Activist shareholders

Activist shareholders' top priorities for 2014

January 6, 2014: 12:23 PM ET

Board diversity, executive pay, transparency on political contributions, and human rights improvements are all on the agenda for shareholders this proxy season.

Photo: Jetta Productions/Getty Images

Photo: Jetta Productions/Getty Images

FORTUNE -- Many of us free ride on actions taken by active, long-term shareholders. These unsung heroes goad managers and boards to reach better decisions, make available desirable employment opportunities and, overall, push them to act like good corporate citizens. These active investors accomplish these things by talking to companies, preparing proxy proposals for all shareholders to consider, and offering recommendations on director elections and company-sponsored proxy measures.

What shape can we expect their efforts to take this year? Overall, we can expect more sophisticated requests of companies than we've ever seen before, and more direct board member interaction with shareholders.

To get the behind-the-scenes skinny, I asked shareholders and others who know what's in store this upcoming proxy season. Here are their informed, excerpted, and edited comments:

Keith Johnson, leader of the institutional investor legal services team at law firm Reinhart Boerner Van Deuren s.c.: My institutional investor clients are focusing on the director selection/election process and how executive pay is structured. Specifically, this means increasing opportunities for qualified women on boards (which has been linked in academic studies to better performance) and backing off from too much emphasis on Total Shareholder Return toward more use of metrics tied to business plans. An October 2013 study by Professors Maurice Levi, Kai Li, and Feng Zhang … shows that "firms with female directors are less likely to make acquisitions and if they do [make acquisitions, they], pay lower bid premia." We have an expectation that there will be effective, independent board leadership and key board committee leadership able to interact directly with shareholders on these topics.

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Laura Campos, director of shareholder activities at the Nathan Cummings Foundation: Board accountability looks set to be a major theme during the 2014 proxy season. It's likely we'll see a continuation of earlier efforts to hold individual directors accountable through the use of targeted vote-no campaigns. Investors are also expanding efforts to achieve proxy access. [Proxy access gives shareholders the right to place candidates of their choice on the company ballot.] Proxy access is now widely recognized as a corporate governance gold standard by institutional investors, so while companies with significant performance problems or governance issues may be more likely to see proxy access proposals in 2014, shareholder efforts to achieve this basic right may extend beyond such companies. Majority voting and board declassification [i.e. annual votes on all directors] are also set to continue in 2014.

Julie Tanner, assistant director of socially responsible investing at Christian Brothers Investment Services:  A major focus of our efforts and those of others in 2014 will be to encourage companies to adopt comprehensive, transparent, and verifiable human rights policies and systems for their direct operations and supply chains. This will include asking companies to adopt practices related to worker safety and encouraging hotel chains and airlines to adopt and implement policies designed to address human trafficking and the sexual exploitation of women, children, and men.

We also plan to address food industry practices in the areas of comprehensive labeling of ingredients, product traceability from conception to consumption, responsible and judicious use of antibiotics, and food safety monitoring as well as encourage food production that encourages healthy eating.

In areas of the environment, we will be asking the largest fossil fuel companies (coal, oil, gas) to assess the business risks posed by the potential inability to burn proven reserves of fossil fuels due to climate change. We'll also be addressing water stewardship and hydraulic fracking.

There will also be continuing efforts in 2014 to address corporate transparency in the areas of political contributions and lobbying as well as address issues in compensation design.

Nell Minow, co-founder of GMI Ratings: 2014 will be more of what we've been seeing in years past. Political contributions, majority voting, executive compensation, and climate change proposals will all be in the mix. Because of the way in which the SEC routinely allows companies to exclude shareholder proposals based on word choice, many proposals will look like they have in years past. As usual, the primary companies targeted will be outliers although there could be some surprises if there is a critical mass of likely shareholder support for change at the company. Many issues raised by shareholders won't ever appear on the proxies because companies will negotiate with shareholders in advance.

Michael Pryce-Jones, senior governance policy analyst at CtW Investment Group: Shareholders this year will be going after pale, male, stale boards, which are a symptom of deeper problems in board governance. They'll be doing it through diversity proposals and also vote-no campaigns on directors. Proxy access will be a big issue this year. CtW introduced a proposal at Walgreens (WAG) in advance of its upcoming meeting on Jan. 8, and other companies can expect similar proposals in 2014, whether they be problem companies [think Nabors] or ones where we'd like to encourage best practice [think Verizon].

Strategic expansion and human capital management are other areas of shareholder concern. Boards need to oversee supply chains and worker pay more rigorously. For example, analysts of the fast-food industry indicate problems with key talent retention at the store level.

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Executive compensation remains an ongoing concern, and in our submission to the SEC on the pay ratio disclosure, we referred to analysis that shows pay disparity in a company is associated with lower shareholder returns. Restaurants and retailers are likely to receive the bulk of the attention, reflected in no recommendations on "say on pay" -- and no-vote campaigns against individual compensation committee board members.

Tim Smith, director of ESG shareowner engagement at Walden Asset Management: In 2014, shareholders will be asking fossil fuel companies to review their public advocacy and lobbying, both individually and through trade associations. They'll also be looking for disclosures from companies like Google (GOOG) about their membership in legislative groups like Alec. Shareholders will be looking for new disclosures related to emissions, water, and the social and environmental impacts of using palm oil.

There will be efforts to get board nomination charters to explicitly value racial and gender diversity and, as in years past, ask companies to increase transparency around sustainability, safety, health, and child labor issues. A few companies should also expect resolutions related to the aftermath of the financial crisis and the recent issues at JPMorgan (JPM).

James McRitchie, author of the corpgov.net website and a frequent shareholder proposal filer: Golden leashes (and corporate by-laws to prevent them) are a new topic. [So-called golden leashes are payments shareholder activists make to their director picks on a board over and above the fees the company pays those directors for their services.]

While filing a lot of other "good governance" proposals, I'll continue to focus attention on two most innovative proposals. One calls for a proxy advisor contest. It would make information available to all shareowners and would incentivize much better coverage. [It was] last voted on at Cisco (CSCO). [That proposal asked Cisco to hold a competition that would ask shareholders to vote on the usefulness of information various proxy advisor contestants provided.] Next up will probably be Caterpillar (CAT).

The second proposal is for proxy access, a variation of what I did last year. It would build on a model that would discourage contests of control, where winners divide the spoils of war. Instead, it seeks more of a coalition-style government with owners having a voice, but not necessarily a unified one. It was up for a vote at the end of December at Reeds, Inc. Next up will probably be Citigroup (C).

………

To be sure, not many people like to be questioned or second-guessed. But sometimes, things go awry -- and everyone wishes that more perspectives had been considered. BP's (BP) Gulf disaster and JPMorgan's London Whale are prime examples of this problem.

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Board members are paid to engage in this type of questioning, helping to test managers' plans. (It's useful if employees are encouraged to do this too.) The best board members acknowledge the benefits derived from the perspectives that active long-term shareholders voluntarily provide. And, lucky enough for companies, these shareholders offer this service every year, free of charge.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board education and advisory firm.

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