Uncertainty in the Air: Boards Face Shifting Landscape in 2017

19 December 2016 Publication

Corporate boards have become increasingly well acquainted with uncertainty as activist shareholders, aggressive regulators and shifting investor priorities have brought new levels of scrutiny and pressure on directors and executives.

But in 2017, boards will face a new level of ambiguity in the wake of an election outcome that could bring sweeping change in Washington, D.C. That was in full evidence at Foley & Lardner LLP’s 15th annual National Directors Institute (NDI) Executive Exchange corporate governance conference.

How a Trump administration, working with a Republican-controlled Congress, might impact corporate governance remains far from clear. But the executives and board directors who gathered in Chicago on November 10 – just two days after the election – heard that no matter what emanates from Washington, boards will be impacted by a host of ongoing currents in the coming year.

The following are some of the key themes that emerged from the day:

Proxy Access: In Wake of a Record Year, More on the Way

2016 saw a “tidal wave” of proxy access proposals, Patrick McGurn, Executive Director of Institutional Shareholder Services, said in his keynote address. In 2014, less than 1 percent of S&P 500 companies had access bylaws on their books. Today, more than 40 percent have adopted proxy-access provisions and McGurn expects that trend to continue. In particular, he predicted that line-item veto proposals, in which shareholders seek the ability to propose referendums on specific policies such as executive compensation, would dominate 2017’s proxy season.

Settlement Fever Continues, But Activists Aren’t Winning

The widespread shift in companies’ responses to activist investors was on full display at NDI. McGurn noted that most activist actions in 2016 have resulted in settlements where the activist takes a board seat. “We’re getting more sophisticated about counting votes and predicting what proxy outcomes will be,” said Rick Grubaugh, Senior Vice President at D.F. King and Co., during a panel on shareholder activism. So management is often best served by offering a board seat, and then working to find mutually agreeable solutions once the activist is inside the tent. The consensus among the inside counsel, investors and advisors in the room was that engagement, often meaning a settlement, represents the best method for defusing an activist attack.

And yet, even as boards seek to avoid conflict, the data shows that when activist actions do go to a proxy battle, the activists only win half of the time. And the bigger the company, the lower the activist batting average. For companies with market caps of $100 million or more, activists lost more than half of their proxy votes in 2015 and 2016.

Cybersecurity: Programs Mature, Threats Increase

In the span of a few years, an issue that used to be confined to the IT department has become a critical item on nearly every board’s agenda. At an NDI panel on cyber issues, the overarching conclusion was that boards need to treat cybersecurity as an enterprise risk, not an IT risk.

That means, according to the panelists:

  • Using and trusting outside security providers and advisors. 
  • Understanding that no organization is immune; it’s a matter of when a breach will occur, not if. 
  • Training: 70 percent of breaches start from the inside, so employee awareness is vital. 
  • Calculating risk, developing a plan and running tests to understand the likelihood, frequency and severity of attacks.

ESG Rising

Support for environmental, social and governance proposals soared in 2016, and there’s no reason to believe it will subside in the coming year. In particular, McGurn said, proposals on gender pay disparity have received frequent majority support.

And while a Trump Administration is expected to roll back many of President Obama’s climate change efforts, companies may not be relieved of pressure on that front. In 2016, 54 climate-risk proposals appeared on proxy ballots, up from 34 the previous year.

Investors have also shown broad support for say-on-pay measures, and for board diversity efforts.

The Trump Transition

While the surprising election results were clearly on the minds of everyone at NDI, attendees and panelists alike largely agreed that it was too early to know what implications those results might have for companies or boards.

But at a panel dedicated to the election, Dennis Cardoza and Scott Klug, co-chairs of Foley’s Federal Public Affairs Practice and both former U.S. Congressmen, discussed a wide range of potential changes, including broad deregulation, a new stance on trade policy and the potential for drastically higher infrastructure spending.

They also noted that in the past six years, gridlock in Washington has led many organizations to vastly scale back their lobbying efforts. But now, with the G.O.P. in control of both houses and a president promising sweeping change, it will become vital to have representation in the capitol.