Why Precatory Proxy Access Proposals?

The respected scholar, Lawrence Hamermesh, writes about the model proxy access proposal published by United States Proxy Exchange (USPX) and asks why an organization whose motto (”Populus Constituit,” the people decide) is so reluctant to file mandatory bylaw proposals, instead of precatory proposals. (Precatory proxy access proposals, The Institute of Delaware corporate and Business Law, 11/15/2011)

Prof. Lawrence A. Hamermesh

Hamermesh speculates USPX members chose the precatory route because “a mandatory bylaw proposal won’t get nearly as high a vote as a diluted, precatory proposal.” He then goes on to argue that boards of directors should “not to take even a majority vote on a precatory proposal seriously,” since “if real bullets had been at stake the stockholders themselves wouldn’t have voted for it.”

He concludes, “Why the reluctance to actually find out how stockholders would vote on whether to use the powers that they clearly have under state law?”

This was a group decision. Some members wanted binding bylaws.  Others wanted precatory proposals. I was among the later camp. While the group made no formal declaration of the rationale used for arriving at its approach, I can at least speak to my own reasons.

Proxy access has been around as an issue for eighty years. For many years shareowners filed a range of proposals on the subject asking companies to nominate more than one person for each position, to allow any three shareowners to nominate and place candidates on the proxy, to allow 500 or more shareowners to place nominees on corporate proxies and in several other forms.

One company argued that placing a minimum threshold on access would discriminate “in favor of large stockholders and to the detriment of small stockholders.” These and other access proposals met the same fate of all resolutions but in 1987 and 1988 two proxy proposals actually won a majority.

In 1990, without public discussion, the SEC began issuing a series of no-action letters on access proposals. The SEC’s about-face may have been prompted by fear that “private ordering,” through shareowner proposals, was about to begin in earnest. AFSCME eventually took the SEC to court and got their underground change in regulations overturned in 2006. Three access proposals were submitted that season but the SEC then passed a rule banning proxy access proposals, which remained in effect until this year.

Therefore, proxy access proposals are in a sense new again. Traditionally, shareowners have submitted new proposals as precatory to measure support and to avoid getting into the weeds on company specific legal issues better left to corporate attorneys.  In fact, the vast majority of shareowner proposals are advisory. Generally, it is only after being ignored that shareowners file binding resolutions.

Hamermesh argues using a precatory proposal goes against the “people decide” principles of USPX.

I don’t see it that way at all. I joined USPX because members believe in and work for more democratic corporate governance. Generally, the “people decide” in democracies by delegating authority to their elected representatives. As voters, we get involved directly in nominating and electing candidates but generally then hope that our representatives will work in our interest. We pass along advice and concerns. If our elected officials fail to represent us, we the people again act more directly through initiatives, recall, etc.

I don’t know how Professor Hamermesh acts in his daily life but I suspect, like most of us, he generally asks for what he wants before making demands. That is the polite and more collaborative approach. For example, if you have a problem with your neighbor, you talk over the issue. You don’t immediately file a lawsuit.

Yet, Hamermesh uses the language of instant escalation, advocating the use of “real bullets” at the starting point.

Not me. I’ve written enough laws and regulations over my career to respect the process of public notice and debate… and the importance of everyone being heard before decisions are made.  Directors have much to add to the debate. Let’s hear from them.

I’m not opposed to submitting binding bylaw proposals but what’s wrong with asking first? If our proposals are successfully endorsed by shareowners but ignored by directors then I would be ready to escalate, not only by submitting binding bylaw proposals but also by calling on shareowners to vote against directors who ignore the will of the voter.

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