients of forthcoming events (particularly if there is a corporate action) and to ascertain if their clients have delivered voting instructions.
10: It is nearly one week until the proxy voting deadline and many votes have not materialised. When do shareholder votes generally come in? Should we be alarmed?
Through diligent vote-matching exercises, we can determine: 1. which votes have come in and; 2. who has voted with a high degree of accuracy. This is undertaken a few days before institutional and PCB deadlines (generally up to a week before the proxy deadline) when voting instructions from corporate governance analysts and fund managers are processed by back office staff, as are the voting instructions received from underlying holders by the PCBs. Many custodians will leave it until the last minute and process any voting instructions en bloc, rather than simply process them as they come in. Votes processed through some platforms such as Broadridge may not become visible until the cusp of the deadline.
As during a proxy solicitation campaign, we can harvest vote intentions and we can be aware of voting decisions that have been made before the votes are actually processed, enabling greater visibility for the issuer and allowing careful vigilance in order to ensure that the shares are voted according to the declared intention.
11: We have had negative voting recommendations from the proxy advisers. Should we be concerned?
Proxy advisers tend to vary in their approach and their level of influence. In particular, any negative recommendations from ISS and Glass Lewis are very likely to have a significant negative impact on the vote of institutions, given their usage among institutions. Institutions use proxy advisers such as ISS and Glass Lewis to provide research and voting recommendations on the thousands of stocks held in their portfolios.
12: We have had negative voting recommendations from the proxy advisers. What should we do?
A knowledge of the institutional shareholder base can help to calculate the likely voting impact that a negative proxy adviser recommendation may bring to bear. Amongst proxy advisers, PIRC are amongst the most hard-line in their judgements, but are used by only a small number of institutions, while others such as ISS present an industry standard in governance analysis and voting advice. The most influential proxy advisers will generally be open to engagement with issuers after the publication of the report, and a compelling explanation has been sufficient in previous instances for proxy advisers to change their voting recommendations, or at the very least, to include the issuers perspective in their report.
13: How much do institutions actually follow the proxy adviser recommendations?
There is a strong correlation between voting patterns and proxy adviser recommendations, though most institutions state they use for ‘research purposes’ only, and do not blindly follow their vote. Many institutions have extensive portfolios potentially amounting to hundreds or even thousands of companies (for example, Blackrock holds stakes of 5% or more in 40% of publically traded companies in the US) and extensive international holdings. As a result, they outsource research on the shareholdings in their portfolio to proxy advisers, as they would lack the facilities to research the governance of every company in their portfolio, especially around proxy season. Larger institutions possess dedicated governance teams and individuals who will ultimately make the voting decision in-house, but nevertheless, a negative vote recommendation will at least cause them to contemplate a negative vote which they may otherwise not have done. Smaller institutions (e.g. Edinburgh Partners) with limited in-house capacities for making vote decisions are even more reliant on proxy adviser and may follow their voting recommendations automatically as a result.
It should be noted that positive proxy adviser recommendations may not necessarily lead to institutional support. FirstGroup experienced a 25% against vote on their remuneration report at the 2014 AGM despite a FOR recommendation from ISS.
14: Are the proxy advisers stubborn or have they been known to change their recommendations?
Proxy advisers vary in this regard. ISS welcomes comments and engagements and new publically available information coming to light can cause them to change recommendations. Others like PIRC may only amend reports if there are factual errors and are very unlikely to change recommendations.
15: Why do proxy advisers take such a tough stance on board independence?
Proxy advisers regard a lack of independence to be indicative of suspect governance generally, but on the whole their criteria replicate the independence criteria of the applicable corporate governance codes. A certain flexibility is also exercised, with only PIRC of the four main proxy advisers regarding non-executives who have served 9+ years not to be independent, as stipulated under the UK Corporate Governance Code. For AIM companies, while proxy advisers recognise they are not subject to the Code, they will still apply its independence criteria.
Where there is a fine balance of independent directors on the Board, the strict application of independence criteria may result in proxy advisers concluding there is an insufficient independent representation on the board and board committee level.
16: One of our non-executive directors has some options in the company, is this issue?
In the UK, this would be an independence issue under the UK Corporate Governance Code, as it would represent a direct interest in the Company’s share price. Such practises are very rare among FTSE-listed companies, though it is recognised that this is a more common practice for smaller AIM-listed companies.
17: How do I ensure a positive proxy adviser recommendation?
A detailed and up-to-date knowledge of proxy adviser policies will limit the capacity for unexpected voting recommendations. Any cases of non-compliance with proxy adviser policies should be previously identified, and compelling explanations prepared, not just for engagement with proxy advisers or major shareholders, but also for the publically available information used as the first source of analysis for the proxy advisers, such as the annual report and the notice of meeting. Proxy consultants such as Boudicca, with a detailed knowledge not just of proxy adviser policy, but also their working perspective and their key contacts, can provide consultative and engagement services which serve to further diminish the risk of negative proxy adviser recommendations.
18: Apart from remuneration, what other issues are proxy adviser’s starting to take notice of? What about issues like sustainability?
Remuneration and corporate governance issues still tend to form the ‘bread and butter’ of proxy adviser analysis, though sustainability issues are reported on for the benefit of clients who place precedence on these. In terms of the impact of sustainability issues on institutional voting, these tend to be the preserve of religious or trade union-affiliated US shareholders in all but the most exceptional circumstances.
19: Is there any recent legislation that you think may impact the proxy voting and corporate governance landscape? What’s your main focus for the year ahead?
We also anticipate a further increase in activist approaches to European companies, especially in the UK, where half of all European shareholder activist approaches are made. The activist-friendly regulatory environment that prevails in the UK, and the industry consensus that activist funds generate outperforming returns is likely to encourage further activism.
20: What will be the impact of the update to the UK Corporate Governance Code?
The UK Corporate Governance Code (the ‘Code’) effective from 1 October 2014, and the updated in April 2016, will require companies to discuss in greater detail in their annual and half-yearly financial statements the suitability of continuing on a going concern basis and identify any material uncertainties that may affect them in the next 12 months. Otherwise, the change does not represent any significant changes to the requirements and responsibilities for companies under the Code, but does redouble its emphasis on shareholder engagement, and will now require companies to disclose how they intend to address any ‘significant’ (as determined by the issuer’) shareholder dissent recorded at a shareholder meeting.
No new reporting requirements on remuneration have been included. The guidance of the Code has shifted from the emphasis on avoiding excessive remuneration to linking remuneration to the long-term, echoing the shift in the previous few years to the deferral of bonuses and post-vesting holding periods for share awards.
21: We have noticed an activist on our share register. What should we do?
Much would depend on the nature of the activist, but evidently corporate preparedness should be ramped up due to the possibility of the activist making an approach. Plans should be made for further engagement with shareholders in order to limit their influence and make use of the inherent advantage that companies have over the activist; the greater visibility and contacts among the shareholder base. The use of proxy consultants can further solidify this advantage. Their movements on the share register must also be observed closely in case they are accumulating holdings which would enable them to requisition a general meeting (5% in the UK).
The appearance of an activist on the register should not cause companies to automatically panic, but any such development should be taken extremely seriously to ensure corporate preparedness. It is likely that an activist would wish to conduct engagement with the company before taking any action, however, so companies should be prepared to engage with an activist as they would do any other shareholder. The merits of the proposal can be judged, and could even be adopted by the company.
22: How do you combat activism?
A strong corporate preparedness programme and vigilance of the share register can help to identify activist approaches before they happen, allowing greater time for effective preparation. Establishing and maintaining a strong shareholder engagement culture will also help to increase the company’s ability to communicate with the shareholder base more easily and effectively than the activist.
In addition, due care is to be given to any other trigger for shareholder dissent, such as governance or remuneration issues. Failures on these issues provide further ammunition for activists, even if their overall objective is not predominantly concerned with these issues.
Proxy consultants undertake training and analyses for clients in order to minimise the potential approach of an activist, and through such work (including a proxy solicitation campaign) can help to ensure that should an activist resort to a proxy fight, they are defeated by a margin which dissuades repeat actions and entrenches shareholder and market confidence in the existing management.
23: What kinds of companies are targeted by shareholder activists?
Historically, it has been considered that small-cap companies are the biggest activist targets, and indeed, there are activist funds such as Crystal Amber who target UK AIM-listed companies. However, studies indicate that large-cap companies are increasingly being targeted (such as AB Inbev and SAB Miller merger) as well as investors combining their forces, and having a tendency to target firms which other activists are already targeting.
Activists often seek out what they perceive to be relatively underperforming companies; as such, this may include large-cap companies as well as small cap. There is also an increasing trend of ‘bumpitrage’ when activist investors buy shares in companies that have agreed to be acquired, and push for a higher price such as at Poundland, Dragon Oil and SAB Miller in the UK.
24: Do you think that the split vote on remuneration has changed things much?
There was no unprecedented impact in the first year of the split vote. The introduction of the binding vote on policy did not create a second front for remuneration-related dissent, with the average vote FOR on both the report and policy this year being between 94-95%.(1) In the next three years, however, the manner in which companies implement the remuneration policy may still have significant impact. It remains to be seen how shareholders will react to the actual implementation of the policy.
(1) Based on ISS data for year to date (25 Sep 2014).
25: Have proxy advisers focused on the Remuneration Policy and not so much the Remuneration Report this year?
This has not really been the case. Proxy advisers have tended to be stricter on the report than the policy. Proxy advisers are particularly interested in the capacity for discretion under the remuneration policy as it is set out for three years. The excessive exercise of discretion has led to negative voting recommendations on policy (e.g. Kentz).
26: Our remuneration policy passed without dissent at the last AGM. Surely we are OK for the next three years?
Companies should not take shareholder approval of the remuneration policy as an automatic licence to operate that policy with impunity, but keep their practises under review and keep shareholder engagement in mind. Significant deviations or exercises in discretion from policy will have to be considered very carefully, now that the policy as accepted by shareholders will be a critical reference point.
In addition, any new executive director appointees up till the next vote on remuneration policy may receive remuneration packages with some elements that test the capacity for discretion permitted under the remuneration policy, such as buy-out awards to compensate for forfeited awards at a former employer, or a large salary increase relative to the predecessor.
27: We are planning remuneration changes and unsure about how shareholders will respond. What can proxy do to combat this?
If your company was not required to have a binding vote on remuneration policy, then companies will retain a larger discretion to substantially change their remuneration practises. However, changes without due regard for shareholder feeling may result in a backlash from shareholders at the AGM.
Proxy consultants, with their in-depth knowledge of shareholder and proxy adviser perspective on remuneration can offer consultative services to ensure that any changes are formulated and presented in the most shareholder-friendly view possible and forecast the risk of the proposed changes. Any potentially contentious issues can also be addressed in advance and the best way to present the commercial imperatives to the key decision makers can be decided, which can then be reiterated during the course of a proxy solicitation campaign reducing reliance on ‘tick-box’ compliance with remuneration best practice.
28: How do you combat negative proxy adviser recommendations?
Proxy advisers often neglect commercial arguments in their assessment of best practice. Through a proxy solicitation, we can make shareholders aware of the client’s point of view, ensuring the shareholder takes their perspective into consideration. Also, engagement with the proxy advisers can on occasion cause them to revise their voting recommendations, or at least, to include the issuer’s arguments in their reports, so shareholders can be exposed to both sides of the story.
29: Who are your clients?
Clients vary from issuers seeking shareholder acceptances of a share offer, to those who have been targeted by shareholder activists or are facing negative recommendations from the proxy advisers, as well as companies who are seeking to expand their shareholder engagement in a more general sense.
30: Are any of your clients’ smaller companies, or just larger ones?
Governance issues and shareholder concerns cut across all sizes and sectors of company. As a result, Boudicca’s client base comprises some of the largest hitters in the FTSE index (Xstrata plc, BG Group plc, FirstGroup et al) to companies in the small cap and AIM indices.