The 2010 Dodd-Frank financial reform law required all companies to provide proxy access to shareholders, but the implementation of this rule has been tied up in court. A small number of companies have moved ahead, and this proxy season roughly 40 companies have made “proxy access” available to shareholders. Meanwhile, the New York City Pension System filed proxy access requests to 75 companies in May. Below we provide some background on the issue, in the form of responses to questions we’re frequently asked.
I know there have been debates between companies and some shareholders about something called “Proxy Access.” What is this all about?
Proxy Access allows a company’s shareholders to nominate director candidates directly to boards of directors, and to have their nominees appear on the company ballot. At each company annual meeting, shareholders would have the right to choose between a company’s nominees and properly nominated shareholder nominees. Under most versions of proxy access, a shareholder or group of shareholders must own a minimum amount of equity in the company for a certain length of time to be eligible to nominate director candidates.
Why would shareholders want to nominate directors to boards?
Directors play a critical role in corporate governance. They are responsible for overseeing management and ensuring that company strategies and operations serve the interests of shareholders. To do their jobs properly, directors need to be independent and qualified to challenge management’s views, ask hard questions, or change corporate strategy or executive personnel when necessary.
Certain shareholders who monitor boards closely have raised concerns that some directors, whether because of specific ties to management or because they have worked closely with management for too long, may not be in a position to exert independent judgment. In the past, some companies appointed directors lacking relevant qualifications, allowing management to act without robust oversight, often to the detriment of shareholders.
The goal of proxy access is to improve corporate performance by holding boards more accountable to shareholders. Some investor advocates believe that the power to nominate director candidates to boards is a basic shareholder right.
How do directors get on boards right now?
Every company Board of Directors appoints a Nominating and Governance Committee from among its members that, among other responsibilities, selects director nominees. These nominees are approved by the full board, and then submitted to the shareholders for a vote at the annual meeting. Most shareholders do not attend annual meetings, but vote by sending in proxy ballots ahead of time.
At most meetings, the company’s nominees run unopposed and are elected overwhelmingly. Most companies require directors to receive a majority vote to be guaranteed appointment, though most company by-laws also allow the board discretion to appoint directors who receive less than a majority vote. Other companies use procedures that guarantee appointment of all of the company’s nominees in normal circumstances regardless of the vote.
The 2010 Dodd-Frank financial reform law did require all companies to provide proxy access to shareholders, but the implementation of this rule has been tied up in court. For all intents and purposes, it is up to each individual company and its shareholders to decide whether to adopt proxy access.
That doesn’t sound very democratic.
Shareholders do have the right under state law to nominate directors to challenge company nominees, but they have to send out their own ballot to every shareholder. This process is called a “proxy contest” and it is very expensive and time consuming, while for most diversified shareholders exposure to any one company is minimal. Aside from a few dedicated “activist” managers who own large stakes in a small number of companies that they hope to improve through activism, most shareholders do not consider proxy contests worth the expense and effort.
Proxy contests actually succeed fairly often when they happen, and activist shareholders point to research indicating that they are able to improve company performance by removing underperforming directors. Still, in practice, it is rare for a company’s nominee to be rejected by shareholders.
Proxy Access sounds like a no-brainer. Are there any good reasons not to support it?
In general, it would not be a good thing for contested director elections to become routine. Most companies carefully select a group of directors who possess a specific mix of skills and talents and work well together. Companies benefit from consistency in the boardroom (but not too much consistency), and some companies claim that dissident directors can disrupt boardroom dynamics and make it difficult for the board to function.
Moreover, Edward B. Rock and Marcel Kahan, two academics usually sympathetic to activist shareholders, have argued that proxy access would have little impact because the cost and restrictions of proxy access make it a less appealing way to change the makeup of boards than more traditional strategies, including proxy contests and “vote-no” campaigns.
Nevertheless, many supporters of proxy access argue that this right is important because it increases the likelihood that boards will pay attention to shareholder concerns to avoid being challenged on a ballot, not because large numbers of directors will actually be replaced.
Have many companies allow this? Do investors care?
As of May 2015, according to the Council of Institutional Investors, about 40 companies have voluntarily allowed some form of proxy access. About 13 companies received proxy access proposals in 2014.
Shareholder support for proxy access has been mixed. Overall, approximately half of all proxy access proposals pass. In general, shareholder support is higher when there are existing governance concerns at companies, and when the form of proxy access being proposed places significant limits on the power of shareholders to nominate directors. The most widely supported proposal would limit proxy access to groups of shareholders that have held 3% of shares for at least three years. While this threshold may not seem high, it may be difficult to achieve for large, broadly held companies where few shareholders hold even 1% of the company.
What should I be paying attention to?
This year, the most significant effort to promote Proxy Access comes from The New York City Pension System, which has filed Proxy Access proposals with 75 companies. In previous years, companies chosen to receive access proposals because of general governance or performance concerns. New York City selected these companies based on specific concerns about specific priority issue areas: climate change, diversity, and CEO compensation. When the complete results become available during the summer of 2015, it will become clear whether shareholders are willing to support proxy access proposals as a means of addressing these kinds of concerns.John K.S. Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Group. John has over 16 years of experience in socially responsible investing and corporate governance. Previously, he was Director of Corporate Governance for TIAA-CREF, where he oversaw the voting of proxies at CREF’s 8,000 portfolio companies and engaged in dialogue with corporate boards and management to promote sustainability and good corporate governance. An Adjunct Assistant Professor at Columbia Business School, John is also a member of the Advisory Council to the Sustainability Accounting Standards Board. He writes and presents widely about the relevance of social responsibility to investment performance.