Oregon State Treasury Nomination Neutrality

Philip Larrieu is a Stewardship Investment Officer at the Oregon State Treasury. This post was prepared for the Forum by Mr. Larrieu. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst and The Myth of the Shareholder Franchise (discussed on the Forum here) by Lucian A. Bebchuk.

The essence of corporate governance is rooted in addressing the agency problem, which encapsulates the inherent tension between the Board of Directors’ fiduciary duty to represent shareholder interests on one hand and the possible conflict this presents with personal interests. This fundamental conflict engenders significant apprehension among shareholders, stemming from the potential for the board or management to consider self-preservation over shareholder value and interests. To mitigate these concerns, shareholders have historically advocated for mechanisms to maintain their appropriate influence within the corporate governance framework. A central goal in many of these efforts has been protecting and enhancing shareholders’ ability to nominate director candidates.

A notable example in recent history is proxy access, allowing shareholders to directly nominate board members they view as more aligned with their interests, particularly in instances where the existing board’s effectiveness is questioned. Furthermore, shareholders value the ability to exercise discretion in their voting during contested board elections, aiming to cast votes for directors that best reflect their preferences, independent of the slate on which they are presented. These proactive concepts are designed to ensure that the governance structure remains responsive and accountable to shareholder interests, thereby fostering a more equitable and effective corporate governance environment.

The vacation of SEC Rule 14-a11 in 2011 marked a considerable regression in the quest for proxy access, essentially confining the effort to obtain the right to a case-by-case approach through private ordering. The capacity for shareholders to mix and match their votes among director candidates across slates has historically been possible, but heavily encumbered by the burdensome and potentially costly requirement to secure a legal proxy and physically attend the shareholders’ meeting. The recent promulgation of SEC Rule 14a-19, known as the “Universal Proxy” rule, has substantially encompassed both these shareholder rights. In short, the rule set minimum procedural requirements that the shareholder must notify the company with names of its nominees at least 60 days in advance, confirm they will solicit at least 67% of the shareholder base, and file a definitive proxy statement at least 25 days before the meeting. Despite these minimal requirements, companies have felt the need to adopt rules that extend beyond what is required by law claiming that the complicated issue and operational difficulties necessitate additional disclosure and deadlines. These stipulations, often encapsulated under the concept of advance notice provisions, have emerged as a contentious means by which some boards have erected unnecessary and burdensome hurdles frustrating the ability of shareholders to nominate candidates.

With nearly two decades of experience in corporate governance, including proxy voting, corporate engagement, and working alongside activist investors, I have observed numerous strategies to thwart shareholder interests. A system that should be “trust but verify” has become “suspect and assume”. In terms of Universal Proxy, procedural requirements, though essential for ensuring an orderly process, should not be exploited to hinder shareholder rights. This evolving landscape of corporate governance reflects the challenges and the cautious approach needed by shareholders to navigate through this governance and voting process.

The Oregon State Treasury has introduced the Nomination Neutrality Initiative to address these issues. Nomination Neutrality aims to ensure that the process for evaluating and electing board members is fair, impartial, democratic, and not burdened by unnecessary hurdles. It asserts that for a candidate nominated under the Universal Proxy rule, inclusion on the company proxy card is a procedural matter. This determines whether they meet the requirements of the rule and by-laws and it is not subject to the board’s view of their suitability. Additionally, it reinforces the integrity, spirit, and promise of Universal Proxy by establishing that the board should evaluate externally nominated candidates using the same standard (or at least no more stringent standards) than they use for internally generated candidates.

Nomination Neutrality serves as a guiding principle intended to steer corporate governance toward greater fairness and transparency. This approach is increasingly relevant as instances of burdensome advance notice provisions, restrictive practices, and overly invasive questionnaires become more common. Nomination Neutrality doesn’t aim to prevent the board from expressing views on nominees. The board’s insights on a candidate are valuable for shareholders in assessing how a nominee might fit as a director and influence governance matters such as independence and the structure of committees for example. By contrast, we believe it is an inappropriate impediment to good corporate governance when boards adopt restrictive and complex advance notice bylaws ostensibly to “evaluate” potential shareholder nominations that have a right to be on the proxy under the rule. The proper role of advance notice provisions is to establish eligibility while it should be up to shareholders in a fair election to determine suitability.

The Oregon State Treasury is championing Nomination Neutrality as a foundation for forward-thinking corporate governance, emphasizing its pivotal role in balancing the legitimate need for appropriate advance notice provisions while promoting shareholder democracy and fortifying the integrity of corporate governance. As the landscape of corporate governance continues to evolve, Nomination Neutrality emerges as an important guide toward best practices and shareholder alignment. It champions a culture of fairness, transparency, and accountability, promising a future where corporate governance not only respects shareholder rights but also enhances the overall health and performance of the corporation, benefiting all stakeholders.

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