The Meaningful Return of Shareholder Access (Part 2)
In the aftermath of the Business Roundtable, shareholder access has largely been left to private ordering. A number of shareholder proposals have been submitted to public companies asking management to provide shareholders with access to the proxy statement. A number have received majority support, although the numbers have been modest.
This may change, however, with the advent of the Board Accountability Project. Spearheaded by the NYC Comptrollers Office, the Project involves the submission of shareholder access proposals to 75 separate public companies. The list of companies is here.
Each of the proposals calls on companies to provide shareholders owning 3% of the voting shares for at least three years with the right to include a short slate of directors (not more than 25% of the number then serving) in the proxy statement. The proposals largely mimics the requirements of the SEC rule struck down by the DC Circuit in Business Roundtable.
A significant number will likely receive majority support. This is the case for a number of reasons. First, most will go to a vote. These proposals are difficult to exclude from the proxy statement. As a memo from Wachtell noted: "The current wave of proxy access proposals has evolved to cure most substantive vulnerabilities and, absent procedural defects, the SEC has generally been unsympathetic to proxy access exclusion requests."
Whole Foods is seeking to demonstrate otherwise. The company has sought no action relief, arguing that an access proposal (permitting shareholders owning 3% for 3 years) should be excluded because it has submitted an alternative (permitting shareholders owning 9% for five years).
As a result, companies will likely be able to avoid a shareholder vote on an access proposal only if they prevail on the NYC Comptroller to withdraw the proposal. That in turn will presumably require concessions by the company.
Second, the category of companies have been carefully selected. The companies receiving the proposals fell into three categories. As the Comptroller's Office described, they included:
- 33 carbon-intensive coal, oil and gas, and utility companies;
- 24 companies with few or no women directors, and little or no apparent racial or ethnic diversity; and
- 25 companies that received significant opposition to their 2013 advisory vote on executive compensation (“say-on-pay”)
These are not a particularly sympathetic group of companies. Take diversity (or the lack thereof). Given the number of qualified women and ethnic/racial minorities, it is not convincing claim to contend that a lack of diversity can be explained by an inadequate pool of candidates. Instead, other reasons likely explain the absence of such candidates, not the least of which is the preference for directors who will reliably support management. See The Demythification of the Board of Directors.
Third, the Project already has significant support, particularly from other large institutional investors. According to the NYT, CALPERS has already signed on:
- Working with Mr. Stringer’s office to drum up support are officials at the California Employees' Retirement System, the nation’s largest public pension fund. Calpers said it would hire a proxy solicitor to discuss the proposal with other institutional shareholders. “We view this as a five-year project and will be back again and again as needed,” said Anne Simpson, senior portfolio manager and governance director at Calpers. “But making the commitment and getting an alliance formed on this issue is so important.”
Other public pension plans "supporting the effort" include plans from Connecticut, Illinois and North Carolina.
Fourth, these proposals have proven popular. Last week, for example, an access proposal at Oracle received about 45% of the vote (1,578,053,610 shares in favor; 1,946,813,794 shares against). The percentage was even more significant given that Larry Ellison held 26% of the shares and presumably voted against the proposal. As CALSTRS (a joint sponsor of the proposal) stated:
- Independent shareholders overwhelmingly supported CalSTRS’ proposal opening the corporate proxy to shareholder candidate nominations for the Oracle Corporation Board of Directors. While it received approximately 45 percent of the overall vote, it did not pass due to Larry Ellison’s large inside ownership. However, CalSTRS believes shareholders today sent a strong signal to the board of directors and we expect more accountability from them, as a result.
These efforts are likely to renew interest in shareholder access. Ultimately, however, private ordering is not the best way to approach this issue. The proxy statement is a corporate document that ought to be available for nominees from both management and shareholders. For that, SEC rulemaking will be necessary.