The Corporate Library Blog

Bebchuck Tells It on Proxy Access

Cheers to Harvard Professor Lucien Bebchuck for his stirring op-ed on proxy access.  He makes the key points that this last-minute effort to gut the provision by imposing and insurmountable threshold (a) inserts (presumably corporate-authored) language to replace provisions where there was no conflict between the House and Senate versions so it was acceptable as it was and (b) makes proxy access into a tool that can only be used by raiders who are just as likely to exploit shareholders as corporations are.

Any reform of corporate elections should include ending incumbents’ monopoly over the corporate ballot — the proxy card sent by the company at its expense to all shareholders. Only board-nominated candidates get to appear on this ballot; challengers must bear the costs of sending (and getting back) their own proxy card to shareholders. Providing shareholders with proxy access — the right to place candidates on the ballot — would contribute to leveling the playing field.

Managements have long opposed proxy-access reform and have thus far succeeded in blocking it. In the wake of the financial crisis, however, the Securities and Exchange Commissionproposed a proxy-access rule and seemed determined to adopt it this year. Because business groups threatened to challenge in court the S.E.C.’s authority to adopt such a rule, the Senate and the House bills sought to support the agency’s reform by affirming this authority. Under the senators’ amendment, however, the financial regulation legislation would not merely affirm the S.E.C.’s authority but rather severely limit it.

The proposed amendment cannot be viewed as an attempt to reconcile the Senate and House bills. These bills were largely identical in affirming the S.E.C.’s authority and leaving the design of a proxy-access rule to S.E.C. rule-making. Rather than reconciling different arrangements found in the Senate and House bills, the amendment would replace an identical arrangement appearing in both bills with a different arrangement appearing in none.

If adopted, this new arrangement would largely eliminate the benefits that proxy-access reform could provide. A 5 percent ownership threshold would make the proxy provisions largely useless for the main set of investors whose involvement the proxy-access reform is intended to facilitate. (Emphasis added)

The New York Times also has a pointed editorial about the blatant links between campaign contributions and support for business-oriented revisions to the legislation. 

Congress has vowed to get tough with financial companies. But not so tough that members won’t eagerly solicit and accept their campaign contributions. While the House and Senate have been wrestling over financial reform legislation, members of the relevant committees have found time to conduct more than 800 fund-raising events.

The tawdry symbiosis is so routine that some members are crying foul about a preliminary investigation by the House’s new independent ethics watchdog.

Shareholders should make sure that Congress and the White House know how important proxy access and majority vote are to them.  And then they need to let corporations know that boards who think that it is an appropriate use of shareholder funds to promote policies that are not in our interests will not be permitted to continue to serve.

Nell Minow - Editor

Letter to Valerie Jarrett

Dear Ms. Jarrett,

I was shocked today to hear that there are rumors that the White House is trying either to block proxy access or to raise the threshold necessary to initiate access to a level which even the largest funds cannot hope to reach.

Given the administration’s explicit support of proxy access – one of the most important precepts of strong corporate governance – such a change of direction, if it were true, would be a serious betrayal of trust.

If we cannot get significant corporate reform through after the kind of economic crisis we have just been through then there is no possibility that the U.S. will catch up to the levels of good corporate governance that are practiced by the rest of the Western world. To put it bluntly, if the level of value destruction, the level of lying, guilt, greed, and cupidity that has just been evidenced by many in the corporate community is not sufficient to warrant a basic tenet of shareholder protection, then it is hard to know what kind of behavior will be.

Corporations are owned by shareholders, not by The Business Roundtable, whose continued denial of global climate change has lost it any of the shreds of credibility that still clung to it.

Please ensure that the House and the Senate retain the proxy access language in the final bill that was in each of the original bills.

Yours sincerely,

Paul Hodgson - Senior Research Associate

Shameful

The headline from the Huffington Post:

White House Guts Reform To Protect CEO Pay

What that means:

Wall Street Uses Main Street's Money to Corrupt the Legislative Process

and Perpetuate The System that Failed Us and Will Fail Again

Did I mention that eight legislators are under investigation for conflicts of interest relating to fundraising from financial services firms during consideration of this legislation?

I'm shocked, shocked to find gambling going on in Casablanca.  

It is despicable that the very people we entrust with our investment capital are using it to thwart any attempt at market-based oversight.

The Council of Institutional Investors sent out this urgent message to its members:

All Council members opposed to the Senate's proposed 5% ownership requirement for proxy access are strongly encouraged to call and email White House advisor Valerie Jarrett TODAY. As a senior advisor to President Obama, Jarrett has significant influence over the ongoing House-Senate conference committee negotiations, particularly regarding the proxy access provision of the base text (section 972).

To support proxy access, call the White House switchboard at (202) 456-1414 and request to be connected to Valerie Jarrett's office.  If you cannot reach Ms. Jarrett, we encourage you to leave a message expressing your strong opposition to the Senate's amendment imposing a 5% ownerhsip threshold for shareowner access to the proxy.  Tell Jarrett and the White House to support the original language passed by both houses of Congress simply affirming the SEC's authority to issue a proxy access rule.  Be sure to include some brief information about your fund as well as your contact information.  You can also send Ms. Jarrett an email at Jarrettpublic@who.eop.gov.

Tell Valerie Jarrett and the Obama administration to publicly oppose the Senate's proxy access amendment imposing a 5% ownership requirement.  Encourage them to call upon House and Senate conferees to reject this harmful change.

If you have any questions, please do not hestitate to contact Council analyst Jonathan Urick at (202) 261-7096 or jonathan@cii.org, or our general counsel Jeff Mahoney at (202) 261-7081 or jeff@cii.org.

Nell Minow - Editor

Public Pension Plans Sign Letter on Governance Reforms

CalPERS and 20 other public pension funds have sent a letter to the two legislators responsible for assembling the final version of the financial reform package, Senator Chris Dodd and Representative Barney Frank, in support of corporate governance reforms.  In particular, the letter says that the proxy access provision is "a critical component."

Nell Minow - Editor 

Francis Byrd Interviews Holly Gregory

Be sure to take a look at the Francis Byrd's interview of Holly Gregory for the Altman Group, published on the website of the Harvard Law School Forum on Corporate Governance and Financial Regulation.  Byrd, formerly at Moody's and the New York City Comptroller's office and Gregory, long-time colleague of Ira Millstein at Weil, Gotchal & Manges, are two of the most highly-respected and influential experts in this field, and this is an excellent opportunity to see the current thinking from the corporate perspective.

On proxy access:

According to proponents, this is necessary to make directors more accountable to shareholders. What we will have to see play out is whether more frequent contests for board seats results in positive gains from heightened accountability. Some believe that boards are already under an unhealthy degree of shareholder pressure for immediate and ever rising share price gains.

...

If the concerns that I’ve described are realized, proxy access will not be the panacea that the regulators intend, and shareholders as a whole will not be better off. In that scenario the primary beneficiaries will be shareholders who use proxy access to forward a specific objective or strategy that is not broadly shared by the entire shareholding body.

On the impact of say on pay:

This is the time for boards and management teams to be gearing up and thinking about shareholder relations in new, more creative and more engaged ways. Improved engagement with shareholders is the best hope companies have of avoiding or mitigating [the concerns raised above].

On the consequences of pay abuses and excesses:

Many of these issues are not new, but at times boards and managements have exhibited tone-deafness or an unwillingness to set forth in plain and rational terms the legitimate justifications for certain pay practices. It is no longer enough to simply cite competition and retention concerns to justify large packages and grants.

On proxy advisory services:

There are legitimate concerns about the power of certain of the proxy advisory firms and about their capacity to provide the kind of nuanced company-specific analysis that will only become more important to our economic system as shareholders gain power.

Nell Minow - Editor

Proxy Access: Our Comment Letter to the SEC

Via Email

Aug. 14, 2009

Elizabeth M. Murphy, Secretary

United States Securities and Exchange Commission

Re: Facilitating Director Nominations (File No. S7-10-09)

Dear Ms. Murphy:

On behalf of The Corporate Library, an independent corporate governance research firm, we are writing to express our support for the Securities and Exchange Commission’s (SEC) proposed rule, Facilitating Shareholder Director Nominations.  The current financial crisis underscores both the complacency within some boards to protect long-term shareholders’ interests and the need to strengthen accountability of boards and management.

We believe granting long-term shareholders the right to nominate directors, thereby ending the de facto monopoly the board and management has in picking director slates, is an important component of achieving the goals of effective oversight of U.S. publicly traded companies’ boards and of broad financial reform.  Therefore, we concur with the SEC that the reforms outlined in the SEC’s proposed Rule 14a-11 and revisions to Rule 14a-8(i)(8), following decades of debate over proxy access, are long overdue and should be adopted swiftly.  We support the application of Rule 14a-11 as proposed and welcome the opportunity to comment on points still under consideration.

We agree with the SEC’s position that the proposed rule should:

• Permit shareholders to aggregate their holdings to meet the minimum share ownership thresholds.
• Grant only long-term shareowners, those holding stock for at least one year, access to nominate directors.
• Employ safeguards to ensure that access is not used as a takeover mechanism by short-term profit seekers.
• Require strong independence standards for director nominees.
• Require full and accurate disclosure by nominating groups, including all pertinent information about nominated directors.
• Allow nominating shareholders to make statements of opposition against the election of other board members on the company’s slate in the proxy statement.
• Authorize shareholders to file resolutions related to the issue of board elections.
• Become effective immediately without a lengthy implementation period, associated triggering mechanism, or exemption or delay for smaller issuers.

We also would like to take this opportunity to comment in greater detail on several features of the proposed rule that are of particular interest to us:

• Priority access: We favor an approach whereby the largest beneficial owner or group of owners gain proxy access, as opposed to awarding access to the first shareholder or group of shareholders filing. We are concerned that a first come, first served approach might force shareholders to rush to file and result in a less thoughtful process than is otherwise possible. In the end, we also believe that the investor or group with the greatest stake in the director election and the company’s long-term financial performance should prevail in these situations.
• Failed nominations and resubmitting candidates: We believe that there should not be any waiting period for resubmitting candidates failing to win election to a board.
• Shareholder proposals: We oppose permitting companies subject to Rule 14a-11 to exclude shareholder proposals that they otherwise would be required to include. We believe the shareholder proposal rule 14a-8 is an important conduit for opening dialogue between management and shareholders on key ESG environmental, social, and governance policy issues that have significant consequences for long-term shareholder value as well as society.
• A uniform federal rule: We would also like to stress that we favor a uniform federal rule on proxy access. While some of those commenting on the rule have urged that the Commission instead allow access regimes to be adopted on a company-by-company basis (with, for example, different ownership thresholds, holding periods, or triggering requirements), we believe this would result in an unworkable administrative burden for broadly invested shareholders that need to track deadlines and requirements at many different companies. In addition, the very companies that would benefit most from a shareholder access regime are likely to put up the stiffest resistance to adopting access. Some companies may have or adopt supermajority voting requirements to amend the bylaws or, in states that permit it, eliminate shareholders’ right to amend the bylaws altogether. Similarly, although Delaware has recently adopted changes to its corporation code designed to clarify the validity of proxy access bylaw proposals, other states have not done so. As a result, a company incorporated outside Delaware could stymie shareholder efforts to press for access by litigating the validity of a shareholder proposal, which would entail substantial expense and delay. Even Delaware-incorporated companies could mount challenges to the statute or particular drafting choices made by a proposal’s sponsor, or their boards could repeal shareholder-adopted bylaws providing for access. (Unlike the Delaware statute on shareholder-adopted majority voting bylaws, the statute authorizing access and reimbursement bylaws does not state that such bylaws may not be repealed unilaterally by the board.)

Finally, we would like to express our view that the Commission has ample authority to adopt a uniform proxy access rule, contrary to the assertions of some who have commented on the proposed rule.  Section 14(a) of the Securities Exchange Act empowers the Commission to issue rules regarding the solicitation of proxies.  The Proposed Access Rule would not create a new substantive right for shareholders; indeed, it would operate only where state law gives shareholders the right to nominate directors.  Like Rule 14a-8, the Proposed Access Rule serves a disclosure function.  It would address the inclusion of an item in the company’s proxy statement used to inform shareholders of matters management knows will be brought to a vote at the upcoming meeting.  The Proposed Access Rule’s eligibility criteria and procedural requirements for using the proxy access process are similar to those found in Rule 14a-8 and reflect the Commission’s judgment regarding which items merit company-financed proxy disclosure.  Put another way, both the Proposed Access Rule and Rule 14a-8 allow shareholders to exercise in a particular venue—the company proxy statement—a right they already have.

In sum, we feel there is a strong case for proxy access based on the issues of equity, good governance, transparency and accountability.  Proxy access is a matter of fair corporate suffrage, necessary and appropriate for the protection of investors and the greater public good.  Therefore, we strongly favor the SEC’s approach to proxy access and appreciate the opportunity to express our views on this matter.

Sincerely,

Kimberly Gladman, CFA, Ph.D., Director of Research and Ratings

Beth Young, J.D., Senior Research Associate

Annalisa Barrett, MBA, Senior Research Associate

Mary Schapiro On Point

As we wind down our proxy season data collection and gear up to analyze the fruits of our labor, we would be aided by many of the proposed changes that SEC Chairman Mary Schapiro described in her testimony Tuesday (http://www.house.gov/apps/list/hearing/financialsvcs_dem/sec_testimony.pdf). Among the various improvements she described that the SEC has been working to propose and implement are proxy access (allowing alternative director candidates to be included on a proxy), expanded CD&A explanation of compensation policies (to include those regarding lower-echelons of employees beyond just the Named Executives), expanding disclosure of board information (to include qualifications of directors, among other details), requiring earlier disclosure of voting results after annual meetings, and elimination of broker votes on uncontested director elections.

All of these efforts would help shareholders, largely by improving the culture of accountability at their companies.  Needing to publish information often has an impact on the information itself – the proverbial “sunlight” on the issues at hand – and these proposals go far in this regard. Others improve the timing of information (there’s another proverb – time being money) which also aids shareholders and their efforts, giving closure to outstanding issues, and informing them of those still to be addressed. Yet others, like fighting “ballot-stuffing” and allowing for competition for a board seat, simply right past wrongs. Schapiro’s testimony was a refreshing view into an agency that is doing good in a tough time.

Michelle Lamb — Research Associate

SEC Approves Proposed Proxy Access Rule

With a 3-2 vote split along party lines, the Securities and Exchange Commission voted to approve a proposed rule that would give shareholders the right to nominate up to 25 percent of the candidates for a board of directors and to have those nominees included in the proxy statement and card circulated by the company.  Interested parties will now have a chance to file comments with the Commission for 60 days, and then the staff will review the comments, revise the proposal, and put it to a final vote.  If approved, it could be one of the most fundamental and far-reaching changes in corporate governance since the creation of the SEC in the 1930's.

The issue of the role of shareholders in director elections has been under discussion at the Commission almost since that time, and both the Chair and one of the Commissioners commented on the long-term conflicts over this issue over many decades.  Currently, if permitted by state law and the company's governing documents, shareholders may nominate candidates for the board, but the complications and expense are all but prohibitive and proxy contests occur in only a fraction of a percentage of corporate elections.  In virtually all cases, management and the board select the nominees and no one runs against them.  They can serve even if they do not get majority support from the shareholders, as long as they run unopposed.  The proposal also gives shareholders the right to submit shareholder proposals relating to the board nomination and election processes.

The proposed rule would remove some of the most significant and costly impediments to shareholder nomination of directors.  If a significant number of shareholders (the amount is tiered, depending on the market capitalization of the issuer) who have held their stock for a year submit nominees, providing the same kind of information currently required for management-nominated candidates, plus an assurance that the slate is not seeking control, they will be included in the company's proxy and the shareholders will not have to obtain a separate shareholder list and print and circulate their own materials.  If more than one group submits a slate, the first in time after the nomination period is open will be included.  It is likely that these provisions in particular will provoke some lively debate.

Even the most enthusiastic advocates of this proposal do not intend for it to be widely used.  Its impact will be felt more pervasively in providing an incentive for management and support for boards to increase the transparency of their procedures and criteria for board nominations and encourage better communication with shareholders.

The Commissioners who oppose proxy access, Kathleen L.Casey and Troy Paredes, objected primarily on the issues of federalism, believing that this is a more substantive than procedural and disclosure-related rule and thus impinges on state authority, and on its mandatory application, instead of allowing shareholders to determine on a company by company basis whether proxy access is appropriate.

The business community has made it clear they intend to fight this proposal and the Chamber of Commerce has vowed to challenge the rule in court as soon as it becomes final.  Their most likely method of attack will be a lawsuit along the lines of the successful challenge to the SEC's jurisdiction in the "one share, one vote" case in the late 1980's.  Perhaps in anticipation of this vulnerability, Senator Schumer's bill, also introduced this week, would explicitly grant the Commission the requisite authority.  But since the rule is based on state law, we can also expect some lobbying at the state level to permit companies to opt out of giving shareholders the right to nominate candidates.

Nell Minow — Editor