Proxy Access—the Devil Is in the Details
Proxy access, meaning the ability of stockholders to put their nominees on management’s proxy card and create a proxy contest without having to file their own proxy statement, was the marquee issue of the 2015 proxy season. The 2015 push for proxy access was largely spearheaded by the New York City comptroller through his Boardroom Accountability Project. The comptroller, whose goal is to make proxy access universal at US companies, submitted 75 proxy access bylaw proposals to well-known companies with the following parameters: ownership of at least 3 percent of a company’s stock for at least three years and the right to nominate up to 25 percent of a company’s board. These parameters are largely based upon the proxy access rule adopted by the Securities and Exchange Commission in 2010, which was subsequently struck down by a federal court.
According to Institutional Shareholder Services, a total of 57 companies have adopted or announced an intent to adopt proxy access, including 42 in 2015. The total includes approximately five percent of the S&P 500.
While there appears to be an emerging consensus granting proxy access to 3 percent of shareholders who have held their shares for at least three years, limited to 25 percent of the board, other details of the provisions have not widely been debated. The Council of Institutional Investors (CII), a group of public, union and corporate employee benefit plans, endowments and foundations with combined assets exceeding $3 billion, issued Proxy Access: Best Practices on August 5.CII is sometimes characterized as a governance activist, and its policies and recommendations are not automatically followed by corporate America, although they are typically considered by companies. Best Practices highlights clauses in proxy access bylaws and charter provisions (as described below) that CII believes “could significantly impair shareowners’ ability to use proxy access, or even render access unworkable.”
Ownership Threshold – CII supports a 3 percent threshold, and objects to a 5 percent ownership threshold.
Number of Candidates – CII opposes provisions that would prevent stockholders from nominating fewer than two board candidates on the theory that stockholder “nominees [must] have meaningful representation on the board and that one director is insufficient to achieve that goal.”
Aggregating Ownership – proxy access provisions typically limit the number of stockholders whose ownership may be aggregated to achieve the ownership threshold. The most typical limit is 20, although some companies have set a lower limit. CII opposes limits, arguing that “even if the 20 largest public pension funds were able to aggregate their shares they would not meet the 3 percent criteria at most of the companies examined.”
Excluding Loaned Shares – many institutional investors earn income from share lending. Typically, the right to vote such shares goes to the borrower. CII argues that shares on loan should be counted toward the ownership threshold, provided that the lending investor represents that it (1) has the legal right to recall those shares and intends to vote the shares at the stockholders meeting; and (2) will hold the securities through the date of the annual meeting.
Requiring Ownership of Shares After the Annual Meeting – CII opposes requiring that a nominating stockholder provide a statement of its intent to continue to hold the threshold number of shares after the annual meeting.
Restrictions on Renominations – CII opposes restrictions on renominating proxy access director candidates who failed to receive a specific percentage of votes, noting that such restrictions do not apply to management candidates.
Limitations on Director Compensation From Third Parties – CII opposes prohibiting proxy access candidates from receiving third-party compensation for their service as directors, maintaining that such prohibitions will limit the pool of prospective candidates. CII does, however, support disclosure about compensation arrangements with third parties.
Institutional Shareholder Services also is exploring the language in proxy access bylaws, as reflected in its annual policy survey launched on August 4. The survey asks about restrictions in board-implemented proxy access rights, different from those requested in a majority supported shareholder proposal, that investors “would find problematic enough to potentially warrant an ‘against’ or ‘withhold’ vote” for directors.
Read Proxy Access: Best Practices here.
The Institutional Shareholder Services’ annual policy survey is available here.