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Proxy access support reaches new level

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Patrick McGurn said proxy access support seems to be more philosophical than practical.

More proxy access proposals have won a majority level of shareholder support this year than in any other year, leading one asset owner executive to conjecture a tipping point has been reached in terms of investors and management embracing the concept.

So far, six shareholder access proposals have prevailed in shareholder voting, while management has introduced three such proposals, all also winning a majority of shareholder vote in support. Another company agreed to implement access in advance of a vote.

The proposals enable company shareholders to use corporate proxy materials to nominate directors to corporate boards.

Of the shareholder proposals, none has been adopted by the companies, although one board has it under review. The three companies with the management proposals will implement access.

“It is a record number of majority votes” for each type — shareholder proposal or management proposal — said Patrick McGurn, special counsel, Institutional Shareholder Services Inc., Rockville, Md.

A record number of proposals — 20 — has been filed this year, with 14 coming to a vote so far, according to ISS Voting Analytics database. The average level of support this year has been 39.4%.

In 2013, votes were cast on 16 shareholder access proposals, with a 33.1% average level of support.

Abercrombie & Fitch Co. shareholders are among the most recent to approve an access proposal with a 55.3% vote on June 19. The proposal was filed by the $150 billion New York City Retirement Systems, the $28.5 billion Connecticut Retirement Plans & Trust Funds, Hartford, and the $4.3 billion Philadelphia Public Employees Retirement System.

“The Abercrombie vote caps a proxy season in which proxy access reached a tipping point in terms of investor support and increasingly, board acceptance,” said Scott M. Stringer, New York City comptroller who oversees the five pension funds of the New York City system, in an e-mail.

The Abercrombie & Fitch board, which opposed the proposal, “will consider the outcome of the vote and determine the best course of action in the best interests of all shareholders,” said a company statement.

Charles M. Elson, the Edgar S. Woolard Jr. chair in corporate governance and professor of finance, professor in legal studies and director of the John L. Weinberg Center for Corporate Governance, University of Delaware, Newark, said, “I think (proxy access) is an idea that has found significant shareholder support.

“It's not just that (access) idea. It's the idea that shareholders want greater input into board selection. It's not shareholders are (looking) for a fight,” Mr. Elson said. “Shareholders are saying that we want to have more of an input into the process by which director nominees are selected.”

Big question

Mr. McGurn said that “the big question is, will some institution or group of institutions step forward and make this their priority issue in the same way we've seen investors do that on the majority-voting (to elect directors) issue, for example. It's really more of a question of whether we will see more (access) proposals rather than whether we will see support” for them.

“Voting support ... appears to be driven more by philosophy, that (institutional investors) believe proxy access is a good idea, rather than differentiating their voting based on the governance practices or performance of particular companies,” Mr. McGurn said.

But not all agree that a trend is emerging to embrace proxy access.

“We are far from a tipping point in terms of corporate governance,” said Michael Ryan, vice president, Business Roundtable, a Washington-based association of CEOs of major companies. “There is a relatively few of these” access proposals out of about 8,000 to 10,000 publicly traded companies, he said. “I don't think (the outcomes) suggest a trend at all. It doesn't enhance accountability.”

Amy Borrus, deputy director of the Council of Institutional Investors, Washington, said she is not surprised to see only a few access proposals. “Shareholders tend to seek proxy access as a last resort, when dialogue has failed,” Ms. Borrus said in a follow-up e-mail.

Compared to previous years, access is on an upswing.

Kilroy Realty Corp.'s board adopted proxy access in advance of its May 22 annual meeting for which the New York City funds had filed an access proposal. Kilroy will allow access for shareholders owning 5% of the stock for three years to nominate up to 25% of the directors.

In addition to Abercrombie & Fitch, other companies this year where shareholder access proposals received a majority vote are Nabors Industries Ltd., Big Lots Inc., International Game Technology, Boston Properties Inc. and SLM Corp., based on the ISS Voting Analytics database.

Companies that introduced board-sponsored proposals this year are Verizon Communications Inc., CenturyLink Inc. and Chesapeake Energy Corp. All were adopted and will be implemented.

“I wouldn't call any of the adoptions voluntary,” Mr. McGurn said. The board proposals came after shareholder proposals won majority support in previous years.

McKesson Corp.'s board announced June 17 a commitment to sponsor an access bylaw proposal at its 2015 annual meeting and seek shareholder support for its passage. The commitment came after an agreement with the New York City funds.

Among the shareholder access proposals this year, the New York City funds have been the leader in such filings, including at Nabors and Big Lots; the Philadelphia system filed the Boston Properties proposal.

All the proposals that received a majority vote this year used a standard the Securities and Exchange Commission adopted in 2010 in an access rule that was invalidated in 2011 by a federal appellate court. That standard, which allows up to 25% of directors to be nominated under access, requires a shareholder or group of shareholders to have at least a combined 3% of shares of a company held for three years for eligibility to nominate directors.

“I think because it went through that whole vetting process at the SEC,” investors favor that standard, Mr. McGurn said. “It sort of gained the imprimatur of the SEC over the structure of it.”

Adoption not mandatory

But a majority of shareholder voting in support of access doesn't necessarily lead to company adoption.

Access proposals filed jointly by the New York City funds and the Connecticut fund received majority votes at Nabors Industries in 2012 and 2013 without any implementation.

But on April 14, less than two month before its June 3 annual meeting, Nabors Industries board sought to undercut an access proposal for this year filed jointly by the same pension funds. The board adopted on its own an access policy, allowing any shareholder holding at least 5% of the shares for three years to nominate directors.

Even with the policy, the pension funds' proposal won a majority of the votes. Mark Andrews, Nabors corporate secretary, couldn't be reached on whether the company will revise its access policy in light of the voting.

“I've always thought that great shareholder input into the process (of nominating directors) is a welcome objective,” Mr. Elson said. “This is what access is all about ... and I think it's an idea (shareholders) feel comfortable with.”

With proxy access, shareholders use the potential for nomination to bolster the communication process with the board on nominations, rather than nominate candidates, Mr. Elson said.

Seven companies have implemented proxy access: Hewlett-Packard Corp., Western Union Co. and American Railcar Industries Inc. as well as Verizon, CenturyLink, Chesapeake and Nabors.

Shareholders have yet to nominate any directors at the companies, said Mr. McGurn.

Access, which Mr. McGurn once called the “holy grail” of corporate governance, now is part of what he sees as the big four issues for institutional investors. The other three are annual election of all directors, requiring a majority of shareholder votes to elect directors and companies having an independent chairman. The independent chairman, he said, “is the only one where there is not broad consensus” among institutional investors. “But the other three, given the voting results that they produce, seem to have a very wide and large following among institutional investors.”


This article originally appeared in the July 7, 2014 print issue as, "Proxy access support reaches new level".