Companies, funds spar over need for nomination rule

Corporations and public pension funds are facing off over what one proponent is calling “the greatest advancement of shareholder fundamental rights,” the proposed rule by the SEC to allow stockholders access to corporate proxy material to nominate directors.

But there is least one major surprise among the opposing sides of institutional allies on the issue.

The United Brotherhood of Carpenters, a leading shareholder activist, “strongly urge(s) the commission not to adopt proposed Rule 14a-11 establishing a federal proxy access right for shareholder nominations,” Edward J. Durkin, director-corporate affairs department, wrote in a six-page comment letter to the SEC.

Instead of the broad mandate to allow nominations, the union supports a proposed amendment to “Rule 14a8(i)(8) to enable shareholders, under certain circumstances, to require companies to include in company proxy materials proposals that would establish or request the establishment of a proxy access right for shareholder director nominees.”

Among the roughly 500 comment letters submitted to the Securities and Exchange Commission, only about a dozen came from investment management companies, including Barclays Global Investors, T. Rowe Price Associates Inc. and AllianceBernstein LP, all three of which supported the proposal to some extent.

BGI, in a letter submitted by Abe Friedman, managing director and global head of corporate governance and proxy voting, said the San Francisco-based firm supports the proposal if it is modified make it tougher for “investors with short-term goals or take-over interests” to abuse the system.

T. Rowe Price Associates Inc. supports the access concept in general, but believes the SEC needs to rework the proposal, according to the money manger's comment letter.

Among corporate governance advisory firms, The Corporate Library, RiskMetrics Group Inc., GovernanceMetrics International Inc. and Governance for Owners LLP support the proposal, according to their letters.

Marco Consulting Group, a pension investment consultant, also submitted a letter of support.

The California Public Employees' Retirement System, California State Teachers' Retirement System, Florida State Board of Administration, Ohio Public Employees Retirement System, Colorado Public Employees' Retirement Association and the Connecticut Retirement Plans and Trust Funds all endorsed the proposal in separate letters.

Numerous companies — including Procter & Gamble Co., 3M Co., AT&T Inc., Emerson Electric Co., Boeing Co. and UnitedHealth Group Inc. — submitted letters opposing adoption of the proposed rule.

Steven W. Jemison, chief legal officer and secretary, and E.J. Wunsch, assistant secretary and associate general counsel for Cincinnati-based Procter & Gamble, wrote: “The SEC's proposed rule seems to assume that all boards of directors are not as accountable to shareholders as they should be — thus, the need for a rule for shareholder nomination of directors that is universal. In our experience, this assumption is wrong.”

Gregg M. Larson, deputy general counsel, 3M, St. Paul, Minn., wrote in a 10-page letter, “We believe ... that an unproven and untested federal rule mandating proxy access for public companies is unnecessary in light of widespread governance changes over the last several years and ill-advised given the numerous workability and other issues surrounding” the proposal. “Instead, we believe the commission should focus its efforts ... to allow proxy access stockholder proposals. This approach would allow stockholders to choose the proxy access system, if any, they determine is appropriate for their individual company.”

Wayne Watts, Dallas-based AT&T's senior executive vice president and general counsel, wrote that the SEC “lacks the statutory authority to adopt (such a proposed rule), which “would impose a uniform federal mandate on corporations that would deprive shareholders of existing rights under state law to regulate the nomination and election of directors. ... Congress has not delegated to the commission the authority.”

Dannette L. Smith, secretary to the board of Minnetonka, Minn.-based UnitedHealth, wrote the “proposal also does not give adequate consideration to the current corporate governance processes in place at UnitedHealth Group (and other similarly situated companies). Further, the ... proposal fails to give proper consideration to the difference in state law duties that are applicable to the board of directors and a nominating shareholder. As a result, it is our concern that the proxy access proposal would create a one-size-fits-all mandate.”

On the other side of the sparring ring, the Council of Institutional Investors, Washington, “strongly supports” the proposed rule, but has some strong disagreements about some aspects, according to a 72-page comment letter by Jeff Mahoney, CII general counsel.

For one, the CII opposes the SEC's proposed first-filers approach for determining which shareholder nominees are included in a company's proxy materials.

The “first-in” approach, allowing shareholder groups that file their nominations first to nominate the maximum number of directors allowed, “would likely cause a pointless and potentially harmful race to be the first to file. What matters most is not who is the fastest to nominate but what investor or group has the greatest stake in the director election and ultimately, the long-term performance of the company,” Mr. Mahoney wrote.

The council would prefer that “the shareowner or shareowner group with the largest beneficial ownership would have the right to nominate the maximum number of director candidates allowed under the rule,” Mr. Mahoney wrote.

Sacramento-based CalPERS “strongly endorsed” the proposed rule, according to its letter. It supports elements of the proposal, including one to “prevent the nomination of directors who would represent special interests rather than pluralities of shareowners voting on board seats,” Joseph Dear, chief investment officer of the $190.6 billion system, wrote.

“A national standard for proxy access should be established,” Mr. Dear wrote. “CalPERS considers that the commission has clear authority to adopt the proxy access rule proposal. ... Federalism issues aside, the main advantage of a national standard is to ensure that the companies that need the reform the most actually implement the rule. In CalPERS experience, recalcitrant companies may unreasonably resist shareowner proposals.”

“Investors are best protected when board directors are responsive and accountable to the shareowners,” Mr. Dear wrote. “Having an effective channel through which to nominate directors through access to the company's proxy card is critical to ensuring this accountability.”

Jack Ehnes, CEO of the $122.4 billion CalSTRS in West Sacramento, called the proposal “the greatest advancement of shareholder fundamental rights in decades.”

“We do not suggest that granting long-term shareholders, such as CalSTRS, access to the corporate proxy ballot will solve all the instances of excessive risk-taking in the market place, but its existence will give shareholders, at minimum, an important and necessary negotiating tool at the corporate governance table,” Mr. Ehnes wrote.