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Proxy access adoption, board leadership and gender diversity remained top of mind for corporate boards, driven by continued pressure from shareholders, according to Shearman & Sterling’s 14^th annual Corporate Governance & Executive Compensation Survey. These findings are among the many included in the 2016 Survey, which examines some of the most important governance and executive compensation practices facing boards today. New this year is an analysis of IPO governance practices, shareholder engagement and data breach trends, all of which have become hot-button issues for companies and their boards.

“Corporate governance and executive compensation decisions continue to be the focus of intense regulatory and shareholder scrutiny,” said John Cannon, a partner in the firm’s Compensation, Governance & ERISA practice. “Our annual survey of the nation’s Top 100 US Public Companies provides an important benchmark for best practices in these critical areas.”

Proxy Access

The number of proxy access proposals submitted for the 2016 proxy season rose significantly compared to 2015.  Over the past year, 69% of the Top 100 Companies, 40% of the S&P 500 and 34% of Fortune 500 companies have enacted proxy access.

Stephen Giove, a capital markets partner at Shearman & Sterling, commented, “We expect the adoption of proxy access to accelerate in the years to come. Our survey already shows that proxy access is on the verge of becoming the majority practice at S&P 500 companies.”

Key 2016 findings include:

• Proxy access proposals submitted for the 2016 proxy season increased from 116 in 2015 to 200 as of August 31, 2016.
• Proxy access bylaw adoptions totaled 226 from September 2015 to August 2016, compared to just 32 at the end of the same period a year before.
• 75 proposals requesting adoption of proxy access were included in proxy statements and voted on for the 2016 proxy season as of August 31, 2016.

IPO Governance

This year, the survey analyzed the governance practices adopted at companies formed through an IPO.  In its Executive Summary of 2016 Global Benchmark Policy Updates published in November 2015, ISS Governance announced that starting in 2016 it would consider recommending a vote against directors of newly public companies due to the adoption, prior to or in connection with an IPO, of governance policies that diminish shareholder rights. Our survey of 62 IPO companies priced at $100 million or more in 2015 found that most adopted practices that ISS identifies as either actually or potentially problematic.

“Investors have traditionally been less sensitive to the specifics of corporate governance practices at newly public companies,” said Richard Alsop, a capital markets partner with the firm. “Given the recommendations from ISS, we expect law firms and banks will continue to advise IPO companies not to overreact to the new policy, but we will watch this one closely.”

Shareholder Activism

Shareholder activism continued to gain momentum over the past year.  Seven of the Top 100 Companies were faced with activist campaigns, compared with eight in 2015. Activists were involved in several large, high-profile M&A transactions which faced significant opposition from antitrust regulators. 

“Shareholder activism remains an area of significant focus for corporate boards,” said Rory O’Halloran, an M&A partner with the firm. “Although some activist funds and companies targeted by activists have been seen as underperforming over the past year, activist funds continue to manage large amounts of capital.  Consequently, any meaningful downturn in the level of activist activity seems unlikely.”

Key 2016 findings include:

• At the seven Top 100 Companies that were the subject of public shareholder activism campaigns, the activists used publicly disclosed letters or presentation, filed a 13-D with the SEC or held a private meeting (later reported in the media).
• Areas of focus by activists at these seven companies included M&A transactions as well as capital distribution and governance practices.

Board Leadership and Diversity

Board diversity is important to boards on many levels, and gender diversity is only one aspect of this topic. This year’s survey reveals that 23% of board seats at the Top 100 Companies are held by women, up from 22% in 2015. Only 15 of the Top 100 Companies have boards composed of 30% or more women members, down from 16 last year. Three of these companies have a board of 40% or more women members, up from two in 2015.

“Companies should take advantage of the tremendous untapped pool of qualified female board candidates,” said partner Doreen Lilienfeld, who leads the firm’s Compensation, Governance & ERISA practice. “While there is significant work yet to be done, it is encouraging that progress has been made in achieving greater gender balance in board composition.”

Key 2016 findings include:

• Women serve as CEO at 13 of the Top 100 companies, compared to 11 in 2015, and as CFO at 12 of these companies, compared to 14 in 2015. Only one company has a woman in both of these senior executive positions.
• The average board tenure of male and female directors is about the same, with men serving 8.54 years on average and women serving 8.36 years.
• The average age of male board members is 63.8 and the average age of female board members is 61.3.

Compensation

Always a key focus of Shearman & Sterling’s Survey, findings in the areas of compensation disclosure and practice once again received considerable attention.  For instance, approval rates for say-on-pay votes in excess of 90% have climbed from 67% in 2012 to 78% this year.  In addition, driven by the SEC’s long-awaited rules to implement Section 954 of the Dodd-Frank Act, 90 of the Top 100 Companies surveyed in 2016 have voluntarily implemented clawback policies, up from 87 last year. Only 15 of these companies require mandatory clawbacks, increasing from 12 last year.

“Increasingly, we are seeing more thoughtful disclosure on a company’s performance and compensation, including the governance steps that reinforce the processes behind executive pay,” noted Lilienfeld. “Say on pay has had an enormous impact on the way companies approach executive compensation. This is a positive development from a governance and issuer perspective and for retention.”

Key findings include: 

• 94 of the Top 100 Companies that held a say-on-pay vote in 2016 received approval, up from 93 in 2015.
• 83 of the Top 100 Companies included an executive summary in their CD&A highlighting company performance, pay-for-performance and good corporate governance features, down from 87 in 2015.
• 43 of the Top 100 Companies have included some form of alternative pay disclosure in their CD&A, down from 52 last year.
• Since 2014, proxy summaries have increased more than 25%, and 76 of the Top 100 Companies provided an up-front “proxy summary” highlighting key points of the entire proxy, including executive compensation disclosures.

Shareholder Engagement

The Survey also looks at shareholder engagement and analyzes the many engagement methods employed by public companies, including those required by regulatory bodies and expected by shareholders. It also looks at other activities companies have begun to pursue in an effort to connect directly with their shareholders.  

Key 2016 findings include:

• 81% of the Top 100 Companies made shareholder engagement disclosures in their annual proxy statement.
• 60% of the companies making shareholder engagement disclosures in their annual proxy statements disclosed the reasons why they engage.
• 62 of the Top 100 Companies disclosed in their annual proxy statement the extent of their outreach to/contact with shareholders.

Methodology

Shearman & Sterling’s Corporate Governance & Executive Compensation Survey reviewed the corporate governance and compensation practices of 100 of the largest US public companies listed on the NYSE or NASDAQ.  We derived the data from the annual proxy statements, compensation committee charters and corporate governance guidelines posted on the companies’ websites available as of June 1, 2016.

The survey is available on request from Shearman & Sterling’s website or at the survey site.

Shearman & Sterling is a global law firm with approximately 850 lawyers and 20 offices in the world’s major commercial centers. The firm is a leader in mergers and acquisitions, capital markets, financial regulatory, compensation and corporate governance, project development and finance, complex business litigation and international arbitration, asset management and tax.