Proxy Access: Private Ordering with High Threshold Minimums

Since filing the initial 21st century petition for proxy access in 2002 with Les Greenberg, I have written extensively on the need. With the 3-2 vote by SEC commissioners, as most expected, it will soon be a reality… in time for at least a portion of the 2011 proxy season. What we proposed back in 2002 was essentially what the Chamber, BRT and other rear-guard organizations have been calling “private ordering.” Let each company decide. Of course, ours was based on what shareowners would propose and pass, not simply on what an entrenched board and management might install without a shareowner vote.

As reported elsewhere, Proxy Access Is In (Lucian Bebchuk and Scott Hirst, Harvard Law School, 8/25/10).

Under the rule, a shareholder (or shareholder group) would need to hold more than 3% of the company’s shares for more than 3 years to be eligible to use the rule to place director candidates on the corporate ballot. These eligibility requirements, together with the rule’s procedural requirements, will place substantial limits on its use. (To illustrate, according to data put together by CalPERS, the 10 largest public pension funds together hold less than 2.5 percent at Bank of America, Microsoft, I.B.M. and Exxon Mobil.)

It should also be noted, the “First to File” rule was replaced with a “Size Matters” rule. As Bebchuk and Hirst indicate, “To the extent that these limits prove excessive, we hope that the SEC will reconsider the thresholds set today.” The limits are excessive but the SEC also voted to amend Rule 14a-8 to enable shareowners to include, on corporate proxies, proposals related to election and nomination procedures, like we could for many years until the SEC reinterpreted that rule, without a rulemaking or even notice, to prohibit such proposals. AFSCME v AIG led to a brief window of opportunity for shareowners when the court overturned that illegal action by the SEC. However, under Cox, the SEC they then changed the rule to prohibit private ordering by shareowners, even suggestions for private ordering, which is essentially what nonbinding resolutions do.

It is very important to have a base threshold. The new Rule 14a-11 puts entrenched managers and boards on notice that they are slightly more likely to be held accountable. Shareowners may be able to nominate and elect up to 25% of the board. While that doesn’t give them any real power to move the corporation in a different direction without the consent of the already entrenched, at least they’ll have a front row seat and will be able to make arguments, if they can get a second. Existing board members might just begin to get the feeling they are accountable to shareowners… not just fellow board members and the CEO.

One of the most important clarifications regarding the revised Rule 14a-8 is contained in footnote 674 of the release, concerning what is meant by a proposal under 14a-8 that may “conflict” with 14a-11.

Under the Proposal, Rule 14a-8(i)(8) would allow shareholders to propose additional means, other than Rule 14a-11, for inclusion of shareholder nominees in company proxy materials. Therefore, under the Proposal, a shareholder proposal that sought to provide an additional means for including shareholder nominees in the company’s proxy materials pursuant to the company’s governing documents would not be deemed to conflict with Rule 14a-11 simply because it would establish different eligibility thresholds or require more extensive disclosures about a nominee or nominating shareholder than would be required under Rule 14a-11. A shareholder proposal would conflict with proposed Rule 14a-11, however, to the extent that the proposal would purport to prevent a shareholder or shareholder group that met the requirements of proposed Rule 14a-11 from having their nominee for director included in the company’s proxy materials.

What the SEC has done is establish “private ordering” with a very high floor. Within a few years, we can expect to see 100s of proposals calling for more reasonable thresholds and holding periods, as well as allowing a greater proportion of shareowner nominees. Corporate governance activists have been given a new focus. Just as we have been struggling to obtain majority vote standards, we will now be fighting for more reasonable nomination requirements. To the John Cheveddens and Ken Steiners of the world I say, “Time to gear up; may a thousand access proposals bloom.” Start with small companies where the SEC has delayed implementation of Rule 14a-11 and where, on average, corporate governance reforms are furthest behind. Have an access proposal ready for next year? Please share it.

See also Pesky shareholder activists gain influence: After years of battling futilely to rein in corporate boards, ‘gadflies’ are winning votes, LATimes, 8/23/10; Speech by SEC Chairman: Opening Statement at the SEC Open Meeting; SEC Approves Final Proxy Access Rule, RMG, Ted Allen, 8/25/10; In 3-2 Vote, SEC Finally Adopts Proxy Access Rule, Compliance Week, 8/25/10; Social Investment Forum Welcomes Federal Proxy Access Rule, 8/25/10; press release, Shareowners.org, 8/25/10; ProfessorBainbridge, 8/25/10; The Conference Board blog, 8/25/10; S.E.C. Makes Access to Proxy Ballots Easier, NYTimes, 8/25/10; Jim Hamilton’s World of Securities Regulation, 8/25/10; Activist Shareholders Get a Louder Voice, Sarah Morgan, SmartMoney, 8/25/10; The SEC Adopts Proxy Access, theCorporateCounsel.net/Blog, 8/26/10; The Promise of Access, theRacetotheBottom, 8/5/10. And here’s a paper of mine published by the Corporate Board in July 2003, Toward Democratic Board Elections; Proxy Access & Shareholder Citizenship: The Quest for Inclusion, Marcy Murninghan, 8/26/10.