ISS Should Reconsider Their Analysis of H&R Block Proxy Access Proposal

The influential proxy analyst, Institutional Shareholder Services (ISS), recommends voting against Kenneth Steiner’s proxy access proposal at H&R Block (HRB) on 9/13 because it “could undermine the efforts of larger, long-term shareholders whose interests might better reflect those of the broader shareholder base.” Their logic appears flawed. Larger, longer-term shareowners would gain rights, not lose them, under the proposal. CBIS changed their vote after reading this post and talking to me (see Will your fund do the same?ISS appears to hold up the SEC’s rejected proxy access proposal as the standard by which all such proposals should be measured. However, that proposal would have placed unreasonable barriers on access. The SEC itself acknowledged that very few proposals would have moved forward given the required threshold of 3% held for three years. Additionally, at the beginning of the 2012 season Latham & Watkins speculated that shareowners would propose lower thresholds and that one strategy companies could use to knock such proposals off their proxies would be putting up their own proposals using the 3%/3 yr. threshold as a backstop. ISS should not settle for the fallback position.

Kenneth Steiner’s proxy access proposal (HRB-ProxyAccessProposal, page 73) at HRB, which I and others at the United States Proxy Exchange (USPX) helped to design, had the following primary features:

  • Precatory to afford flexibility.
  • One nominee (12% of board) per nominating party.
  • Nominating parties can’t coordinate nominations.
  • Two alternatives to satisfy ownership requirement:
    • Option A: Party holding 1% of shares for 2 years, or
    • Option B: Party of 50 shareowners, each holding $2,000 for 1 year

Previous proxy access proposals using the USPX achieved a positive vote up to 32% at Princeton National Bancorp (PNBC). However, several funds and proxy advisors objected to the fact that our original proposals had no cap on the number of directors that could be nominated by shareowners, “which is an essential safeguard of any proxy access right,” according to proxy advisor ISS.

The proposal at HRB addresses this issue by setting an overall cap of 2 nominations (24% of board) each for 1% holder groups and 50 shareowner groups. Therefore, no more than 48% of the board could be replaced by this proposal. In the case of HRB, which has 10 board members, shareowners using the proposal could jointly place no more than 4 nominees on the board. There can be no “change of control.” See previous discussions on the Harvard Law corpgov site. Download a PowerPoint presentation and/or read the paper (pdf).

In their analysis, ISS notes the market cap for HRB is $4.6B and 1% equals $4.6M, “which represents a sizeable stake in the company.” They don’t seem to have a problem with Option A but they object to Option B because the low threshold

could enable holders of relatively few shares to wield considerable influence in the nomination process. ISS believes this threshold risks complicating elections and could undermine the efforts of larger, long-term shareholders whose interests might better reflect those of the broader shareholder base.

So, ISS appears to be okay with the 1% threshold (Option A), which could result in 2 nominations by shareowners holding a total of $9.2M. Perhaps that is because this threshold is not too different from that proposed by the SEC, which would have allowed a group of 3% holders at HRB with $13.8M of holdings to nominate up to 25% of the board, or 2 directors.

Instead, ISS objects that the groups of 50 shareowners “could undermine the efforts of larger, long-term shareholders whose interests might better reflect those of the broader shareholder base.” However, without Steiner’s proposal those larger, long-term shareholder have no right to proxy access. Additionally, the proposal does allow those larger, long-term shareowners to nominate 2 members of the board — the same number ISS appears eager to endorse.  The smaller shareowners provided for in Option B can’t undermine larger, long-term shareholders, since they would file under Option A.

We think it is important that retail shareowners be encouraged to think and act like owners, instead of day traders and speculators. Their participation should not be excluded from the nominating process. Anyone bothering to organize a group of 50 shareowners would likely hold a substantially larger amount than $2,000 of stock to make the effort worth their time and investment. We set the threshold at that level because it is one familiar to shareowners filing proposals and to corporate management receiving proposals. Such groups wouldn’t be undermining the efforts of lager shareowners, they would simply add a fresh perspective and additional knowledge.

Another objection of ISS is that Option B “poses a risk that a shareholder group’s nominee may not bring the type of experience and qualifications that a company of this size and complexity may require.” One might compare Option A filers to the “experts” who write the Encyclopedia Britannica and Option B filers to “amateurs” who write Wikipedia.  There is room for both. Keep in mind, placing a nominee on the proxy is not the same as electing a nominee. Nominees still need to be approved a majority of share votes. Option B takes nothing away from the process (other than a very small amount of company expense for including a 500 word statement, or possibly two such statements, in the proxy).

ISS also notes HRB has annual elections and independent chair but admits, it does not have a plurality carve-out in the case of contested elections and a supermajority required for mergers and business combinations.  True, HRB is not a corporate governance basket case. We actually think that favors proxy access, since a basket case would lose substantial value before the two year process of proxy access can be completed.  There are many specific reasons for targeting HRB, as follows:

  • Underperformed competitor Intuit (INTU) over last 5 years by approximately 120%.
  • Rated “high concern” on executive pay by GMIRatings.
  • Short-term focus of incentive compensation.
  • Combined with tax gross-ups, executive pay practices not aligned with shareholder interest.
  • Unanimous written consent required without a meeting.
  • Special meetings only with 50%+.
  • Supermajority vote requirement (66.67%) to approve mergers.
  • 4 directors held no stock (alignment).
  • 80% shares required to amend bylaws.

We hope ISS will reconsider their position on Kenneth Steiner’s proxy access proposal at H&R Block. The proposal does nothing to undermine the rights of larger, long-term shareowners — the typical customers of ISS. Those shareowners currently have no right of proxy access at H&R Block and won’t if Steiner’s proposal is rejected. If the proposal is voted in and the board fully implements its provisions, large institutional HRB shareowners will have rights similar to those where ISS has endorsed proxy access. In addition, medium and small institutional shareowners, as well as retail shareowners, will also be encouraged to think like owners and participate in the important process of nominating directors.

See H&R Block: I Voted for Proxy Access for how I voted on other items at HRB.

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