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CalSTRS issues warning to companies over shareholders’ director nominations in ‘proxy access’ row

Leading US fund will urge investors to withhold votes

The California State Teachers’ Retirement System (CalSTRS), the $188.8bn (€166bn) US pension giant, has made a stark warning to companies which try to thwart shareholder proposals on nominating directors, saying it will urge fellow shareholders to join it in withholding their votes from the companies’ directors.

It is the latest intervention into an increasingly intensified debate around shareholder ‘proxy access’ proposals sparked by a decision by the Securities Exchange Commission (SEC) to review the process after activist James McRitchie filed a proposal on nominating directors at retailer Whole Foods.

That led to corporate lobby group the Business Roundtable to say the SEC’s review could force companies into litigation around the issue. This was followed by the Council of Institutional Investors (CII), the US-based association of pension funds, endowments and foundations, saying investors would hold company boards “accountable” if they took this step.

In the latest development, CalSTRS says it will support any shareholder proposal that allows shareholder groups owning 3% of company stock for three years (“three-and-three”) to make board director nominations and try to persuade other shareholders to join it in withholding their votes from directors who try to exclude or pre-empt such proposals.
Anne Sheehan, CalSTRS’ Director of Corporate Governance, said: “Our intention is to oppose any proxy access proposal with a structure more onerousthat three-and-three ownership by a group of shareholders.” The giant fund reckons three-and-three is the “appropriate threshold for proxy access”.

This has been the basis of New York Comptroller Scott Stringer’s proxy access campaign that has seen him file proxy access proposals at 75 companies, under the ‘Boardroom Accountability Project’ banner.

And it appears the campaign is becoming an influence with corporates, with industrial giant General Electric (not targeted by BAP) announcing in a filing that it will allow a group of up to 20 shareholders who own more than 3% of the company’s stock for at least three years to nominate up to 20% of the board’s directors.

Speaking to Reuters, Stringer said: “GE just taught corporate America a lesson in what a responsive board looks like. Voluntarily implementing proxy access is a sign that the push for a significant voice in the boardroom is breaking through.”

The whole issue will be the topic of an open roundtable at the SEC next week. Earlier this week, Keith Higgins, Director at the Securities and Exchange Commission’s Division of Corporate Finance, said the SEC had heard concerns that company managements could “continue year after year” to come up with slightly different proposals from those filed by shareholders solely to keep shareholders’ resolutions from AGM agendas. “While we have not yet seen this concern materialize, it is certainly not beyond the realm of possibility,” he said.