Paul Hodgson: How we are winning the war on proxy access

Are we past a tipping point in getting a shareholder role in director nominations?

Yes, sure, there are some companies out there still resisting proxy access, like Avon, one of NYC Comptroller Scott Stringer’s targets, which is still recommending a vote against a proxy access proposal with two pages of argument concluding that it believes “that at this time it is not necessary to adopt this proposal, as the Company’s corporate governance structure and commitment to active shareholder engagement afford significant rights to shareholders, ensure board accountability, and meet best-practice standards.”
But from this side of the battlefield it feels like we have reached and gone beyond the tipping point. As RI described, noting CalPERS strong backing of Stringer’s Boardroom Accountability Project (BAP), natural gas firm EQT Corporation – the first BAP company to have a meeting – saw 66% of its shareholders vote for the resolution. The first one, before the dominoes have started to fall. In addition, six of the original 75 BAP companies crumbled without a fight, and at least 16 more companies have implemented meaningful proxy access since November.
How did all this happen?
Well, once the SEC had got out of the way, proxy advisor ISS issued revised guidance on the whole proxy access-James McRitchie-Whole Foods-CII-Business Roundtable-shareholder proposal exclusion mess last February. It published an FAQ on 2015 Benchmark U.S. Proxy Voting Policies which included a change to its policy on supporting proxy access and on excluding shareholder resolutions.
While supporting proxy access generally, ISS had adopted a case-by-case approach. However, its new policy nails very specific colours to the wall. It will recommend support for proxy access proposals with the following provisions:
• Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;
• Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group;
• Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group;
• Cap: cap on nominees of generally twenty-five percent (25%) of the board.It will recommend against any proposal with provisions that are more restrictive than these. In other words, it will recommend a vote against all the management proposals at the 16 companies attempting to exclude shareholder proposals on proxy access by proposing their own, far more restrictive proposals.
Regarding companies’ attempts to exclude proxy access proposals, the FAQ stated ISS would view attempts to “circumvent the normal avenues of dispute resolution and appeal” with a high degree of skepticism.
In fact, ISS will recommend a vote against one or more directors, or the entire board, if a company tries to exclude a shareholder proposal if: a) it’s not been voluntarily withdrawn; b) without the SEC’s permission (which will not be forthcoming, at least during this proxy season); or c) without a court ruling saying the exclusion is legal.
Glass Lewis had issued its views
even earlier in a blog written by Robert McCormick, Chief Policy Officer. Glass Lewis will retain its case-by-case approach. The blog outlines GL’s policies with extreme objectivity, but there is a clear “between-the-lines” message. For example, McCormick writes: “Glass Lewis will evaluate whether a company’s proposal varies materially from the shareholder proposal in minimum ownership threshold, minimum holding period and maximum number of nominees to determine whether the company’s response is reasonable or would thwart the intent of the shareholder proposal (e.g. establishing a minimum ownership threshold/period significantly higher/longer than that submitted by the shareholder, thereby rendering the provision all but unusable).” It is fairly obvious what he is saying here. Like ISS, GL indicated that it will recommend against directors if a management proposal seeking to dislodge a shareholder proposal “varies materially from the shareholder proposal without sufficient rationale.”
Bob Monks, governance activist and founder of both ISS and The Corporate Library, has blamed the problems elsewhere, not on the SEC itself, but on the ropes, handcuffs and obstacles that are consistently thrown in its way, preventing it from doing its job. “The SEC’s real problem,” said Monks, “is they are battered so much by Congressional appropriation committees and White House directives that there is rarely integrity in their process.
“Mary-Jo White has at least stopped the horror and has given us confusion. The good news is that there is grudging concession that proxy access should be allowed on some basis that is not unreal.”
It appears that Monks’ optimism was well-founded.
The immediate battle may be won, but the war is far from over. Energy companies ConocoPhillips and Murphy Oil, health care company Anthem and department store chain Kohl’s all oppose proxy access. Anthem’s defence includes a claim that, since it has a classified board, proxy access “would permit an excessive number of shareholder access candidates,” approximately 60 per cent of its board, which would precipitate a “change of control.” I guess it’s not the first time I’ve seen a bad governance practice used to argue against a good one. Other companies, like oil and gas exploration company Cimarex Energy, and restaurant chain Chipotle “agree” that proxy access should be implemented but want to do it on their own terms, like Whole Foods.
On the other hand, still other companies, like waste company Republic Services, are neither recommending a ‘for’ nor an ‘against’ vote for proxy access. Boston Properties said there is no need for shareholders to vote for the proposal as it has already implemented proxy access, like Citigroup and the “16 others”.
And then there’s the corporate law side. Even David Katz of law firm Wachtell Lipton said in a Harvard blog: “It’s official: Proxy access is the darling of the 2015 season.”
It may be the darling, but it will be a disaster, claims Katz, as “the primary debate now seems to be whether a 3 percent or 5 percent ownership threshold is more appropriate.” But this is not the main concern, he says. “In fact, it is likely that ‘proxy access directors’ would find themselves in an unenviable position, facing conflicts and conundrums that many proponents of proxy access do not appear to have fully considered.”
Katz claims that proxy access directors will be “constituency” directors and will be seen “as owing allegiance to one or more shareholders in particular”. Constituency directors are defined as those elected, for example, by a parent company, or creditors, or proxy fight winners.
As Nell Minow rightly points out: “How is it mathematically possible to have a ‘constituency director” or a representative of special interests when majority vote is required in order to win?“By definition, anyone elected will represent the views of a majority of shareholders and, by law, anyone elected will represent all shareholders. The ‘constituency’… candidates are those proposed by management who fail to get majority support.”

It’s true, as Katz implies, that when Carl Icahn puts a director on a board, he typically expects that director to do his bidding. It is unlikely, however, that a proxy access director will, as Katz also alleges, be expected to follow some secret CalPERS or Ontario Teachers agenda. Katz argues that proxy access directors “run significant risks regarding losing the protections of the business judgment rule if they act for the benefit of their sponsors and to the detriment of the other shareholders.” Katz also warns that proxy access directors will be isolated and not included in open board discourse. But again Katz’s logic falls down in the face of Minow’s. In order to be elected at all, proxy access directors must be elected by all shareholders, just like any other director. That is not the case with constituency directors.
The unintended consequences of electing a proxy access director, says Katz, is that it could lead boards to conclude that “isolating” such a director from sensitive board deliberations “may be the best way to protect the board’s decision-making process and the company as a whole from the vulnerability introduced” by that director’s presence on the board. This is an extraordinary claim. “Such a situation,” says Katz, “could easily produce a dysfunctional board riven by divisive deadlocks and incapable of making decisions or providing effective oversight.”
He also alleges several more detrimental consequences of proxy access in addition to the above: waste of corporate resources, a lack of required qualifications or experience (for the special committees, for example) and a hampering the board’s progress towards a “desired diversity of skills, genders, and backgrounds.” What was it I just said about a bad governance practice used to argue against a good one? Now we see the reverse.
But the real good news here is that, in making these arguments at all, Katz is merely confirming that the proxy access war has turned.

Paul Hodgson is an independent governance analyst.