Proxy Access and Leverage

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

Thanks to for catching this announcement from NYC Comptroller Scott Stringer and the NYC Retirement Systems, which reported that, since the inception of the Comptroller’s “Boardroom Accountability Project,” there has been a 10,000% increase in the number of companies with proxy access. Stringer began the Project in 2014 with proxy access proposals submitted to 75 companies. At the time, Stringer viewed the campaign as having been “enormously successful: two-thirds of the proposals that went to a vote received majority support and 37 of the companies have agreed to enact viable bylaws to date.” (See this PubCo post and this PubCo post.)  So effective was the proxy access campaign that Stringer leveraged its  success and the “powerful tool” it represented to “demand change” through the Boardroom Accountability Project 2.0, focused on corporate board diversity, independence and climate expertise.  Now, five years later, the number of companies with “meaningful” proxy access has climbed from just six in 2014 to over 600—including over 71% of the S&P 500—all as a consequence, Stringer contends, of the Boardroom Accountability Project. But, you say, proxy access has hardly ever been used (see this PubCo post), so what difference it make?  In Stringer’s view, it makes a big difference.

In fact, Stringer views the proxy access campaign as “groundbreaking,” having ignited a radical transformation of the corporate landscape. How can that be? In his view, the threat implicit in proxy access bylaws serves to create substantial leverage. According to Stringer, “[c]orporations have been in the business of raising barriers, shutting blinds, and avoiding accountability for far too long. Proxy access gives us the leverage to flip that script, and break open the insular systems which have enabled excessive CEO pay, dismal levels of boardroom diversity, and inaction on climate change. Most importantly, stronger board oversight leads to better long-term performance, and helps protect the retirement security of hundreds of thousands of hardworking New Yorkers.”

You might recall that, in 2010, after almost a decade of failed efforts, the SEC adopted “proxy access,” changes to the federal proxy rules to allow eligible shareholders to include their nominees in companies’ proxy materials.  The amendments were designed to address the common complaint that procedures currently available to shareholders for director nominations, such as waging a costly proxy contest, did not afford a practical mechanism for shareholders to participate effectively in the nomination process.  The prevalence of plurality voting also limited the effectiveness of “vote no” campaigns.  Failing these efforts, it was argued, shareholders dissatisfied with board performance may be left with selling their shares as the only option.  However, when challenged in the courts, the SEC’s proxy access rules went down in flames, as the court concluded that the SEC had acted “arbitrarily and capriciously” in issuing the rule when it failed to provide an adequate cost/ benefit analysis.

Instead of reproposing new proxy-access rules, the SEC implemented changes to Rule 14a-8 to allow shareholder proposals for proxy access to go forward, in effect permitting each company and its shareholders to make the decision on proxy access—and the applicable standards for proxy access—on an individual basis (so-called “private ordering”). But private ordering for proxy access did not gather much steam; only six companies had adopted proxy access—until Stringer’s initiative that is. Then, in 2014, Stringer, acting on behalf of several New York City pension funds, submitted proxy access proposals to 75 companies, followed by a raft of proxy access proposals in subsequent years. The form of proposal was similar to the SEC’s rules that were vacated in court, requiring an eligibility threshold of 3% ownership held continuously for three years, with shareholders having the right to nominate up to 25% of the Board.

Just in the last year, the Comptroller’s office reports, over 35 targeted companies have adopted proxy access, which, the office believes, boosted  corporate accountability, giving the pension funds “a stronger voice in…long-term oversight.” In fact, the Comptroller’s office attributes to proxy access substantial progress on a variety of issues, including “diversity of board members, the company’s approach to climate change, and treatment of employees. The increased board responsiveness provided by proxy access has pushed some 62 companies to nominate 77 new board directors who identify as a woman or person of color—including 59 women, 19 African Americans, five Hispanic Americans, two Asian Americans, and one Middle Eastern American. Moreover, at least 24 companies have publicly committed to include women and people of color in the candidate pool for every board search going forward, also known as the ‘Rooney Rule.’”

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