Face Off: "Will of the Voters" – Who Decides?

Prof. Lawrence A. Hamermesh

James McRitchie

I’m glad to see Lawrence Hamermesh and I are moving past the “bullet” stage in our discussions on proxy access towards a real dialogue. Although he is no longer calling on boards to ignore the voting results of precatory proposals on proxy access, Professor Hamermesh still appears too ready to dismiss the legitimacy of such votes. Are directors the only people who can legitimately determine the “will of the voters”? His most recent post follows:

Reaction to Jim McRitchie’s comments on precatory proxy access proposals

Last week Jim McRitchie provided a thoughtful response to my post questioning the utility of precatory proxy access proposals.  As you’ll see from his response, he draws on analogies to political democracy, and why “let the people decide” doesn’t mean “let the people decide everything:”

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.

With regard to how “pass[ing] along advice and concerns” should work, McRitchie says:

Directors have much to add to the debate.  Let’s hear from them.  I’m not opposed to submitting binding bylaws but what’s wrong with asking first?  If our proposals are successfully endorsed by shareholders 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 voters.

I certainly support the idea of constructive engagement before shots are fired, and McRitchie’s commentary certainly persuades me that the precatory aspect of United States Proxy Exchange’s strategy is a reasonable approach.  The new Latham & Watkins model proxy access bylaw and commentary remind me how devilishly complex the details of a proxy access bylaw are (not to mention related matters of advance notice bylaws and qualification bylaws).  So I agree with McRitchie that the precatory approach is a useful way “avoid getting into the weeds on company specific legal issues better left to corporate attorneys.”

There’s still a residual problem, however, where I suspect that McRitchie and I continue to disagree, namely on how a board of directors should evaluate the results of a vote on a precatory proxy access proposal.   McRitchie is evidently ready to call on shareholders to vote out directors who “ignore the will of the voters,” but how does one discern what that “will” is, when a vote is on general principles and avoids getting “into the weeds” where critical issues lie?  If “[d]irectors have much to add to the debate,” as McRitchie correctly argues, isn’t it implicit that they need to exercise judgment and not accede to what they believe are misguided precatory proposals, especially where there’s no cost to shareholders for voting for a proposal that isn’t adequately thought through?

My Response

Of course directors need to exercise judgement on proxy access proposals, just as they would on other complex precatory proposals like “say on pay.” The will of the voters or the will of the people is certainly subject to interpretation and precatory proposals leave implementation to boards.

However, boards should be concerned with the perception of their legitimacy. If for example, the proxy access proposal I filed at Goldman Sachs (download pdf: GS-2012PA) gets a majority vote, I think shareowners would reasonably feel betrayed if the board then adopted the Latham & Watkins model bylaws. Real shareowners have real desires and real values. When boards ignore them, that failure is real too.

Elections are won by rules, but legitimacy is produced through a more informal popular acceptance. There is no final solution in democracy but just as we have let our physical infrastructure decay in America, we have even more so neglected the infrastructure of democracy. Nowhere is this more true than in corporate elections and nothing is more fundamental than who nominates directors.

If directors fail to pay reasonable attention to votes on shareowner proposals, they may face consequences. For example, ISS proxy voting guidelines include a category for “board responsiveness.” Factors that may lead ISS to recommend a vote withhold/against the entire board of directors (except new nominees, who should be considered CASE-BY-CASE), include:

  • The board failed to act on a shareholder proposal that received approval by a majority of the shares outstanding the previous year; or
  • The board failed to act on a shareholder proposal that received approval of the majority of shares cast in the last year and one of the two previous years.

In addition to possibly provoking the wrath of ISS, one can also incur bad press from the blogging community, such as this post on Seeking Alpha, Is Netflix Ignoring The Will Of Its Shareholders?

Effectively, Netflix management and its board is saying no matter what our shareholders have to say about the matter, our position remains unchanged. The vote was clearly little more than a formality.

Couple this rebuke of its shareholders’ will with recent events, particularly Netflix’s aggressive use of stock options as compensation and its stock buyback program followed by $400M financing scheme, and it’s clear I was onto an important theme. As the picture continued to worsen for Netflix, this and all of the other drama suggests a Board of Directors that does not do a whole heck of a lot, other than sign off on this or that for Reed Hastings. That has proven to be a recipe for disaster for many Netflix investors who did not have the foresight to jump ship when the jumping was good.

While Rocco Pendola may think it is time to short Netflix, other owners will see it as a time to take additional action in their role as owners and legitimate participants in governing the corporation.

Back to the specific topic of proxy access proposals, Norges Bank has now filed six proxy access proposals and they all seek to directly amend the bylaws. They’re firing with real bullets, to paraphrase Hamermesh. See Proxy Access Proposed at Six More Companies.

One problem with those proposals is that almost the full 500 words are needed simply to present the bylaw amendments. With no room left to argue the company specifics, Norges will ask that shareownwers visit a web page containing such arguments. Will shareowners go there? Is the approach the $550 billion bank better than that of USPX?

Yesterday, I attended a webinar put on by ISS where Pat McGurn, Executive Vice President & Special Counsel, said that like majority vote requirements they expect many variations of proxy access proposals before shareowners gel around specific acceptable provisions. “Let a thousand flowers bloom,” is how he sees it evolving.  Let’s hope a wide variety of proposals are submitted and approved so that future proposals are based on even better knowledge than we have today.

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