Issuers Adopting Proxy Access at ‘Astonishing Rate'

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By Che Odom

April 27 — More than two-thirds of companies that received proxy access proposals this year from the New York City pension funds have agreed to implement the director-nomination mechanism without holding a shareholder vote.

Proxy access allows shareholders to nominate their own board candidates on the company's ballot. In a release, New York City Comptroller Scott Stringer said he reached agreements with 50 of the 72 companies that his office targeted in 2016, a “sea change” from 2015 when 66 of the 75 companies approached let the matter go before shareholders for a vote.

Corporations “across the market” are adopting meaningful bylaws that allow shareholders access to the proxy at an “astonishing rate,” Stringer said.

Shareholders ultimately approved most of Stringer's 2015 proposals .

Overall, more than 200 U.S. public companies have adopted proxy access bylaws since 2014, the year that Stringer launched his Boardroom Accountability Project by submitting access resolutions simultaneously at 75 companies .

Not everyone is astounded by the accelerated pace at which companies are agreeing to adopt proxy access.

“Though it took years and went through a lot of iterations, proxy access was supported by a broad group of investors,” Stephen Giove, partner and corporate lawyer at Shearman & Sterling LLP, told Bloomberg BNA.

Companies have been privately approached by not only state public pension funds, but also a variety of institutional investors such as TIAA-CREF, said Giove, who advises companies on governance matters.

Fear Not

While proxy access hasn't yet been used in the U.S., companies shouldn't be too concerned about the mechanism, Giove said. “In the U.S., it will be used very infrequently, at least in the short term, mostly in situations in which companies have done something to attract attention or demonstrate a level of unresponsiveness to shareholders.”

Giove also noted that shareholders' first director nominees are likely to be experienced, knowledgeable and non-controversial so that they can attract votes.

“The first cases are not what worry me,” he added. “It is how it is eventually used.”

SEC Allows Exclusion

For the 2016 proxy season, the New York City pension funds filed proxy access proposals to allow a group of shareholders that collectively own at least 3 percent of the company for three years to nominate up to 25 percent of the board in any given year.

By adopting bylaws with these parameters, some companies have been able to fend off shareholder resolutions that attempt to obtain other concessions, such as allowing loaned shares to be counted toward eligibility .

Staff of the Securities and Exchange Commission have concluded that these companies substantially implemented proxy access, giving them a basis to exclude shareholder resolutions that touch on the matter from their proxy materials.

The Details

Shareholder activist and proxy access proponent James McRitchie told Bloomberg BNA that the most problematic feature of many of the bylaws being adopted is their limit on the number of shareholders who may aggregate to meet the requisite ownership threshold.

It is very challenging to reach the 3 percent threshold, McRitchie said. He noted that the largest shareholders—funds such as Vanguard Group and BlackRock Inc.—do not file proxy proposals. Moreover, socially responsible investment funds and union funds are fairly small and their holdings wouldn't amount to 3 percent at most companies. Also, state pension funds probably can't even get there with a group limit of 20, he said. “So, companies may have adopted proxy access but it is meaningless if it can't be implemented.”

Percentage of Board

Another issue is that many companies will only allow nominees for up to 20 percent of the board at any single election.

“At Apple that means one director, so that director would have a hard time covering all of the committees or getting an item on the agenda,” McRitchie said. He added that some companies prohibit a candidate who gets only 25 percent of the vote from running again for two years following the vote.

Some companies have amended their proxy access bylaws shortly after adoption due to pressure from shareholders, Giove said. Shareholders are going beyond the broad eligibility factors, such as 3 percent stock ownership, and scrutinizing the finer details, he said.

“I'm a bit surprised that shareholders are really looking carefully at the terms,” Giove said. He predicted that more companies will have to make adjustments as investors continue to scour the provisions.

To contact the reporter on this story: Che Odom in Washington at codom@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com