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Proxy Season Hints at Future Scrutiny Of Lengthy Board Tenure, Firm Memo Says

Friday, April 25, 2014

April 21 --An early look at the 2014 proxy season shows board tenure may be drawing more attention and institutional investors are promoting governance reforms and engagement efforts, according to a client memo from Davis Polk & Wardwell LLP released April 21.  

“Board tenure may be the next frontier in the efforts of governance advocates to influence board composition,” the client memo, 2014 Proxy Season: Early Indications, says.

The New York-based firm published the memo to give clients an idea of trends emerging from proxy efforts so far this year. It also addresses the status of the Securities and Exchange Commission's agenda on governance matters.

Lengthy Tenure Bad?

The average tenure for directors at S&P 1500 companies is a little more than 10 years. Supporters of long tenure argue that it takes years for a new director to become sufficiently knowledgeable about the company to do the job, the memo says. For that reason, long-tenured directors may be in the best position to challenge management, it says. Critics say that long-tenured directors may cease to be independent.

Institutional Shareholder Services Inc., the proxy advisory firm, is examining whether to take a position on the issue, according to the memo.

Big Investors Want Change

Vanguard Group Inc. sent letters to S&P 500 companies at the start of the proxy season, informing them of Vanguard's position on governance matters and urging companies to adopt annual elections for directors, majority voting and the right of holders of 25 percent of the common stock to call special meetings, the memo says.

“It was an unusually public move for a large institutional investor that, like others of its kind, tends to engage in quiet diplomacy,” the memo says. “Also unusual was the call for universal adoption of this set of governance practices, in contrast to the case-by-case approach traditionally taken by institutional investors.”

Vanguard's campaign may be an indication that the practices it advocates may now be viewed as “accepted norms” instead of just best practices, the memo says.

Hedge Funds Offer Proposals

Increasingly, hedge funds are putting forth more shareholder proposals under Rule 14a-8, seeking share repurchases or corporate divestiture, the memo says. Also, large institutional investors may be supporting these hedge funds behind the scenes, possible feeding them ideas, the memo says.


A copy of the client memo may be downloaded from the Davis Polk website, http://www.davispolk.com/. Look under the “Resources” heading.

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