The time has come for shareowners to be allowed to include their own nominees for corporate boards in the proxy materials their corporations send out every year—so-called “ballot access.”
The current system—that only allows shareowners to vote for candidates nominated by the current board—is absurd. The SEC has finally reaffirmed shareowners’ right to submit proposals to corporations that, if adopted, would allow proxy access for those corporations’ shareowners.
A number of such proposals will be submitted for votes at 2012 annual meetings, but the wording is important. Some of the largest institutional investors plan to submit proposals to grant proxy access but I anticipate they will require high thresholds of ownership that will be difficult for even large investors to meet. What about the rest of us?
If individual investors—not to mention small and medium sized institutional investors—want ballot access for ourselves, we are going to have to submit our own proposals. Let’s take the lead and make it happen.
I’ve written a draft proxy access proposal (see below). I have also formed a members group on the United States Proxy Exchange website, where we can discuss the draft, make changes, and agree on a final version. Then we can each submit that proposal to corporations we own. To get involved, visit the Proxy Access Group to sign up for membership. Also, send me your e-mail address so I can distribute a complete e-mail list to group members. If you are not yet a member of the USPX,
Proxy access will allow shareowners to nominate and elect directors with new perspectives and skills. This will move us from corporate governance version 1.0, where shareowners beg for changes through advisory proposals, to version 2.0 where we can count on board members to represent our interests. Help us design the framework so that we can hit the install button during the 2012 season.
Below, I give background information, present my draft, and provide more information on the new members group.
Proxy statements are by law company documents, not management documents. As such, access to the proxy for the purpose of listing director nominees should be available to all shareowners, not just the board’s nominating committee.
In 1977 the SEC held a number of hearings to address corporate scandals. At that time, the Business Roundtable (BRT) recommended amendments to Rule 14a-8 that would allow access proposals, noting such amendments
… would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.
Soon, we saw several proposals. In 1980 Unicare Services included a proposal to allow any three shareowners to nominate and place candidates on the proxy. Shareowners at Mobil proposed a “reasonable number,” while those at Union Oil proposed a threshold of “500 or more shareholders” to place nominees on corporate proxies.
One company argued that placing a minimum threshold on access would discriminate “in favor of large stockholders and to the detriment of small stockholders,” violating equal treatment principles. CalPERS participated in the movement, submitting a proposal in 1988 but withdrawing it when Texaco agreed to include their nominee.
These early attempts to win proxy access through shareowner resolutions met with the same fate as most resolutions in those days. As of 1986, only two proposals of the thousands submitted had ever been approved—but the tides of change were turning. A 1987 proposal by Lewis Gilbert to allow shareowners to ratify the choice of auditors won a majority vote at Chock Full of O’Nuts Corporation and in 1988 Richard Foley’s proposal to redeem a poison pill won a majority vote at the Santa Fe Southern Pacific Corporation.
In 1990, without public discussion or a rule change, the SEC began issuing a series of no-action letters on access proposals. The SEC’s about-face may have been prompted by fear that “private ordering,” through shareowner proposals, was about to begin in earnest.
Tensions over this giant leap backward rose until AFSCME v AIG (2006). That case involved a 2004 bylaw proposal submitted by the American Federation of State, County & Municipal Employees (AFSCME) to the American International Group (AIG) requiring that specified nominees be included in the proxy. AIG excluded the proposal after receiving a no-action letter from the SEC and AFSCME filed suit.
The court ruled the prohibition on shareowner elections contained in Rule 14a-8 applied only to proposals “used to oppose solicitations dealing with an identified board seat in an upcoming election” (also known as contested elections).
The SEC subsequently adopted a rule banning proposals aimed at prospective elections. But in 2010, the commission adopted both a new Rule 14a-11, specifying a minimum proxy access requirement for all public corporations, and amendments to Rule 14a-8(i)(8) to allow shareowners to submit proposals for more robust proxy access at corporations they own share in.
The US Court of Appeals for the DC Circuit found the new Rule 14a-11 “arbitrary and capricious.” This means our only current option for achieving proxy access is through shareowner proposals filed on a company by company basis under the amended Rule 14a-8.
Shape the Future
The USPX members group I am forming will
- refine a draft model proposal,
- identify possible target companies,
- tailor submissions to those companies, and
- defend against no-action requests by companies to the SEC.
I welcome participation. If you are not already a USPX member, hit the join now button. Once you sign up you will be able to see and join groups. We will be communicating with various web-based tools, e-mail and by phone.
While any actual shareowner proposal will contain a statement demonstrating the need for proxy access and company specific arguments, we will first concentrate on the “resolved” language and point-by-point justification. Below is my draft “resolved” language. I am sure group members will offer plenty of improvements.
Draft Resolved Language
RESOLVED, Shareowners ask our board, to the fullest extent permitted by law, to amend our bylaws and each appropriate governing document to:
- Disclose, in our proxy statement, properly nominated and vetted “qualifying” director candidates, regardless of whether the nomination is made by the nominating committee or shareowners.
- Define “qualifying” candidates as those nominated by the board and nominees who have legally consented to nominations submitted by shareowners meeting the minimum requirements of stock ownership to submit proposals under SEC Rule 14a-8.
- Develop fair and objective standards to reduce the number of “qualifying” candidates nominated by shareowners to a number equal to one quarter the number of board nominated candidates in such instances where the number of qualifying candidates nominated by shareowners would otherwise exceed such number.
- Ensure all nominees meet federal, state and corporate requirements.
- Ensure eligible shareowners can nominate only one “qualifying” candidate each during each election cycle.
- Ensure director qualifications do not vary depending on the source of the nominee and there is no prior agreement with the company or its representatives regarding shareowner nominations.
- Provide for comparable disclosures regarding director nominees and nominators, regardless of the source of the nomination.
- Ensure the proxy statement lists the source of nomination for each “qualifying” candidate.
- Ensure the company’s proxy card gives eligible shareowners the opportunity to vote for any “qualifying” candidates included in the proxy statement.
Explanation of Provisions
- Direct access to the company proxy has long been considered the most direct and cost effective method of allowing shareowners a meaningful role in the nomination and election process. As Les Greenberg and I argued in our petition to the SEC for proxy access more than ten years ago, “entrenched managers and directors will only improve corporate governance when they can be held accountable, e.g., voted out of office and replaced with directors chosen by shareholders.”
- SEC Rule 14a-4(d)(4) prohibits a nominee from being listed unless they have consented to being named in the proxy statement and to serve if elected. I set the bar for nominating directors at the same level as for submitting proposals under SEC Rule 14a-8, since this time-honored standard is surrounded by court decisions, SEC guidance, and no-action letters.
- The aim here is to go with the same 1/4 limit as the overturned Rule 14a-11, making a substantial change in board composition without triggering a change-in-control. The language also gives the current Board flexibility in arriving at a fair and objective standard as to which nominees get on the proxy when more are nominated than the 25% standard. The chances of winning a change-in-control fight through proxy access would be minimal, since other shareowners usually expect to be paid a change-in-control premium by a controlling acquirer. Obtaining approval from ISS, Glass-Lewis and other proxy advisors is considerably harder for a change-in-control slate than from a short slate. Change-in-control could also trigger provisions in debt instruments, employee agreements, severance agreements and other contracts resulting in costly disruptions. Yes, we can expect some boards to game the system with unfair standards. Hopefully, ISS, Glass-Lewis and others will call them on it and recommend voting against directors that play such games.
- Since the company would be listing shareowner nominees in their proxy, they will need to ensure they meet all legal requirements. Otherwise they may face liabilities and shareowners would be voting for ineligible candidates. Legal standards are generally minimal, like not having declared personal bankruptcy or not having been found legally insane, so the cost of such an exercise should be minimal.
- Limiting shareowners to one nominee is an attempt to address concerns that “special interests” would take over boards. These concerns have been overblown, since directors have a fiduciary duty to the company and must win by a majority of all shares voted. However, it is a way of reassuring groups like the US Chamber of Commerce and Business Roundtable that no shareowner gains what these special interest groups would consider “undue” influence through the proxy access process.
- This provision is designed to ensure the company does not apply more stringent standards for shareowner nominees or short-circuit the access process through side agreements with nominees or nominators.
- This provision is to ensure a level playing field with regard to disclosures in the proxy and and their accessibility by shareowners.
- This provision will ensure that shareowners know the source of the nomination so they can make a fully informed decision.
- This provision is the main point; include all “qualified” candidates on the proxy card so that shareowners can vote for them.
Since the timeframe for submitting proxy proposals is rapidly approaching for many corporations, time is of the essence. Additionally, I will be traveling for several weeks beginning the second week in November. Therefore, I would propose that we have the first phase of work done (model “resolved” language) by November 5th. Hopefully, the group can reach consensus by then.
Of course, with or without consensus, anyone is free to use the language however they want. After November 5th I would hope the group can move on to identifying possible targets and submitting proposals. Key will be choosing targets where shareowners already recognize a lack of board leadership and will be ready to vote for change.
Again, here are the links you need to join the USPX and then join the new Proxy Access members group. Don’t forget to e-mail me at [email protected], so I can add your e-mail address to the master distribution list.