Carpenter Funds’ 2017 Proxy Season Report

Majority voting and auditor independence will continue as focal issues for the Carpenter Funds in the 2017 proxy season, with the Funds continuing shareholder proposal submissions on the majority vote standard issue.  Additionally, we have communicated with an additional 60  S&P 500 Index companies requesting enhanced auditor independence disclosure in the companies’ proxy statements.  The auditor independence issue is being advanced through non-shareholder proposal engagements. The Funds’ Executive Compensation Core Principles & Practices document used to guide the analysis of the executive compensation plans at the corporations in the Funds’ investment portfolios has been further updated.  The compensation plan analysis assists in the Funds’ Say-on-Pay voting and guides our engagements with companies on the executive pay issue.   The Carpenter Funds will advocate for a triennial Say-on-Pay vote as corporations submit management proposals on the Say-on-Pay vote frequency issue as required by Dodd-Frank

Majority Voting in Director Elections

The 2017 proxy season is the 14^th proxy season in which Carpenter Funds have advocated for the adoption of the majority vote standard. Since 2004, Carpenter Funds have submitted 555 majority vote shareholder proposals to US corporations, with the focus on large cap companies. 2017 target companies including the few remaining S7P 500 companies, such as ExxonMobil, that have not adopted a majority vote standard. To date, 457 or 92.3% of the S&P 500 Index companies have adopted a majority vote standard. Over 40% of the companies in the Russell 3000 Index have adopted a majority vote standard in director elections.

The Carpenter’s submitted comments to the SEC’s proposed rulemaking on the “universal proxy.” The focus of the Carpenter comments were to those aspects of the proposed rulemaking that related to the votes options in uncontested director elections. (Carpenter Universal Proxy Comment Letter). The comment letter highlighted the continued inaccurate and misleading proxy statement and proxy card disclosure associated with the so-called “withhold vote” by many companies that retain a plurality vote standard. Final action on the proposed rulemaking is unlikely in light of the presidential election results.

Director Election Vote Standard (S&P 500 Companies)

Executive Compensation $$$

The Funds updated their Executive Compensation Core Principles and Practices Evaluation Form that guides their review of the corporate executive pay plans in their  investment portfolios.  The Core Principles and Practices include four overarching executive compensation principles that outline sound compensation policies along with twenty-five pay practices essential to sound plan design.

While the Core Principles and Practices present compensation principles and practices that should be reflected in executive pay plans, the guidelines encourage distinctive plan design. The Core Principles and Practices Evaluation Form is used to support the Funds’ proxy voting and identify corporate engagement opportunities on executive compensation issues.

Auditor Independence Issue

Building on the past several proxy seasons’ success in securing corporate commitments to expand auditor independence disclosure, the Funds have sent an Auditor Independence Disclosure Letter to 60 large-cap companies in advance of the 2017 proxy season.  The Funds advocacy entails an outreach to secure a commitment to include six points of disclosure in the audit firm ratification vote portion of a company’s proxy statement – an Audit Firm Independence Statement.  The requested independence representations include the following:

1. The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent external audit firm retained to audit the Company’s financial statements.
2.  The year in which the Audit Firm was first retained.
3. The Audit Committee is responsible for the audit fee negotiations associated with the Audit Firm.
4. The Audit Committee periodically considers whether there should be a regular rotation of the independent external audit firm.
5. The Audit Committee and its chairperson are directly involved in the selection of Audit Firm’s new lead engagement partner at time of mandated rotation.
6. The members of the Board and its Audit Committee believe that the continued retention of the Audit Firm to serve as the Company’s independent external auditor is in the best interests of the Company and its investors.

The companies receiving the disclosure requests, are large cap companies with long-term relationships with their outside independent audit firms – Auditor Independence Disclosure Companies 2017.  The requested disclosure is designed to inform investors and the market of the tenure of the corporate client – audit firm relationship and important actions undertaken by the Board and its Audit Committee to protect audit firm independence.  At present, we are engaging and communicating with many of the companies that have received the 2017 letter and are receiving generally positive responses, with many companies and their audit committees committing to include the requested disclosure items in their upcoming 2017 proxy statements.