Proxy Access Reaches the Tipping Point

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on a Sidley update by Ms. Gregory, John P. Kelsh, Thomas J. Kim, Rebecca Grapsas, and Claire H. Holland. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk, and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

In late December 2016, proxy access reached the tipping point in terms of adoption by large companies—just over 50% of S&P 500 companies have now adopted proxy access. Through the collective efforts of large institutional investors, including public and private pension funds, and other shareholder proponents, shareholders are increasingly gaining the power to nominate a portion of the board without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials), shareholders will have yet another tool to influence board decisions.

As a follow-up to our previous reports on proxy access, this update reflects recent developments on the topic, including:

  • the continuing and increasing pace of proxy access bylaw adoptions and the convergence toward standard key parameters (most commonly 3% for 3 years for up to 20% of the board (at least 2 directors) with a nominating group size limit of 20);
  • the first attempt to utilize proxy access at a public company in the U.S.—which was promptly withdrawn;
  • a new Appendix B that summarizes recent shareholder proposals seeking specified revisions to existing proxy access provisions (so-called “fix-it” proposals) and additional responses from the Staff of the SEC’s Division of Corporation Finance (SEC Staff) to requests to grant no-action relief to companies seeking to exclude such proposals; and
  • new questions relating to proxy access that ISS will consider for purposes of its newly-updated QualityScore corporate governance ratings tool.

We have also updated Appendix A which highlights, on a company-by-company basis, various terms of proxy access provisions adopted by 342 companies in 2015 and 2016 (inclusive of but not limited to S&P 500 companies). This data includes the terms adopted by 79 companies since we published our last Sidley Corporate Governance Report on proxy access on September 22, 2016.

Snapshot of Proxy Access Provisions Adopted Since January 1, 2015

(See Appendix A in the complete publication for these and additional provisions, presented on a company-by-company basis)

proxy-access-corporate-governance-report-december-2016[2]-2
Proxy access initiatives had limited levels of success prior to 2015. However, shareholder support started to increase in 2014 as proponents began to focus on the 3% for 3 years ownership requirement adopted by the SEC in its 2010 rulemaking efforts (as described in the complete publication).While proxy access has been the subject of shareholder proposals for several years, 2015 was a watershed year, following the private ordering pattern of majority voting in uncontested director elections. Many companies received proposals for their 2015 annual meetings requesting that the board amend the bylaws to allow large, long-standing shareholders (or groups of shareholders) to nominate directors and include those nominees in the company’s own proxy statement and related materials. The 2015 proxy season saw a significant increase in the number of shareholder proxy access proposals and shareholder support for such proposals (see box below), as well as an increased frequency of negotiation and adoption of proxy access via board action—including an accelerating trend towards board adoption without receipt of a shareholder proposal. This trend continued in 2016 and appears to be continuing into 2017.

Key Highlights of Shareholder Proxy Access Proposal Voting Results [1]
Shareholder Proxy Access Proposals 2014 2015 2016
Voted On 18 91 77
Passed 5 (28%) 55 (60%) 40 (52%)
 Average Support 34% 55% 51%

In 2015, with a major initiative from public pension funds led by New York City Comptroller Scott M. Stringer and with encouragement from major investors, such as TIAA, and the large institutional investor industry group, the Council of Institutional Investors (CII), proxy access took hold. Adding to the momentum was the SEC Staff’s refusal to grant no-action relief in situations where a company intends to put forward its own competing proposal. Proxy advisory firm policies supporting proxy access added to the momentum. Moreover, in August 2014, the CFA Institute published a report discussing the potential economic benefits of proxy access; this report has been cited by Comptroller Stringer, CalPERS and other proponents in their proposals. [2] In early 2016, a business law professor published a policy brief criticizing the CFA Institute report as being “deeply flawed” and urging that it not be used as support for mandatory proxy access. [3]

The broad-based shareholder campaign for proxy access on a company-by-company basis, and the momentum that continues to accelerate among targeted companies and other leading companies to respond by taking action to adopt proxy access (with or without first receiving a shareholder proposal), is reminiscent of the campaign several years ago for companies to replace plurality voting with majority voting in the uncontested election of directors. Both issues relate to the ability of shareholders to influence the composition of the board, and both campaigns show the power of concerted efforts at private ordering.

* * *

The complete publication is available for download here.

Endnotes:

1Data points in this report with respect to proxy access proposals are derived from SharkRepellent.net, last accessed on December 31, 2016. All voting results in this report are calculated on the basis of votes cast “for” the proposal divided by the sum of votes cast “for” and “against” that proposal (not taking into account abstentions). For purposes of this report, references to “shareholder proxy access proposals” mean proposals seeking a proxy access right rather than proposals seeking amendments to an existing proxy access provision.(go back)

2Proxy Access in the United States: Revisiting the Proposed SEC Rule, CFA Institute (Aug. 2014) (the “CFA Institute Report on Proxy Access”), available here. (go back)

3 R Street Shorts: Critiquing the CFA Institute’s Report on Proxy Access, Bernard S. Sharfman (Mar. 2016), available here
(go back)

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