Scaling the High Wall of Proxy Access

Boardroom2So what does Gamco Asset Management Inc.’s experience tell us about proxy access?

Proxy access facilitates shareholders’ choice of directors by allowing them to include their candidates on the company’s proxy card. On Nov. 10, Gamco became the first shareholder to use the director-nomination process when it announced its nomination of former Goldman Sachs partner Lance Bakrow to the board of National Fuel Gas Co.

That effort was challenged by NFG, after which Gamco withdrew the nomination.

NFG argued that Gamco, through its “long advocated” position that NFG should spin off its utility business, had shown an intent to change or influence the company. In 2015, NFG shareholders rejected a Gamco shareholder proposal on the matter.

According to a Nov. 23 securities filing by NFG, Gamco founder and chief executive officer Mario Gabelli also previously commented that “proxy access was a friendlier approach than a proxy contest” at NFG.

NFG’s proxy access bylaws restrict use of the mechanism to investors that are “not advocating to change or influence control” of the company.

What does this all suggest? That companies likely will use their bylaws to resist proxy access nominations.

About 300 companies have proxy access bylaws. Most of these provisions restrict use of the mechanism to shareholders that have held at least 3 percent of the company’s shares for three years or longer. That in itself is a pretty high hurdle for most shareholders. A Council of Institutional Investors 2015 report on proxy access best practices found that even if the 20 largest public pension funds were to aggregate their shares, they wouldn’t meet most companies’ 3 percent criteria.

Most companies, like NFG, also have clauses requiring the nominating shareholder to represent that it didn’t buy its shares with the aim of influencing or controlling the company. This means that activist shareholders may have a hard time actually using proxy access at companies with which they have actively engaged.

It isn’t clear what was going on behind the scenes in the Gamco situation. The next shareholder that tries to nominate a proxy access candidate will further clarify how easy—or challenging—it is to use the mechanism.

On the other side of the coin, shareholder proponents suggesting tweaks in a company’s proxy access procedures recently have been successful with the Securities and Exchange Commission. Several companies, including Apple Inc. and Walt Disney Co., failed to garner staff approval to omit those resolutions. So, unless the proponents withdraw the proposal or the parties litigate, shareholders may be voting on these recommendations. Although the proposals are nonbinding, companies may have a hard time ignoring those that are supported by shareholders at the annual meeting.

In other words—proponents still can try to modify corporate proxy access bylaws to make them easier to navigate.

What is clear is that proxy access will remain a key topic of shareholder engagement going forward.