As investors focus on climate change, is now the time to deploy proxy access?
Shareholders’ right to nominate directors is a powerful tool that isn’t being used
More than 540 US companies now have proxy access rules in their bylaws, giving shareholders the ability to nominate a director candidate of their own, largely as a result of the Boardroom Accountability Project initiated by New York City Comptroller Scott Stringer’s governance department.
And the campaign’s success continues, as Michael Garland, Stringer’s assistant comptroller for governance and responsible investment noted in an email to RI.
“Some notable successes in 2019,” he wrote, “include meaningful proxy access bylaws at Netflix, Hospitalities Properties Trust, and Senior Housing Properties Trust, all of which resisted engagement historically, notwithstanding majority votes on precatory proposals.”
The success of the campaign has been the swiftest governance revolution ever, largely because the big mutual funds got behind the issue. The Comptroller’s 2018 post-season report summarized the progress so far. For example, focus companies targeted with resolutions in 2018 included those that “awarded excessive executive compensation, companies with little or no apparent gender or racial diversity on their board, and companies that face significant risks related to climate change”, or high emitting industries that did not disclose those emissions through the CDP.
As a result, 35 companies introduced meaningful proxy access bylaws. These included Citrix Systems, Humana, IBM and Monster Beverage Corporation.
Last year also represented the highest settlement rate ever (88%), compared to 2017’s 72% and a withdrawal rate of only six of 75 proxy access proposals in 2015. Votes failed only at controlled companies.
Resolutions on the issue have continued in 2019, apart from the “fix-it” resolutions filed by individual shareholders like James McRitchie, with 25 smaller and mid-sized companies being targeted. Some 18 of these have been withdrawn/settled, and the remainder will go to a vote.
It all means that now more than 60% of the S&P 500 has proxy access, compared to only six companies in 2014.
Nearly one‐third of these companies took action in response to a shareowner proposal from the NYC Funds. Notably, this success has come not just from filing shareholder resolutions but also from proxy solicitation campaigns run by the Comptroller’s office partnering with CalPERS.
But, although the proxy access campaign itself can be termed a success, what impact has it had in terms of shareholders getting directors onto boards?Earlier this year, the Council of Institutional Investors (CII) spotted someone actually using proxy access to nominate a director.
Steven Colmar is a shareholder at The Joint Corp, a micro-cap that owns around 400 chiropractic clinics. He resigned from the board in March 2017, and proposed a proxy access bylaw via a shareholder resolution in 2018.
This was implemented by the board following almost universal shareholder support. Colmar’s holdings appear to meet the requirements for the bylaw and he is eligible to nominate Glenn Krevlin, the candidate, who is a principal at Glenhill Capital Management.
The CII says this is only the second time proxy access has been used in the US.
The first attempt, in 2016, by GAMCO Asset Management, was abortive, as the nomination was withdrawn.
Amy Borrus, deputy director at the CII said that, apart from its use at The Joint Corp that she was “not aware of anyone/any fund currently seeking to use proxy access”.
So could it be that the only accomplishment of proxy access so far is at a micro-cap treating back ache?
Many who supported the campaign have said that this lack of action is not a problem. The thinking is that the mere threat of being able to nominate a director is enough to make boards act more responsibly and responsively.
And, as we discussed last year, CII research showed that even the top 20 largest public pension funds would not be able to meet a 3% ownership threshold. So, perhaps, the funds most likely to use the right are unable to do so.
Using the right of proxy access would not be a problem for any of the four largest mutual funds in the US, however, but – and although they were not able to comment for this piece – they are also the investors least likely to use the right to nominate a director.
So, are there more responsible, and more responsive boards, as a result of proxy access?
Perhaps, but there are still plenty of boards that are not acting that way even if they have proxy access.
Look at ExxonMobil’s board gaily excluding shareholder proposals, look at some of the more recalcitrant boards targeted by Climate Action 100+, and, we should also keep a close eye on the boards of the power utilities targeted by the Climate Majority Project.
But these boards have only been threatened with shareholder votes against directors – not with proxy access. Maybe it is time that investors should consider using a tool they worked so hard to get.