Shareholder Access: The View from the Top Richard H. Anderson Chief Executive Officer, Delta Air Lines, Inc. Richard K. Davis Chairman, President and Chief Executive Officer, U.S. Bancorp Richard B. Hirst Senior Vice President and General Counsel, Delta Air Lines, Inc. Lee R. Mitau Executive Vice President, General Counsel and Corporate Secretary, U.S. Bancorp Bryn R. Vaaler Dorsey & Whitney LLP
SEC proposes amendments to proxy rules requiring shareholder access SEC Release No. 34-60089 (June 10, 2009) (3-to-2 vote) 1. Mandatory access (Rule 14a-11) applicable to all public companies subject to proxy rules (including registered investment companies), but not FPIs Nominating shareholder or group must own (for one year) at least 1% of LAF, 3% of AF and 5% of NonAF No triggering events (as in 2003 proposal) May nominate greater of one director or 25% of board (must certify no intent to change control) First-come, first served if multiple nominating shareholders Disclosure requirements Timing requirements
SEC proposes amendments to proxy rules requiring shareholder access 2. Amendment to Rule 14a-8(i)(8) exclusion to permit proposals to amend governing documents regarding nomination procedures or disclosures relating to nominations, so long as no conflict with Rule 14a-11 Also codifies staff interpretations allowing exclusion of proposals disqualifying nominee, removing director, questioning competence or business judgment or character of nominee or director, nominating specific individual or otherwise affecting outcome of upcoming director election 3. Ancillary provisions aimed at facilitating nominations (e.g., Rule 144, Reg 13D-G & 16)
Opposition to mandatory approach Commissioner Paredes recommends amendments to Rule 14a-8(i)(8) only Let shareholders and issuers address access through private ordering Precedent: majority-election movement In April, David Hirschmann, President of U.S. Chamber of Commerce, wrote to SEC Chairman Shapiro threatening litigation regarding SEC s authority if mandatory approach taken
Proposed legislation giving SEC clearer authority to require access Senators Charles Schumer (D-NY) and Maria Cantwell (D-Wash) have introduced Shareholder Bill of Rights Act (S.1074): Annual say-on-pay advisory vote Confirm SEC s authority to require shareholder access Eliminate classified boards and require majority-election of directors Required separation of CEO and Chairman positions Required risk management committee of board Representative Gary Peters (D-Mich) has introduced Shareholder Empowerment Act of 2009 (H.R. 2861) Contains similar measures
SEC delaying final action It is my hope to finalize the rules early in the new year. I am committed to bringing final rules before the [Commissioners] regarding the ability of shareholders to nominate directors. SEC Chairman Mary Schapiro, October 2, 2009
Premise: Unresponsive boards "This crisis has led many to raise serious concerns about the accountability and responsiveness of some companies and boards of directors to the interests of shareholders. Paragraph 1, SEC Release No. 34-60089 (June 10, 2009) Congress finds that: Among the central causes of the financial and economic crises that the United states faces today has been a widespread failure of corporate governance; A key contributing factor to such failure was the lack of accountability of boards to their ultimate owners, the shareholders; Section 2, Shareholder Bill of Rights (S.1074)
Arguments in opposition to access Increased out-of-pocket costs to company Deter qualified independent directors from serving Distract and disrupt functioning of board Single-issue directors; Balkanized board Conflicts of interest No requirement that nominee be independent of nominating shareholder Nominating shareholder not bound by fiduciary duty to other shareholders Hijack election process
Responses by proponents of access Shareholder nominees would not be elected to board unless majority of shareholders vote for them Once elected, shareholder nominees owe fiduciary duties to all shareholders Without shareholder access, shareholder right to nominate directors is essentially meaningless in context of public company Effectiveness of Hybrid Boards (Proxy Governance, Inc. and IRRC Institute for Corporate Responsibility) (May 2009) 2005-2008 study of 120 companies with hybrid boards resulting from proxy contest shows above-market return for such companies, primarily attributable to jump in share price during contest
Short-termism Beltratti & Stulz, Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation (July 2009) Study of 98 banks in 2007-2008 economic crisis Banks with highest returns in 2006 had worst returns in crisis No evidence that banks with better CGQ score performed better during crisis. In fact, banks with more pro-shareholder boards performed worse during crisis Banks pushed by their boards to maximize shareholder wealth before crisis took risks that ended up being costly ex post because of outcomes not expected when risks were taken
Short-termism If corporate law or other public policy mechanisms grant investors additional rights, we believe it is vital that all institutional investors and related intermediaries be properly incentivized to focus on the interest of promoting sustainable, long-term growth. Aspen Institute, Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management (September 9, 2009)
Short-termism Shareholders, boards and executives... and those involved in legislative and regulatory reform initiatives should give special consideration to the long-term nature of corporate wealth-generating activity and strive to avoid undue short-term focus and pressures that may impede the capacity of the corporation for long-term investments and decisions necessary for sustainable wealth creation. Task Force of ABA Section of Business Law Corporate Governance Committee, Report on Delineation of Governance Roles & Responsibilities (August 1, 2009) [Gregory Report]
Short-termism A shareholder-based, agency model of the corporation sends management a simple instruction: in all circumstances, manage to maximize the market price of the stock. If the financial crisis teaches us anything, it is that managing to the market is the problem that needs to be addressed immediately. That calls for recalibration of compensation mechanisms, not legislative change to increase shareholder power. Bratton & Wachter, The Case Against Shareholder Empowerment, Institute for Law & Economics, University of Pennsylvania Law School (2009)
Private ordering CA v AFSCME Employee Pension Plan, 953 A.2d 227 (Del 2008) Demarcation-DGCL 141(a) & 109 Shareholder-adopted bylaw governing process and procedural matters relating to director election generally valid under DGCL, if there is explicit fiduciary out Covers proxy reimbursement; almost as clearly covers proxy access 2009 DGCL amendments add explicit authority for bylaws requiring proxy reimbursement (new 113) and proxy access (new 112) Non-exclusive list of possible conditions or limitations No explicit fiduciary out requirement as in CA v AFSCME Similar provisions in the works for Model Business Corporation Act
Federal versus state
Proxy reimbursement bylaws HealthSouth Corp. announced on October 26 that board had approved adoption of proxy reimbursement bylaw Reimburse expenses for successful dissident nominee Partially reimburse expenses for unsuccessful dissident nominee if gaining at least 40% of votes cast Charles Elson, Center for Corporate Governance, University of Delaware, promoted bylaw as chair of governance committee AFSCME proposals at Office Depot and Dell received 39% and 35% of votes cast in 2009 proxy season AFSCME plans six similar bylaw proposals in 2010
Specific problems with Rule 14a-11 Adoption too soon Lack of opt-out % ownership levels too low One-year holding period too short Nominee should be independent of nominating shareholder Nominee should meet subjective independence standards with respect to company Nominee should meet other qualification standards (e.g., financial literacy, industry knowledge) of company 25% of board is too high a limit First-come, first-served should not be priority rule Should be limits on nominator s ability to resubmit failed nominees Insufficient disclosures (e.g., derivatives) Timing of notice Should be able to vote for management nominees as group Blank card should count as vote for management nominees as group Should be no new proxy rule exemption for nominating group
NYSE Rule 452 amended Approved by SEC on July 1 (3-to-2 vote along party lines) For proxy voting at meetings held on or after January 1, 2010, brokers may not vote street name shares in uncontested director elections without customer voting instructions Effects Institutional voting and RiskMetrics to have greater impact as retail shares in street name not voted Vote no and withhold campaigns not offset by discretionary block Harder to elect directors if company has majority-voting May reduce use of notice-and-access e-proxy Reliance on other routine matter (i.e., auditor ratification) for quorum Watch for further SEC reforms regarding proxy plumbing NOBO-OBO rules Over and empty voting issues
Influence of proxy advisory firms We recommend that shareholders: Act on an informed basis with respect to their governancerelated rights in the corporation and form company-specific judgments regarding such matters while taking into account their own investment goals. Apply company-specific judgment when considering the use of voting rights and contested elections to change board composition. Consider the long-term strategy of the corporation as communicated by the board in determining whether to initiate or support shareholder proposals. Task Force of ABA Section of Business Law Corporate Governance Committee, Report on Delineation of Governance Roles & Responsibilities (August 1, 2009) [Gregory Report]
Questions?