Proxy Access At The Tipping Point by Holly Gregory

Transcription

1 Proxy Access At The Tipping Point by Hoy Gregory What happens when the sharehoders of most U.S. corporations gain the power to nominate their own sates for board eections? We are about to find out. By the end of 2016, just over haf of America s argest corporations had sharehoder proxy access poicies in pace. The foowing report examines what this quiet revoution in activist power over the board wi mean for proxy season In ate December 2016, proxy access reached the tipping point in terms of adoption by arge companies just over 50 percent of S&P 500 companies have now adopted proxy access. Through the coective efforts of arge institutiona investors, incuding pubic and private pension funds, and other sharehoder proponents, sharehoders are increasingy gaining the power to nominate a portion of the board without undertaking the expense of a proxy soicitation. By obtaining proxy access (the abiity to incude sharehoder nominees in the company s own proxy materias), sharehoders wi have yet another too to infuence board decisions. The movement toward proxy access began to buid in This trend continued in 2016, and is continuing into Whie proxy access has been the subject of sharehoder proposas for severa years, 2015 was a watershed year, foowing the private ordering pattern of majority voting in uncontested director eections. Many companies received proposas for their 2015 annua meetings requesting that the board amend the byaws to aow arge, ong-standing sharehoders (or groups of sharehoders) to nominate directors and incude those nominees in the company s own proxy statement and reated materias. This trend continued in 2016, and is continuing into Proxy access initiatives had imited eves of success prior to However, sharehoder support started to increase in 2014 as proponents began to focus on the three percent for three years ownership requirement adopted by the SEC in its 2010 ruemaking efforts. This is a broad-based sharehoder campaign for proxy access on a company-by-company basis. The momentum continues to acceerate among targeted companies and other eading companies to adopt proxy access (with or without first receiving a sharehoder proposa). It is reminiscent of the campaign severa years ago for companies to repace puraity voting with majority voting in the uncontested eection of directors. Both issues reate to the abiity of sharehoders to infuence the composition of the board, and both campaigns show the power of concerted efforts at private ordering. The SEC s 2010 proxy access rue. The SEC has unsuccessfuy sought to adopt a market-wide proxy access rue for decades. In 2010, the SEC adopted a proxy access rue (Exchange Act Rue 14a-11) that woud have given sharehoders the abiity to nominate candidates through the company s proxy materias if a sharehoder (or a group of sharehoders) hed three percent of the company s shares for at east three years. Under the rue, a nominating sharehoder (or group of sharehoders, with no imit on the size of the group) coud nominate one proxy access director, or 25 percent of the board, whichever is greater. Rue 14a-11 was adopted shorty after Section 971 of the Dodd-Frank Act confirmed the SEC s authority to promugate a proxy access rue. The SEC issued fina rues mandating proxy access in August 2010, which were schedued to become effective in November In addition, the SEC aso amended Exchange Act Rue 14a-8(i)(8) to aow sharehoder proposas reating to proxy access and certain other director eection mechanisms. Hoy Gregory is a partner with the aw firm Sidey Austin LLP. This artice is drawn from a Sidey Corporate Governance Report. [ 10 MARCH/APRIL 2017 THE CORPORATE BOARD

2 PROXY ACCESS Two Busy Yearsmmmmmmmmmmmn Proxy Access Adoptions Since January 2015 Prevaence of Seected Aternatives Sharehoder Viewpoints* Proxy Advisory Firm Poicies and Counci of Institutiona Investors (CII) Position Ownership Threshod and Duration 3% for 3 years 339/342 (99%); incuded in SEC vacated rue 5% for 3 years 3/342 (1%) Neary a favor 3% Sharehoder proposas more ikey if company adopts at 5% ISS and Gass Lewis support 3% CII supports 3% and views 5% as troubesome Proxy Access Nominee Limit (Maximum percent of Board) Greater of 2 or 20% 228/342 (67%) 20% cap 68/342 (20%) Greater of 2 or 25% 23/342 (7%) 25% cap 23/342 (7%); incuded in SEC vacated rue Most favor 20% 25% ISS and Gass Lewis support 25% If adopted after majority-supported sharehoder proposa, ISS may issue negative vote recommendations against directors if ess than 20% CII favors abiity to nominate at east 2 candidates Nominating Group Size Limit No imit 8/342 (2%); incuded in SEC vacated rue 50 1/342 (<1%) 30 2/342 (1%) 25 13/342 (4%) /342 (91%) 15 3/342 (1%) 10 3/342 (1%) 5 1/342 (<1%) Genera consensus that imit of 20 is reasonabe Possibiity of sharehoder proposas seeking remova of imits or specifying a particuar nominating group size (e.g., 40 or 50) ISS favors minima or no imits If adopted after majority-supported sharehoder proposa, ISS may issue negative vote recommendations against directors if ess than 20 CII views any imit as troubesome * Derived from pubicy avaiabe voting poicies as we as preferences expressed through engagement and voting resuts. In September 2010, Business Roundtabe and the U.S. Chamber of Commerce chaenged the vaidity of Rue 14a-11. In 2011, the U.S. Court of Appeas for the District of Coumbia Circuit vacated Rue 14a-11 on the grounds that the SEC had acted arbitrariy and capriciousy in promugating the rue and faiing to adequatey assess its economic impact. The SEC did not appea the court s decision and has not re-proposed any proxy access rue since. However, the amendment to Rue 14a-8 became effective in September 2011, thereby opening the door to sharehoder proposas seeking proxy access. Uptick in sharehoder proxy access proposas. Fifteen companies adopted proxy access prior to 2015, incuding a few arge companies, such as Hewett-Packard Company (now known as HP Inc.), The Western Union Company and Verizon Communications Inc. Each adopted proxy access after receiving a sharehoder proposa on the topic, as we as some companies that have since gone private. In addition, proxy access with a five percent for two years ownership threshod has been mandatory for companies incorporated in North Dakota since We are aware of one pubic company that reincorpo- THE CORPORATE BOARD MARCH/APRIL

3 Hoy Gregory A Roing Tidemmmmmmm Pace Of Proxy Access Adoptions Pre- Jan/Feb Mar/Apr May/Jun Ju/Aug Sep/Oct Nov/Dec Jan/Feb Mar/Apr May/Jun Ju/Aug Sep/Oct Nov/Dec in in 2016 rated to North Dakota from Deaware severa years ago with the stated purpose of taking advantage of this and other sharehoder-friendy provisions. To date, no sharehoder has incuded a director nominee in the proxy materias of a U.S. company pursuant to a proxy access right. The private ordering effort is now in fu swing. Sharehoder proposas seeking proxy access were the defining feature of the 2015 and 2016 proxy seasons, and we expect them to be prevaent in the 2017 proxy season. One hundred fifteen sharehoder proxy access proposas were submitted for the 2015 proxy season, which was more than four times the number submitted for the 2014 proxy season. Based on the success of private ordering efforts in 2015, more than 200 sharehoder proxy access proposas were submitted for the 2016 proxy season, we surpassing prior-year eves. The New York City Pension Funds, with approximatey $160 biion under management, accounted for the majority of the proxy access proposas submitted for the 2015 proxy season. In November 2014, Comptroer Scott Stringer announced the Boardroom Accountabiity Project, targeting 75 companies with non-binding sharehoder proxy access proposas. The proposas request that the board adopt, and present for sharehoder approva, a byaw to give sharehoders who meet a threshod of owning three percent of the company s stock for three or more years the right to incude their director candidates, representing up to 25 percent of the board. On January 11, 2016, the New York City Pension Funds expanded the Boardroom Accountabiity Project by submitting proxy access proposas at 72 companies for Thirty-six that had received proxy access proposas in 2015 were targeted again for 2016 because they had not yet adopted proxy access at a three percent ownership threshod. As of December 31, 2016, 97 of 110 companies targeted by the New York City Pension Funds for 2015 and 2016 have adopted proxy access. Another 36 companies were newy targeted for 2016, with a focus on the Fund s argest portfoio companies, coa-intensive utiities and companies seected due to concerns about board diversity and excessive CEO pay. The form of proxy access proposa submitted for the 2016 proxy season did not differ substantivey from the tempate submitted for the 2015 proxy 12 MARCH/APRIL 2017 THE CORPORATE BOARD

4 PROXY ACCESS season except that it no onger specificay sought sharehoder approva of proxy access byaws. The form of proposa for the 2017 proxy season was revised to indicate that the number of proxy access nominees sha not exceed the arger of two or 25 percent of the board. As of December 31, 2016, 97 of the 110 companies targeted by the New York City Pension Funds for 2015 and 2016 have adopted proxy access. Proxy access is supported by many institutiona investors, incuding the foowing: BackRock reviews proxy access proposas on a case-by-case basis, and generay supports them. The proposas shoud not be overy restrictive or onerous and provide assurances that the mechanism wi not be subject to abuse by short-term investors, investors without a substantia investment in the company, or investors seeking to take contro of the board. Caifornia Pubic Empoyees Retirement System (CaPERS) indicated that proxy access was one of its strategic priorities for the 2015 proxy season and supported proxy access proposas at 100 companies in In February 2016, CaPERS announced that proxy access woud continue to be a strategic priority in 2016, and that it continues to support sharehoder proposas at the three percent for three years threshod and wi issue adverse votes against director nominees at companies where proxy access proposas passed in 2015 and that impemented provisions that restrict or imit the use of proxy access. Finay, CaPERS updated its Goba Governance Guideines in March 2016 to recommend that companies adopt proxy access at the three percent for three years threshod to nominate up to 25 percent of the board. Caifornia State Teachers Retirement System (CaSTRS) supports proxy access at the three percent for three years threshod, capped at a minority of board seats. State Street Goba Advisors reviews proxy access proposas on a case-by-case basis evauating the company s specific circumstances and the proposa s potentia effect on sharehoder vaue. State Street takes into account the ownership threshods and hoding duration proposed in the resoution, the binding nature of the proposa, the number of directors that sharehoders may be abe to nominate each year, company governance structure, sharehoder rights and board performance. TIAA (formery TIAA-CREF) wrote to the 100 argest companies in which it invests in February 2015, encouraging them to adopt proxy access at the three percent for three years threshod. In addition, TIAA submitted proxy access proposas at some companies for the 2016 proxy season. T. Rowe Price supports proxy access proposas at the three percent for three years threshod, and opposes significant impediments to a proponent s abiity to aggregate hodings with other sharehoders to quaify for proxy access. For the 2016 proxy season, T. Rowe Price added to its Proxy Voting Poicies that it wi generay recommend votes against sharehoder proposas to amend existing proxy access byaws if the company s byaw meets the three percent for three years threshod and does not impede aggregation. United Brotherhood of Carpenters sent etters to 50 companies in ate 2015 seeking a proxy access right in the event that the board refuses to accept the resignation of an incumbent director who fais to receive majority support. The etters were sent to companies with a majority voting standard and a director resignation poicy and that had sharehoder proxy access proposas on the baots for their 2015 annua meetings, whether or not those proposas received majority support. Vanguard announced in February 2016 that it amended its proxy voting guideines to decrease the ownership threshod for ikey support from five percent to three percent. Vanguard stated that the poicy change was informed by engagement over the past year and the critica mass of access adoption at the three percent ownership eve by an increasingy wide range of companies. Vanguard now generay support proposas at the three percent for three years threshod, capped at 20 percent of board seats. Fideity updated its proxy voting guideines in January 2017 to no onger vote against proxy access proposas but wi consider them on a case-by-case basis and generay support proposas at the three percent for three years threshod, capped at 20 percent of board seats. THE CORPORATE BOARD MARCH/APRIL

5 Hoy Gregory Investors Speak On Proxy Accessmn Why They Support And Oppose Proposas Factors increasing sharehoder support Company did not adopt proxy access prior to the meeting No competing management proxy access proposa on the baot Less insider ownership More sharehoders that vote in ine with proxy advisory firm recommendations Less voting retai sharehoders Combative tone of corporate discosure around proxy access concept Concerns reating to corporate performance, sharehoder rights and/or compensation Factors decreasing sharehoder support Company adopted proxy access prior to the meeting: significanty ower support if previousy adopted at 3% ownership threshod Competing management proxy access proposa on the baot Greater degree of insider ownership Less sharehoders that vote in ine with proxy advisory firm recommendations More voting retai sharehoders More conciiatory/open tone of corporate discosure around proxy access concept Lack of concern reating to corporate performance, sharehoder rights and/or compensation Sharehoders have aso started fiing fix-it proposas at companies which adopted proxy access rues not to investors iking. Emergence of fix-it proposas. Foowing the food of sharehoder proposas asking companies to adopt proxy access, sharehoder proponents began submitting proposas in 2016 requesting that companies make specific revisions to their existing proxy access byaws. These so-caed fix-it proposas were voted on at ony eight companies in The proposas passed at two companies (in each case where the proponent requested a reduction of the ownership threshod from five percent to three percent, among other amendments) and average sharehoder support was approximatey 44 percent (compared to sharehoder proposas to adopt proxy access which have received average support of 51 percent). Whie they are typicay non-binding, a few fix-it proposas have been binding, none of which were approved by sharehoders. The initia variety of fix-it proposas requested some combination of the foowing amendments: The ownership threshod woud be three percent. The number of proxy access nominees woud be the greater of 25 percent or two directors (or, at some companies, 25 percent). Loaned shares woud count toward the ownership threshod so ong as they are recaabe. There woud be no imit on the size of the nominating group. There woud be no restriction on the re-nomination of a proxy access nominee based on the number or percentage of votes received in a prior eection. There woud be no requirement to hod shares after the annua meeting (e.g., for one year) or to express any intention to do so. The board woud not have the power to amend the proxy access byaw. The board woud defer decisions about the suitabiity of sharehoder nominees to a sharehoder vote. Based on recent SEC staff determinations, some sharehoder proponents are refining their sharehoder proxy access proposas or fix-it proposas to imit them to a singe issue. This makes it ess ikey for a 14 MARCH/APRIL 2017 THE CORPORATE BOARD

6 PROXY ACCESS company to be abe to excude them on the basis of substantia impementation. For exampe, some proponents are asking companies to adopt proxy access or amend their proxy access byaws with a specific imit on the size of the nominating group (40 or 50). Potentia impact on corporate governance. It remains to be seen what impact proxy access wi have on corporate governance. At companies where access has been adopted, boards and management may become more focused on the quaity of sharehoder reations, communications and engagement, in an effort to avoid a contested eection against one or more proxy access nominees. There are benefits in the board sef-determination that occurs without a proxy contest or proxy access situation. The board can better ensure that its composition is aigned with its view of what the company needs for effective oversight. This is not a simpe matter given the mosaic of skis, experience and diversity that is needed on a board. There may be a greater risk that the proxy access director wi be viewed by the rest of the board as an outsider, or even an adversary. An eected proxy access director wi owe the same fiduciary duties as the other directors, though some may view proxy access directors as potentiay having an aegiance to the nominating sharehoder s interests. Depending on the circumstances, however, there may be a greater risk that the proxy access director wi be viewed by the rest of the board as an outsider, or even an adversary. Concerns about how proxy access may impact board dynamics incude: Board fragmentation. The board may become dominated by factions that are aigned with particuar segments of sharehoders, rather than the sharehoding body as a whoe. Board dysfunction. Distrust among directors may deveop, and ead to board dysfunction a negative impact on the quaity of board oversight. Concerns about how proxy access may impact a company in genera incude: A higher risk of ega chaenges. Disagreement among directors may ead to a greater risk of ega chaenges. These incude chaenges on issues that ack business judgment rue protection, subjecting transactions to heightened standards of review. Joint sharehoder action. Specia interest sharehoders coud coordinate to increase their representation on the board without the sharehoding body at arge understanding the potentia for joint action. Increased costs and distractions. Proxy access can ead to increased costs and distractions without deivering improvements in company or board performance. Potentia withdrawa of existing directors. Incumbent directors may choose to resign rather than serve aongside a particuar proxy access director. Proxy access wi inevitaby soon pay a arger roe in corporate governance as a resut of private ordering. Practica considerations. Notwithstanding the concerns noted above, proxy access wi inevitaby soon pay a arger roe in corporate governance as a resut of private ordering. Companies have severa aternatives when considering whether and when to adopt proxy access. Companies with a majority-supported sharehoder access proposa shoud consider proxy advisor poicies when impementing proxy access. Specificay, weigh the ikeihood of negative vote recommendations against directors if the board has faied to act on a majority-supported sharehoder proposa. We expect that some companies wi continue to foow a wait-and-see approach, particuary if they have not previousy received a sharehoder proxy access proposa. However, the trend towards adopting proxy access without receipt of a sharehoder proposa continues to acceerate. Some companies may choose to pre-emptivey adopt a proxy access byaw by board action. This can be done by requesting sharehoder approva of a byaw (or charter) amendment at the next annua meeting, in either case with or without a prior pubic THE CORPORATE BOARD MARCH/APRIL

7 Hoy Gregory commitment to adopt proxy access. This may hep position the company as an eary adopter of governance best practices, particuary if no sharehoder proposa has been received. Depending on the specific provisions, this may aso minimize the ikeihood of receiving a future sharehoder proxy access proposa. A company taking this approach shoud ensure that it can justify any proxy access provision with threshods that differ from the foowing terms which have become standard: three percent for three years for up to 20 percent of the board (at east two directors) with a group size imit of 20. Consider adopting proxy access on your own terms, rather than putting the proposa up for a vote. If faced with a sharehoder proxy access proposa, counse shoud be prepared to hep the board and management consider the fu range of options avaiabe given the company s circumstances. A proxy access proposa with a three percent for three years ownership threshod is ikey to receive majority sharehoder support at a company that has not previousy adopted proxy access. Therefore, consider adopting proxy access on your own terms, rather than putting the proposa up for a vote. Doing so may enabe a company to negotiate a withdrawa from the proponent. Aternativey, in ight of the SEC s grants of no-action reief on the basis of substantia impementation, a company wi ikey be abe to excude the sharehoder proposa so ong as the company s proxy access byaw tracks the proposa s three percent for three years ownership threshod. This may not be the case, though, if the proposa seeks a singe specific provision that the company has not impemented (such as a nominating group size of 40 or 50). Companies that have aready adopted proxy access on standard terms shoud bear in mind that sharehoders increasingy submit proposas seeking to modify the terms of their proxy access byaws. The abiity to have such proposas withdrawn or excuded is far ess certain for sharehoder proposas seeking adoption of proxy access. As companies are considering these aternatives, they shoud: Foow deveopments in this area and keep the nominating and corporate governance committee and the fu board generay apprised. Know the preferences of their sharehoder base (as shown in proxy voting poicies and other pubic statements, and voting history on proxy access proposas), and engage with sharehoders on proxy access. Keep abreast of proxy advisory firm poicies and guidance reating to proxy access. Stay apprised of the key parameters and other terms companies use when adopting proxy access. Be aware of the SEC staff s position on requests to excude sharehoder proxy access proposas and fix-it proposas seeking to amend proxy access byaws. Review the advance notice and director quaification provisions in their byaws, and consider whether such provisions may aign with a proxy access provision if impemented. In addition, companies that have cumuative voting in pace may wish to consider eiminating (or requiring suspension of) cumuative voting if a proxy access nominee is incuded in the company s proxy materias. Reprinted by THE CORPORATE BOARD 4440 Hagadorn Road Okemos, MI , (517) by Vanguard Pubications, Inc. 16 MARCH/APRIL 2017 THE CORPORATE BOARD