Proxy access to nominate shareholder directors: a big stick no one wants to use?

Investors have the right to a board position, now what?

More than 425 companies now have proxy access, including over 60% of the S&P 500, according to the Boardroom Accountability Project (BAP) 2.0. That’s a huge victory for corporate governance and shareholder rights after years of campaigning. But there appears to be no prospect of a group of shareholders actually nominating a director. So what was it all for? According to BAP 2.0, son of the original BAP, which saw the launch of the comprehensive proxy access campaign, Scott Stringer, comptroller of the NYC Pension Funds said: “we set out to give investors a true voice in who sits on corporate boards. Now that we have that power, it’s time to raise our voice and demand change at some of the biggest companies in the world.” But voices are not being raised. Rather, Stringer is calling on the boards of 151 US companies to disclose the race and gender of their directors along with board members’ skills in a ‘matrix’, and to discuss their board’s ‘refreshment’. “Proxy access is a powerful tool” says BAP “and the mere spectre of a proxy access candidate is expected to make boards more responsive to their shareowners.” But it looks like it will remain illusory.
I tried on several occasions to get comment from the NYC funds on whether any flesh was going to be put on the bones of proxy access, but I was not successful. This could be because Mayor Bill de Blasio and Stringer are looking into divesting the fund from fossil fuel companies. If you don’t own it, you can’t nominate anyone to the board of it. “One of the pegs of the boardroom accountability project was climate change,” said a shareholder advocate, who preferred to stay off the record, “and if you remove the companies from the engagement pipeline, that throws a curveball with respect to what they can do with proxy access, assuming they make the decision to divest.” One is tempted to ask: what was the point?
But, of course, there was one.This proxy season sees another flood of proxy access and proxy access ‘fix it’ proposals; the latter seek to make the proxy access bylaws that companies implemented more shareholder friendly. But that battle has been won. Shareholders now have the right to throw their weight around. It’s just that no-one seems to have the stomach to do it.
I spoke to a number of people about the lack of action. Rakhi Kumar, State Street Global Advisor’s head of ESG investing and asset stewardship, replied, with some emphasis: “Philosophically I find it very interesting that we are expected to use the right as soon as it’s available. With shareholder rights, we only focus on them when we don’t have them. That’s what shareholder rights are about, you want to have the right, but you don’t use it as soon as you have it, that’s not how it works.” Like others I spoke to, both on and off the record, she noted that proxy access will only likely be used in egregious circumstances and after years of engagement and non-responsiveness. For example, if Wells Fargo had not moved to ‘refresh’ its board, or if ExxonMobil had not appointed a climate competent director, those companies might have been targets. “Were it not for proxy access winning at Exxon in 2016, for example, it’s unlikely that the company would’ve appointed Susan Avery as a climate competent director,” said one source. “It was close to 10 years of investors asking for more environmental expertise on the board.” Then shareholders won the right to nominate a director and a few months later, she was appointed.
Lack of exercising the right is not unique to the US, of course. “How many proxy access rights have been exercised in the UK and Australia where it’s been part of their rights for a long time?” asked Kumar. Like Stringer, she said that one of the principal aims of the campaign, and why so many shareholders supported it, was to improve board accountability. “So boards are forced to
think: if we are not responsive, and we don’t explain and engage with shareholders, there could be consequences.” She said she would be worried if “we started using this right willy-nilly”. But the shareholder advocate raised the question nevertheless: was it just a big, disruptive, ‘we’ll nominate a director to your board if you don’t listen’ stick to wield over companies so that they would do what you want them to when you engaged with them, or was it actually a bona fide attempt to be able to nominate shareholder approved directors to the board? Yet another fundamental question about the process is: did companies agree to proxy access because they didn’t believe any shareholder would ever exercise its right? Companies certainly were active in adding protections against what they saw as potential abuse of the right, protections that weren’t in the original BAP proposals. “But they also saw the writing on the wall,” said the shareholder advocate, “when they saw what happened at Whole Foods and when they saw the big mutual funds sign on to support.”
The impetus behind the campaign was clearly a continuation of moves to democratize corporate elections, following the declassification of boards, majority voting or plurality plus, and getting rid of zombie directors. But compared to those campaigns, which took forever to achieve, the adoption of proxy access was achieved with an unusual rapidity. Was its rapid adoption due to the fact that companies didn’t believe that it would ever be exercised? “Let’s make shareholders feel good, we’ll just do it for them?” But originally companies believed that it would be used by activist investors and special-interest groups, the source of their early resistance.
“Once the large managers are on board then, for practical purposes, that ship has sailed,” suggested the shareholder advocate as a reason for the lightning speed of its introduction. “But it’s one thing for them to support the establishment of the right, it’s very different for them to support pulling the trigger on the right.”
And that is just one of the multiple problems facing the exercise of proxy access as it exists now. In a 2010 letter to the SEC asking it to introduce universal proxy access – it had a proposed
rule on the issue at the time, a fact often overlooked – the CII found that the aggregated holdings of the ten largest public pension funds would not meet a 5% threshold and “would be unlikely to meet even a three percent threshold”.On the other hand, they might crack 1%. Except that no one has a 1% proxy access rule. In a more recent analysis by the CII’s director of research Glenn Davis, aggregating even the top 20 largest public pension funds would not enable a 3% threshold to be met, either at a large company like Exxon, a medium sized one like Precision Castparts, or a very small one like Manitowoc. Ironically, the closest is Exxon, at 1.73%. Yet more ironically, in a 2007 analysis also by the CII, all three were 3% owned by the top 10 largest public funds. Proxy access might have been possible in 2007, except we didn’t have it. Of course, if the likes of BlackRock, Vanguard and State Street get involved, hitting a 3% threshold is not a problem. “The big question,” said Davis, “is whether asset managers ultimately decide to get involved. Only time will tell under what circumstances, if any, they’ll be willing to partner with funds or use proxy access independently.” Gadfly extraordinaire James McRitchie, one of the many successful shareholder proponents in the campaign, thinks that because the standards of governance at smaller companies are poorer, they’re much more likely to be the object of proxy access than Apple or Exxon. It would be much easier to hit a 3% holding at such companies. But most of those companies don’t have proxy access, so unless there is a continuing campaign to move proxy access beyond the S&P 500 and into the Russell 3000, they are unlikely to be good targets. The shareholder advocate source added another potential problem to the list. Even if a group of shareholders were successful in getting together a 3% coalition, in order to elect the nominated director, a majority of shareholders would have to vote for the candidate for them to be elected. Unless there was a spare seat on the board, it would be a contested election. Off the record, one advocacy group told me that in 2017 it had a company in its sights and a director waiting to be nominated. But for a variety of company specific reasons – a shareholder unfriendly proxy access policy, not an oil major, not in the public eye – the campaign was abandoned. So currently there are no plans to pick up the stick, never mind wield it. And while supporters claim that they are waiting for the next governance disaster to make a move, the structural problems with this particular shareholder right may be a far more potent barrier than waiting for the ‘right moment’.