SEC reviews shareholder proposal process after investors cry foul over ‘proxy access’ loophole

Rare U-turn follows letter from Council of Institutional Investors and direct appeal from shareholder activist

New York City Comptroller Scott Stringer’s ‘proxy access’ campaign to combat “zombie” corporate board members got a boost late on Friday after a rare U-turn by the Securities and Exchange Commission.

The SEC reversed an earlier decision allowing retailer Whole Foods to exclude a shareholder proposal that would make it easier for investors to nominate directors, and announced a review into the whole basis for the now-quashed exclusion stopping other companies using a similar approach for the current proxy season.

The decision follows weeks of scrutiny on its ruling that the company could exclude a proxy access proposal from activist investor Jim McRitchie to allow shareholders owning at least 3% of the company for three years to nominate their own directors.

Commenting on the SEC’s move – after the market had closed and ahead of a US holiday weekend – Stringer said on Twitter it was “taking a big step for investor protection and boardroom accountability”.

The decision follows a letter to the SEC on the issue from the Council of Institutional Investors (CII), which represents pension funds, endowments and foundations with combined assets of more than $3trn (€2.5trn). McRitchie had appealed directly to the SEC leadership as well.

The CII had said the SEC was “forcing shareholders into a dilemma”. Corporate governance blogger Broc Romanek of the CorporateCounsel site said Friday’s decision could, potentially, prove “monumental” as it could mean that the entire shareholder process (known by its SEC term ‘14a-8’) “might be in play”.Whole Foods originally got permission from the SEC to omit McRitchie’s proposal as it had its own, similar proxy access proposal (at a much higher 9% ownership threshold), which had the effect of exposing what amounts to a loophole to allow companies to dodge shareholder proposals relating to the issue.

It was a setback to Stringer’s ‘Boardroom Accountability Project’ (BAP), which has seen him file proxy access proposals, similar to McRitchie’s, at 75 companies. The proposals, which were backed by several big US pension funds like CalPERS, would give one shareholder or a group of them that has owned at least 3% of company stock for three years the right to nominate one-quarter of the board.

It looked under threat after some of the companies he is targeting, including Marathon Oil and Cabot Oil & Gas, sought permission from the SEC to exclude Stringer’s proxy access proposals in a similar way to Whole Foods.

The SEC had originally allowed the Whole Foods exclusion under Exchange Act rule 14a-8(i)(9) which stipulates that proposals can be omitted if it conflicts directly with a company’s proposal to be submitted at the same meeting.

Now SEC chair Mary Jo White said in a letter to McRitchie said that “due to questions that have arisen” she had ordered a review. A spokeswoman for Whole Foods said the company is “reviewing” the SEC’s decision. McRitchie, who runs corporate governance website, said the SEC’s move was “a victory for shareholders.” Link