Group Asks ISS, Glass Lewis Not to Issue Recommendations on Use of Exclusion Rule

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By Yin Wilczek

Jan. 23 — The Business Roundtable has called on Institutional Shareholder Services Inc. and Glass Lewis & Co. LLC to refrain from issuing proxy voting recommendations based on a company's reliance on an exclusion in the shareholder proposal rule for conflicting resolutions.

The Securities and Exchange Commission has suspended no-action relief under 1934 Securities Exchange Act Rule 14a-8(i)(9) while the staff is reviewing the rule. 

In a Jan. 22 letter, BRT told ISS and Glass Lewis that “it would be inappropriate” for them to make proxy voting recommendations based on a company's reliance on the provision “when the Commission has not taken formal regulatory action to change the rule.”

“Just as Chair [Mary Jo] White has determined to study the issue and the Division has determined to express no views on the matter at this time, we urge ISS and Glass Lewis to proceed in a deliberate fashion and exercise restraint as it considers how it will assess the response of companies that exclude shareholder proposals from their company proxy materials based on solid SEC precedent governing `conflicting' company proposals,” BRT stated in a letter signed by president John Engler.

The letter was copied to all the SEC commissioners and to Keith Higgins, director of the SEC Division of Corporation Finance, which manages the shareholder proposal no-action process.

Glass Lewis Response 

Glass Lewis, however, appears ready to proceed, at least in the context of proxy access resolutions.

In a Jan. 23 e-mail, Glass Lewis Chief Policy Officer Robert McCormick told Bloomberg BNA that the firm will evaluate the “reasonableness and rationale” of a company's response to a shareholder's access proposal—including omission of that proposal in favor of a management-sponsored resolution—based on the differences between the two proposals, “as well as analysis of the company, its governance, performance, board independence and responsiveness to shareholders.”

“Specifically, Glass Lewis will evaluate whether a company's alternate proposal varies materially from the shareholder proposal in minimum ownership threshold, minimum holding period and maximum percentage of nominees to determine whether the company's response is reasonable or would thwart the intent of the shareholder proposal (e.g. establishing a minimum ownership threshold/period significantly higher/longer than that submitted by the shareholder, rendering the provision all but unusable),” McCormick said in an e-mail. “Glass Lewis in limited cases may recommend voting against certain directors if the management proposal varies materially from the shareholder proposal without sufficient rationale.”

ISS did not immediately respond to a request for comment.

The SEC initiated its review and suspended its consideration of no-action applications in response to investor concerns that certain companies were using the exclusion to omit from their proxy materials shareholder-proposed access resolutions with eligibility thresholds they considered too low. Such concerns were sparked by several companies asking for no-action relief on similar grounds after the staff allowed Whole Foods Market Inc. to exclude a shareholder-proposed access resolution based on Rule 14a-8(i)(9).

Much Invoked 

The “conflicting proposal” exclusion is frequently invoked not only for proxy access, but also for other governance matters that may have a broader impact on companies.

In its letter, BRT said the SEC suspension of relief has impacted about 53 pending no-action requests. The business group also noted that its timing—coming so late in the proxy season—has “created significant disruption for boards and their companies.”

“In many cases, boards have been engaging in dialogue with their shareholders and considering responses to various shareholder proposals for some time,” BRT said.

Meanwhile, attorneys said that because the rule remains on the books, companies are within their rights to exclude shareholder proposals that directly conflict with management resolutions they intend to put to a vote. However, the Council of Institutional Investors suggested that companies think long and hard before omitting shareholder access resolutions.

CII was one of the groups urging the SEC to review the rule.

“The views of shareholders are more important than proxy adviser recommendations,” CII Deputy Director Amy Borrus told BBNA. “And what we’re hearing from shareholders is that there will be ramifications for boards that don’t include shareholder resolutions because of the SEC’s pause on the Rule 14a-8(i)(9) exclusion.”

To contact the reporter on this story: Yin Wilczek in Washington at ywilczek@bna.com

To contact the editor responsible for this story: Ryan Tuck at rtuck@bna.com

BRT's letter is available at http://businessroundtable.org/resources/brt-letter-response-recent-sec-announcements-conflicting-proposals.