Investors Ready to Vote Against Boards That Move in Bad Faith on Proxy Access

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By Yin Wilczek

Feb. 12 — Shareholder activists Feb. 12 urged the Securities and Exchange Commission to revisit its federal proxy access rule, adding that they are prepared to vote against directors in companies that act against proxy access shareholder proposals in bad faith.

Speaking at the meeting of the SEC Investor Advisory Committee (IAC), Zachary Oleksiuk, head of corporate governance, Americas, for BlackRock, said his firm may “vote against certain directors, including potentially members of the governance committee of boards and independent board leadership, where it appears that boards are provided the opportunity to provide proxy access but do not appear to be acting in good faith to do so.”

“We will examine particularly closely situations where companies exclude or litigate shareholder proposals or counter with what we view as an egregiously high and meaningless set of parameters,” Oleksiuk continued. “We will closely consider a board’s publicly disclosed rationale, but in our view these actions may equate to depriving shareholders the ability to weigh in on a meaningful and critical governance issue.”

Oleksiuk added that due to the potentially different outcomes from private ordering, proxy access is a “governance issue more appropriately addressed through government rulemaking.”

However, Darla Stuckey, president and chief executive officer of the Society of Corporate Secretaries and Governance Professionals, warned that proxy access is a very complex issue requiring further discussions.

Meanwhile, David Fredrickson, chief counsel of the SEC Division of Corporation Finance, told the audience that in its review of the shareholder proposal rule's “directly conflicts” exclusion, the staff is taking “an open view” as to whether it should re-evaluate its position on the provision or recommend that the SEC initiate rulemaking.

Suspension of Relief 

The SEC Jan. 16 announced that its staff will not process no-action relief related to 1934 Securities Exchange Act Rule 14a-8(i)(9) while the provision is under review. 

The review was prompted by investor concerns that certain companies were using the exclusion to omit from their proxy materials access resolutions submitted by shareholders in lieu of management proposals with more stringent eligibility thresholds.

Proxy access received renewed attention this season largely because of an initiative in which New York City Comptroller Scott Stringer submitted, on behalf of the $160 billion New York City Pension Funds, access proposals to 75 companies.

Stringer's resolutions recommended giving shareholders that own at least 3 percent of the company stock for three or more years the right to list their director candidates on the company's ballot, for up to 25 percent of the board. These thresholds are identical to what the SEC recommended in the federal proxy access rule that the U.S. Court of Appeals for the District of Columbia invalidated in July 2011.

At the IAC meeting, Michael Garland, assistant comptroller, environmental, social & governance for the New York City Comptroller's office, said his office submitted the resolutions because it felt the “time was right” to “change the conversation” on the topic. Among other factors, Garland noted that shareholder support for access proposals over the last three years with the 3 percent/three years eligibility threshold averaged 55 percent support.

In addition, companies in various industries and of various sizes—including Chesapeake Energy Corp., McKesson Corp., Hewlett-Packard and Verizon—have adopted proxy access bylaws with that threshold, Garland said. There probably are about “10 plus companies today that either have” such bylaws or are putting them in place, he said.

GE Announcement 

General Electric Corp. Feb. 11 became the latest company to announce that it adopted a proxy access bylaw with the three percent/three years threshold.

Garland also noted that of the 75 companies that received his office's proposals, two have agreed to implement the resolutions, with one more agreement “imminent.”

“We hope more agreements are forthcoming,” Garland said. “But we also expect that many boards will never willingly enact a meaningful proxy access bylaw,” he added. “Even at the most optimistic scenario, the company-by-company bylaw will never be an adequate substitute for a universal rule.”

In the latest developments, two companies that received proxy access resolutions from the New York City Comptroller's office—CF Industries Holdings Inc. and HCP Inc.—announced in recent Forms 8-K that they have adopted bylaws with more stringent requirements than advocated by the office.

CF Industries' bylaw allows any shareholder or group of up to 20 shareholders that have held 5 percent or more shares for at least three years may nominate up to 20 percent of directors at the company.

HCP's bylaw allows any shareholder or a group of up to 10 shareholders that hold at least 5 percent of the company's stock to nominate up to 20 percent of the board.

At the meeting, Garland noted that up to the suspension of the SEC's no-action relief for Rule 14a-8(i)(9), 42 percent of the 75 companies that received the office's access resolutions had submitted no-action applications to the SEC, some on grounds other than the “directly conflict” provision.

Garland also noted that some boards that have adopted 3 percent/three-year access bylaws have included other requirements—such as representations and warranties—that make the bylaw “potentially impossible to use.” He urged the IAC to recommend that the SEC revisit its vacated proxy access rule. Any action that the IAC can take in support of proxy access is “critically important,” he said.

‘Tread Carefully.'

Stuckey, speaking up for the corporate community, observed that of the 90 or so companies that received a proxy access shareholder proposal this season, about half are members in her society.

She also urged the audience to “tread carefully” and question what they hear about proxy access. Among other problems, investors are not all the same, she stressed. She noted, for example, that in her discussions with shareholders, the support for the 3 percent/three years threshold is not universal.

Stuckey also asked what governance problem proxy access seeks to address. If it is zombie directors, that might be better dealt with through majority voting, she suggested.

Stuckey said that issues that require further discussion include:

• what number of shareholders should be aggregated that are eligible?

• what stock-holding period is appropriate?

• how should shareholders vote for an access nominee?


Companies with shareholder access proposals and those seeking to use the Rule 14a-8(i)(9) exclusion for other matters currently feel they are in a “no-win” situation, Stuckey said.

Those companies “feel like they're being cautioned to not put in a management proposal because they’re going to be voted against,” she said. “We think this is problematic” that boards elected to exercise their judgment are now being cautioned that they may be subjected to vote-no campaigns.

In addition, proxy access is proving a distraction, Stuckey continued. Companies should be focused on cybersecurity, risk management and other more pressing matters, and not on whether shareholder eligibility for proxy access should be 3 percent or 5 percent, she said.

As to what companies are doing, Stuckey said they are “talking about it a lot.” She suggested that there will not be many companies that exclude shareholder access proposals. She added that she has not heard of any company intending to litigate.

‘Fresh Look.'

In his presentation to the IAC, Fredrickson said the staff will give Rule 14a-8(i)(9) a “fresh” look. The matter has raised some interesting issues, he said.

These include whether “the disclosure around the proposals that have been excluded should be revisited, whether the proponent or opponent should be required or encouraged to say something about the excluded proposal,” Fredrickson said. “It's also raised some interesting issues about how voting currently is conducted under Rule 14a-4, that you vote for, against or abstain in assessing shareholder sentiment.” Would there be a better way of capturing shareholder “flavor” other than through these options? he asked.

Fredrickson also said the staff will consider timing issues, such as whether companies should be allowed to move on a management resolution after they receive a shareholder proposal.

The SEC official said he spoke his own opinions and not on behalf of the commission or other staff members.

IAC members also offered some observations. Damon Silvers, associate general counsel of the AFL-CIO, asked Fredrickson whether he considered there a “structural weakness” in Rule 14a-8(i)(9) because it allows management to block a shareholder proposal. Fredrickson said he was “not ready to concede” that point.

Steven Wallman, a former SEC commissioner who now is CEO of Foliofn Inc., asked why there should even be limits on shareholder eligibility. The 3 percent requirement is “huge” for many companies, he said, adding that small shareholders may also have strong views that are “worthy of espousing.”

“Why can't it be more open?” Wallman asked.

To contact the reporter on this story: Yin Wilczek in Washington at

To contact the editor responsible for this story: Ryan Tuck at

CF Industries' Form 8-K is available at

HCP's Form 8-K is available at


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