The Securities and Exchange Commission (SEC) has said it won’t block a proposal from a shareholder activist calling on Microsoft to consider removing the cap on the number of shareholders required to vote in the election of directors under proxy access rules, in a blow to the software giant which was resisting change.
Activist James McRitchie is calling for a change in Microsoft’s existing proxy access bylaws to allow for an “unrestricted” number of shareholders with at least 3% of Microsoft’s outstanding shares held continuously for at least three years, to nominate directors for election to the company’s board. Currently, this number is restricted to 20 shareholders.
Rejecting Microsoft’s appeal to exclude the proposal, the SEC said: “We are unable to conclude that Microsoft’s proxy access bylaw compares favorably with the guidelines of [McRitchie’s] proposal.”
Last year, Microsoft joined a growing list of companies, including Apple, in allowing proxy access, which gives investors greater powers to remove directors and influence corporate strategy by nominating board candidates.
In its letter to the SEC, Microsoft had argued there was no need to change rules as its twenty largest shareholders held more than 40% of the stock.
However, John Chevedden who filed the motion on behalf of McRitchie, said that most of those shareholders had never even filed a shareholder proposal.
“It is preposterous to think they would go through the trouble to nominate proxy access candidates, which would take much more effort,” his letter to the SEC read.
“Is twenty dollars substantially the same as an unlimited number of dollars? Of course it is not. Similarly, limiting the number of nominating shareholders is not substantially the same as allowing an unlimited number of shareholders to aggregate their shares,” he wrote.The company meanwhile argued that its Proxy Access Bylaw, which places a twenty-shareholder limit on the size of a nominating group, “achieves the essential purpose of the proposal by ensuring that shareholders are able to use the proxy access right effectively, while addressing administrative concerns that could arise if an unwieldy number of shareholders sought to nominate director candidates under proxy access”.
Speaking to Responsible Investor, McRitchie said: “While I am pleased that we are getting some progress on proxy access, I think as an industry we would be far more effective if we had the Vanguards and the BlackRocks joining us on some of these proposals.”
“We would be far more effective if we had the Vanguards and the BlackRocks joining us”
He added: “Under proxy access ‘lite’, shareholder nominations are highly unlikely because of the limitation of 20 participants that makes nominations extremely difficult.”
He cited research from the Council of Institutional Investors that noted that even if the 20 largest public pension funds were able to aggregate their shares, they would not meet the 3% criteria at most of the companies examined.
McRitchie noted that with most large indexed funds in direct competition with one another, any outperformance came from cost savings.
“And fighting for proxy access will be an additional cost to them, so there is no real incentive for them to do this,” he added.
Although in theory, the Vanguard Group – which owns over 6% of the stock – could nominate proxy access candidates, McRitchie thinks this is “highly unlikely”.
“Not only is Vanguard not known as activist, they have never even filed a proxy proposal, a governance measure that takes substantially less effort than nominating and promoting director candidates,” he said.