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Proxy Access: A New Version for 2013

October 16, 2012 in General

Update: This is a revised version of an earlier post this month. I’ve deleted that post because I don’t want anyone to mistakenly use the prior draft language. I’m hoping this language is a little tighter but always welcome reader suggestions.

Last month I hoped ISS would reconsider their analysis of our proxy access proposal at H&R Block (HRB-ProxyAccessProposal pdf), submitted by Kenneth Steiner. ISS had said our proposals “could undermine the efforts of larger, long-term shareholders whose interests might better reflect those of the broader shareholder base.” However, as I wrote in my September 10th post,

their logic appears flawed. Larger, longer-term shareowners would gain rights, not lose them, under the proposal… without Steiner’s proposal those larger, long-term shareholder have no right to proxy access. Additionally, the proposal does allow those larger, long-term shareowners to nominate 2 members of the board — the same number ISS appears eager to endorse. The smaller shareowners provided for in Option B can’t undermine larger, long-term shareholders, since they would file under Option A.

Nonetheless, they recommended against the proposal and it failed. We spent much of last spring trying to work proxy proposals though the SEC “no-action” process. It looks like it may take fall revisions to obtain endorsements from ISS and Glass Lewis. This post proposes a revised proxy access template, which would still create the possibility for retail shareowners to participate in proxy access nominations but also attempts to address concerns raise by proxy advisors and large institutional investors. Read the rest of this entry →

Proxy Advisors Obstruct Proxy Access

August 9, 2012 in General

The good news is that, on the second round of submissions of the USPX model proxy access proposal, the SEC rejected all no-action requests. We now have votes coming up in the next couple months at Forest Labs ($FRX), Medtronic ($MDT) and H&R Block ($HRB). All three were submtted by individual shareowner Kenneth Steiner.

The bad news is that the proxy advisory firms ISS and Glass Lewis are now standing in the way. Jim McRitchie, John Chevedden and Glyn Holton have been doing outreach to the proxy advisors and institutional investors … but we pretty much have to get support from influential ISS, or we won’t receive majority votes.

A couple weeks ago, USPX members finalized a slide presentation on the USPX Model Proxy Access Proposal. We forwarded it to ISS, and they agreed to have a conference call. It was a cordial conversation. We walked them through the careful logic behind the model proposal, as described in the release document. They listened and asked questions … and several times made a disturbing protest to the effect that some of their clients disagreed with our position that proxy access should be open to smaller investors, including individual shareowners. They didn’t exactly explain why those clients disagreed. All that mattered was that … they disagreed.

Through back channels, we later heard:

ISS is not recommending a yes vote. They said their clients are expressing support for a higher threshold of stock ownership than ISS expected. Plus their clients wanted more change in control safeguards.

ISS has come out against our proposal at Forest Labs and Medtronics. They haven’t yet taken a position on the H&R Block proposal, which is slightly different from the other two. it blocks takeover attempts by capping the number of shareowner nominees at 48% of the board—precisely the sort of change in control safeguard ISS found lacking in the other two proposals. We will wait and see what they decide.

The response from Glass Lewis has been even worse: they refused to even speak to us. Proxy access is the biggest issue in shareowner proposals this year, and our model proposal has been submitted to more companies than all other proxy access proposals combined, and they wouldn’t even speak to us …

Proxy Access Moves Forward: Forest Labs, Medtronic & H&R Block

August 1, 2012 in General

The cartoon at left accompanied an article entitled Where are the funds? (Pensions & Investments, 3/5/2012). P&I lamented, “instead of sitting on the sidelines, activist investors should take advantage of the opportunity to file access proposals… proxy access proponents must be adventurous.” Working through the USPX, individual shareowners are using the key; adventure is on the way.

Individual shareowner Ken Steiner has three proxy access proposals—all based on the updated USPX model proxy access proposal—coming up for votes at  Forest Labs ($FRX) on August 15th, Medtronic  ($MDT) on August 23rd and at H&R Block ($HRB), whose proxy materials have not yet been released. All three proposals survived no-action challenges at the SEC. Read the rest of this entry →

2012 Proxy Access Efforts

July 10, 2012 in General

As Glyn Holton reported last week, the SEC denied no-action requests from Forest Labs ($FRX) and Medtronic ($MDT). (SEC Delivers For Shareowners On Proxy Access, 6/29/2012) Therefore, shareowners will get an opportunity to vote in favor of proxy access at upcoming shareowner meetings. Read the rest of this entry →

SEC Delivers for Shareowners on Proxy Access

June 29, 2012 in General

USPX members’ efforts to advance proxy access got a boost today from SEC staff. Two companies, Forest Labs ($FRX) and Medtronic ($MDT), had sought no-action letters from Commission staff to allow them to exclude from their proxy materials the USPX model proxy access proposal. Both requests have been denied. 

These decisions come on the heals of much criticized no-action decisions by SEC staff that allowed six companies to exclude an earlier version of the USPX model proposal (see Pushback From SEC Staff, March 9, 2012). In response to those decisions, USPX members immediately redrafted the USPX model proposal and resubmitted it to Forest Labs, Medtronic and H&R Block ($HRB). Commission staff have not yet made a decision on an H&R Block no-action request.

All three of the most recent proposal submissions were made by shareowner Kenneth Steiner with help from John Chevedden. Various members of the USPX have also pitched in. In particular, Glyn Holton, Jim McRitchie and Dan Rudewicz helped organize responses to the three most recent no-action requests.

We now have a version of the USPX model proxy access proposal that we know can pass muster with the SEC. But we still have plenty of work ahead of us. Proxy access doesn’t become real until shareowners approve it at a company’s annual meeting, and even then, the board has discretion over whether or not to actually implement it (because the USPX model proposal is precatory). Our immediate next steps are to reach out to proxy advisory services and encourage them to support the USPX model proposal in their voting recommendations.

Updated Model Proxy Access Proposal

March 23, 2012 in Standards

Two weeks after SEC lawyers granted six corporations approval to exclude “proxy access” proposals from their proxy materials, USPX members are already submitting an updated version of that same proposal to other corporations. Updated language addresses the flimsy pretexts for the lawyers’ decision, as well as implementing improvements to the proposal language that shareowners have recommended.

The original proposals were based on a USPX model proxy access proposal released on November 10, 2011. Today, the USPX announces an update to that model proposal, which shareowners can submit to corporations. Shareowner Kenneth Steiner received an advance copy of the update, and he has already submitted proposals based on the new language to Medtronics (MDT) and Forest Labs (FRX).

The purpose of the model proposal is to facilitate board nominations, not only by the largest institutional shareowners, but by all shareowners, including individual investors. The updated model proposal has two alternative versions. Version A is a direct evolution of the original model. Version B is based on a customization of the model, developed by shareowners Jim McRitchie and Glyn Holton for submission to Dell Corporation (DELL).

By limiting the number of proxy access nominations to less than a majority of board seats, the second version provides a strong safeguard against proxy access being used to pursue a change in control at a corporation. While Version A also seeks to avoid change in control issues, it does so primarily by prohibiting coordination of nominating groups, not by restricting the total number of shareowner nominees.

A 16 page release document presents the text of both versions followed by instructions for submission, background information and the history of proxy access. A section provides a detailed explanation of Version A. A shorter section follows that to explain how Version B differs from Version A.

Shareowners are encouraged to submit a version of the model proposal to corporations they think would benefit from it. We also encourage shareowners to experiment with modifications and/or to submit entirely different proxy access proposals of their own design and to let us know of those modifications or different proposals.

We welcome feedback, which can be posted directly on this page (log-in as a USPX member to do so) or send an e-mail at jm@corpgov.net.

Pushback From SEC Staff

March 9, 2012 in General

“Stunning”, “arbitrary”, “unjustifiied” … “questionable”: these are some of the words individual shareowners are using to describe the SEC handling of six corporations’ requests to be allowed to exclude the USPX model proxy access proposal from their 2012 proxy materials.[1] This week, the Commission’s staff approved every one of those requests.

Corporate executives routinely solicit SEC staff no-action letters indicating staff will recommend no enforcement action should a company exclude a proposal from its proxy materials. Grounds for excluding proposals are spelled out in Rule 14a-8(i)(9) and include cases where proposals might violate state law, address personal grievances, relate to routine business decisions, etc. Corporations’ in-house counsel often draft no-action requests. If executives really want to block a proposal, they spend shareowner money on outside law firms to write the requests. In response to the USPX model proxy access proposal, executives went all-out, hiring outside law firms to draft lengthy no-action requests floating numerous possible reasons for exclusion.

The high-priced law firm Gibson Dunn wrote an October 23, 2011 no-action request for Textron (TXT) proposing that the USPX model proposal, which shareowner Kenneth Steiner had submitted to the company, might be excluded because it dealt “with matters relating to the Company’s ordinary business”; was actually multiple proposals posing as one; was “impermissibly vague and indefinite so as to be inherently misleading”; and was “beyond the Company’s power to implement.” The letter goes on for 19 pages, not including 18 pages of exhibits. Gibson Dunn recycled essentially the same letter for another client, Bank of America (BAC). The law firm Stinson Morrison Hecker wrote a staggering 27 page letter for their client, Sprint (S), arguing that the USPX model proposal would violate Kansas law, was “impermissibly vague and indefinite so as to be inherently misleading”; was beyond the Company’s power to implement; and dealt “with matters relating to the Company’s ordinary business.”

Law firms take a “throw things at the wall and see what sticks” approach to the no-action process. No argument seems too far fetched. The corporations are footing the legal bills, and, who knows, Commission staff only have to accept one contrived argument for a proposal to be excluded—might as well offer them plenty to choose from. With corporations recycling each others’ arguments, it turns out that Commission staff only had to accept two arguments in order to allow exclusion of every single contested submission of the USPX model proxy access proposal.

The first of those arguments—among those raised by Textron, Bank of America and Goldman Sachs (GS)—was that the USPX model proxy access proposal was actually two proposals disguised as one! The proposal’s item 6 provided a common-sense safeguard against executives exploiting proxy access as a means of enriching themselves:

Any election resulting in a majority of board seats being filled by individuals nominated by the board and/or by parties nominating under these provisions shall be considered to not be a change in control by the Company, its board and officers.

In the past, the Commission allowed shareowners to submit as many proposals to a corporation as they liked. In 1976, they limited shareowners to two proposals a year, which they further reduced to one a year in 1983. Common sense would suggest that a single proposal would be whatever a shareowner submitted for a single up or down vote, but it has been many decades since anyone accused the SEC of having common sense. No. The Commission’s lawyer-bureaucrats set themselves the task of deciphering shareowner proposals to see if, in their opinion, they address multiple issues. Rarely is this clear, so decisions tend to be … nuanced. Commission staff didn’t have to decide against shareowners on this one, but they did. It doesn’t mean anything—just lawyers mentally masturbating—but the consequences are real. Shareowners of Textron, Bank of America and Goldman Sachs almost had a chance to vote on proxy access this year, but Commission staff decided otherwise.

The second argument Commission staff accepted—among those advanced by Sprint, MEMC Electronic Materials (WFR) and Chiquita (CQB)—was that, because the proposal cited the Commission’s own Rule 14a-8, it was impermissibly vague or misleading. Specifically, Commission staff noted that the USPX model proxy access proposal asked that companies’ proxy materials

… include the director nominees of shareholders who satisfy the “SEC Rule 14a-8(b) eligibility requirements.” The proposal, however, does not describe the specific eligibility requirements. In our view, the specific eligibility requirements represent a central aspect of the proposal. While we recognize that some shareholders voting on the proposal may be familiar with the eligibility requirements of rule 14a-8(b), many other shareholders may not be familiar with the requirements and would not be able to determine the requirements based on the language of the proposal. As such, neither shareholders nor [the Company] would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.

The SEC’s own Rule 14a-8(b) is easily accessible with a web search. It explains in a half page of plain English what the eligibility requirements are, so how does Commission staff conclude that “neither shareholders nor [the Company] would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires”???

The SEC is a giant revolving door for lawyers. Almost the entire senior staff is lawyers who work at the Commission for a few years and can then look around for high-paying jobs at law firms. Recently, one such departure was Greg Belliston, who left the Commission for—where else!—Gibson Dunn.

In commenting on Commission staff’s treatment of the USPX model proposal, the CorporateCounsel.net Blog offers shareowners some comfort:

As is usually the case with the type of exclusions that we see here … the proponents will no doubt get smarter next year and try to correct the language which led to exclusion this year, so the landscape might be quite different in 2013.

Actually, shareowners won’t be waiting for 2013. USPX members are already redrafting the USPX model proxy access proposal. Expect new submissions in the next few weeks.

Footnotes    (↵ returns to text)
  1. Shareowner David Monier submitted a proxy access proposal based on the USPX language to the Princeton National Bancorp, Inc (PNBC). The bank did not challenge the proposal, so it will appear in their proxy materials. Jim McRitchie submitted a proposal based in part on the USPX language to Dell, which has requested an SEC no -action letter. Based on their other responses, we expect Commission staff will grant that request.

Reflections on 2011

December 26, 2011 in General

The United States Proxy Exchange (USPX) is a experiment premised on the notion that a grass roots movement—by individual shareowners, for individual shareowners and funded entirely by dues of individual shaeowners—can improve corporate governance and address financial abuse. It is too early to say for sure, but based on what we achieved in 2011, the experiment appears to be working. Accomplishments included:

  • We developed simple say-on-pay voting guidelines to help shaeowners make sense of executive compensation and cast productive say-on-pay votes.
  • We drafted a model proxy access proposal that shareowners have been submitting to corporations for shareowner votes in 2012.
  • We kept a focus on the threat of virtual-only shareowner meetings, attracting media attention, including a recent Wall Street Journal article.

All the while, our members expanded their own personal efforts: attending annual meetings, submitting shareowner proposals, blogging and otherwise advocating for shareowner rights. These individual efforts, more than any other, are the measure of our success. In 2011, supporting them was a primary focus.

In June, we held a meeting of long-time supporters, who made a commitment to decentralizing our movement. The idea was that, no matter how capable our leadership may be, we can accomplish more by providing members the tools to self-organize around issues. Central to this strategy was our new social-networking website, which went live in November. Already, five members are actively blogging on the site, with social networking tools promoting their posts and ensuring a ready audience.

Our membership continues to grow. More importantly, the sophistication and commitment of our members is exemplary. With the social networking tools of the new website at members’ disposal, we are poised to make a difference.

Still, we face enormous challenges. Wall Street and corporate interests have seemilgly limitless funds to spend on lawyers, lobbyists and other enablers. They set the agenda and we respond to it. All three branches of our government—legislative, executive and judicial—are largely beholden to them. Most shares in this country—and the voting rights that go with them—are held by institutional investors, the majority of whom are profoundly conflicted.

With executive compensation at astronomical levels, those institutional shareowners approved compensation packages at 98% of corporations in 2011 say-on-pay votes.[1] Prospects for proxy access appear similarly dismal for 2012. The 2010 Supreme Court decision in Citizens United v FEC ensures that the upcoming presidential and congressional elections will be awash in corporate spending.

The 2011 Occupy Wall Street movement has fizzled for now, but it has lessons. For a time, their message that the system is broken resonated with Americans. They allowed themselves to be painted as “left wing” (mostly, they were) and failed to articulate an agenda. Certainly, one can take decentralization too far. Occupiers were disturbingly unsophisticated, earnestly debating meaningless proposals to abolish corporate personhood or restore the gold standard.

The USPX—small, sophisticated, adamently non-partisan, and with a clear agenda—can succeed in ways Occupy Wall Street could not. We plan for the long term and understand that education is a precursor to reform. Shoulder-to-shoulder, we face an uncertain future. We don’t promise success. We do promise a good fight.

Footnotes    (↵ returns to text)
  1. James Barrall and Alice Chung, Say on Pay and Related Advisory Vote Proposals, Latham Watkins, September 12, 2011

Model Shareowner Proposal for Proxy Access

November 10, 2011 in Standards

 

Today, the United States Proxy Exchange (USPX) released a Model Proxy Access Proposal that can be presented to corporations for a shareowner vote under SEC Rule 14a-8 to ensure that long-term shareowners have a reasonable, but not necessarily easy, means for including board nominations in the proxy materials those corporations distribute—so called “proxy access”.

The Model Proposal is designed to achieve legitimate purposes of proxy access without including anti-democratic provisions that have marred other approaches—most notably the SEC’s vacated Rule 14a-11. It provides two alternative ways parties may qualify to nominate: one is mostly suited for large shareowners, and the other is mostly suited for small shareowners. The Model Proposal imposes no hard cap on the total number of shareowner nominations, although it provides safeguards that obstruct parties from seeking a change in control through proxy access.

The Model Proposal is released with thirteen pages of accompanying discussion. This explains how to submit the Model Proposal to corporations. It describes the history of proxy access, dating to the 1970s. It details the legitimate goals of proxy access and explains how the Model Proposal achieves these without disenfranchising the majority of shareowners.

The USPX has developed the Model Proposal as a means of stimulating debate and experimentation with alternative approaches to proxy access. Implemented as-is, it will provide a reasonable means for most long-term shareowners to participate in nominating directors.

We encourage shareowners to submit the Model Proposal or to use it as a starting point in developing their own proposals. We hope that shareowners will also submit completely different proposals of their own design. Our discussion of issues should assist shareowners in that process.

The success of proxy access depends on experimentation to find what works. The USPX is committed to supporting such experimentation. Releasing the Model Proposal is a part of our support.

An Open Letter to Institutional Shareholder Services (ISS)

November 4, 2011 in General

November 4, 2011

 

VIA E-MAIL (policy@issgovernance.com)

Global Policy Board
Institutional Shareholder Services Inc.
2099 Gaither Road
Rockville, Maryland 20850

Re: ISS 2012 Proxy Voting Policies – Proxy Access Proposals (US)

Dear Sir or Madam:

Thank you for this opportunity to comment as you develop policies for making shareowner voting recommendations in 2012. This letter addresses policies with regard to Rule 14a-8 proxy access proposals.

After twenty years of obstructing shareowner efforts to achieve proxy access, the SEC finally released Rule 14a-11. While ostensibly providing proxy access at public corporations, it was anti-democratic. Two particularly objectionable aspects of the rule were:

  1. A high ownership threshold of 3% of a corporation’s outstanding stock in order to nominate. This disenfranchised all individual shareowners and all but the very largest of institutional shareowners, at least at medium or large corporations.
  2. A hard cap on the total number of shareowner nominations was set equal to 25% of the number of board members, which ensured Rule 14a-11 would never have more than token impact.

The courts may have their own reasons for vacating Rule 14a-11, but we agree with their conclusion that the rule could be seen as “arbitrary and capricious.”

While we object to Rule 14a-11, we applaud the SEC for amendments to Rule 14a-8 to allow shareowners to submit their own proposals for alternative—and presumably better—forms of proxy access at individual corporations. This “private ordering” approach to proxy access would allow shareowners to experiment with different approaches to proxy access at individual firms, to see what worked.

Now that Rule 14a-11 has been vacated, prospects for private ordering experimentation are dimming. Large institutional investors that intend to submit proxy access proposals appear poised to base those proposals on Rule 14a-11, incorporating the two anti-democratic aspect of that rule, which I have already mentioned.

In formulating a policy for making voting recommendations with regard to proxy access, we encourage you to make voting recommendations as if Rule 14a-11 were never vacated. If that were the case, Rule 14a-11 would be a minimal baseline already applicable at all corporations, and the purpose of proxy access proposals would be to experiment with innovative alternatives. We see no reason that should change just because Rule 14a-11 was vacated. Vacated or not, Rule 14a-11 was a bad rule, and shareowners need to innovate and experiment with alternatives, implemented through the Rule 14a-8 proposal process, to find a means of proxy access that works.

The United States Proxy Exchange (USPX) is developing a model proxy access proposal. This will provide a reasonable—but not necessarily easy—means for most long-term shareowners to participate in nominating directors. It will impose no hard cap on the total number of shareowner proposals, although it will provide safeguards that obstruct parties seeking a change of control through proxy access.

We will encourage shareowners to submit our model proposal or to use it as a starting point to develop their own proposals. We hope that shareowners will also submit completely different proposals of their own design. The success of proxy access depends on experimentation to find what works. This entails risk, of course. Democracy always does. The USPX intends to fully support the process, and we hope ISS will too.

We will forward our model proxy access proposal to you when it is complete.

Sincerely,

Glyn A. Holton
Executive Director

cc:  Laura Berry, ICCR
Michael Garland, Change To Win
Brandon Rees, AFL-CIO
Michael Ring, SEIU
Anne Sheehan, CalSTRS
Anne Simpson, CalPERS
Ann Yerger, CII
Michael Zucker, AFSCME

An Important E-mail YOU Can Send To facilitate Proxy Access

November 3, 2011 in General

Can you write an e-mail to Institutional Shareholder Services (ISS)? It will take you two minutes, and doing so could have an enormous impact on proxy access proposals in 2012.

A hard-working team of USPX members are drafting a model proxy access proposal that members can submit to corporations for the 2012 proxy season. Here is the latest draft. It is critical that this proposal win majority votes at the corporations to which it is submitted, but for that to happen, proxy advisory firms need to support the proposal. WE NEED TO MAKE A CASE TO THEM THAT THEY SHOULD SUPPORT IT.

The biggest proxy advisory firm, ISS, is requesting shareowner feedback on what their internal policies for making voting recommendations should be for 2012. Anyone is welcome to respond. It is easy to provide feedback. Below is a sample note you can send. Please cut and paste it into an e-mail. Edit the non-bold portions to make the e-mail your own. Add your full name at the bottom, and include an appropriate subject at the top, such as “Comments on 2012 Policies”. Then e-mail it to ISS at policy@issgovernance.com. Please send a copy to us at contact@proxyexchange.org, so we can post it to the website. For more information, see the ISS website.

The deadline for commenting is November 7. Please don’t wait. Send your e-mail now.

Here is the sample e-mail you can send:

Dear ISS:

Thank you for the opportunity to comment for your 2012 Draft Policies. I respond below to the questions you posed relating to Proxy Access Proposals (U.S). You may list my affiliation as “member, United States Proxy Exchange”.

Q: Does your organization intend to generally support or oppose proxy access shareholder proposals? Would your organization’s view differ based on whether the proposal is a binding bylaw resolution versus a precatory (non-binding) one? If so, how?

A: I personally will generally support both binding and nonbinding proxy access proposals that afford a reasonable—but not necessarily easy—means available to all long-term shareowners to nominate.

Q: If your organization is likely to take a Case-by-Case approach on proxy access shareholder proposals, are there any additional factors not enumerated in ISS’ proposed policy that your organization believes are central to the evaluation of these proposals? If yes, please specify.

A: I will generally oppose proposals that I consider to be blatantly undemocratic. Specifically, I would oppose high ownership thresholds, which would disenfranchise all but the largest institutional shareowners. I would also oppose caps on the number of shareowner nominees, especially caps designed to ensure that a majority of board seats are retained by the current board’s nominees.

Q: Would your organization look for specific thresholds or limits when evaluating these shareholder proposals (e.g., a minimum or maximum ownership percentage or number of board seats)? If yes, what specific parameters does your organization favor?

A: By asking what sorts of thresholds or limits respondents might support, this question fails to recognize that innovative proposals using mechanisms other than the “thresholds” and “limits” or Rule 14a-11 might deserve support. As a member of the United States Proxy Exchange (USPX), I know my organization is preparing a model proxy access proposal that includes a number of sound innovations. One of these, as the draft is currently written, would allow a group of 100 shareowners, all satisfying the Rule 14a-8 eligibility requirements, to place one nominee on the proxy. The USPX model proposal has not yet been released. When it is, I hope ISS will review it carefully and choose to recommend supporting votes for it.

Q: Would your organization oppose the shareholder proposal if it allowed 13D filers seeking a change in control to place candidates on ballots? If no, please explain.

A: I would not want any party simultaneously performing an independent proxy solicitation AND nominating under proxy access.

Thank you,