Proxy Access Proposals Move Forward

On March 26, 2012, SEC staff issued their decision on a request by iRobot (IRBT) to exclude my proxy access proposal from their proxy. Although similar proposals had survived no-action requests last year, IRB management held out hopes that small changes made in the proposal might have made the proposal “vague” under rule 14a-8(1)(3) or “ordinary business” under rule 14a-8(1)(7). SEC staff could not concur and therefore advised IRBT not to omit my proposal based on those rules.

Shareowners of iRobot, a Massachusetts-based manufacturer of self-propelled machines engaged in tasks ranging from vacuuming to explosives demolition, will now have an opportunity to vote on the proposal — probably in May.  The default proxy access proposal seems to be 3% held for 3 years, effectively cutting out any significant role for retail investors, other than voting. My proposal is based on the premise that retail investors have both brains and motivation — and that final votes are made by all shareowners.

A million dollar investment in a company may mean very little to a huge fund group like Fidelity, with $3.9 trillion under management. Additionally, most funds are based on indexes, modified indexes or algorithms. They exist in a competitive environment driven by reducing costs. The more money a fund spends on monitoring corporations and trying to change corporate governance, the more they are likely to lose to their competitors.

Let’s say, for example, that Fidelity own 2% of a company, while Vanguard and BlackRock also own 2% each. That’s a total of only 6% and there are many more competitors out there but this will illustrate my point. If Fidelity introduces a proxy access proposal at a company and subsequently nominates a couple of board members who add so much value that share price rises by 5%, Fidelity would see its profits in that company rise by 5%, less any cost the incurred for their effort.  The profits of Vanguard and BlackRock, Fidelity’s competitors, would also rise by 5% but they don’t have to subtract any costs, since they didn’t incur any additional effort. The more such effort Fidelity makes, the more they will be at a disadvantage to their competitors.

Individual retail investors aren’t under the same constraints. My $10,000 or $100,000 investment in the same company may be a far larger part of my portfolio than a $1 million investment is to Fidelity. I’m not competing against anyone and I may be able to put in the same amount of effort as a fund at far less expense, especially if I can harness the volunteer labor and wisdom of other shareowners through sites like

As noted in a recent post on the Harvard corpogov blog, 2013 Proxy Season Preview: Key Shareholder Proposals, proposals are taking on additional importance:

Votes on shareholder proposals will carry weightier implications for issuers going forward due to changes this year to proxy advisor policies. Boards that fail to adequately address shareholder ballot measures that receive significant support may face a greater likelihood of “withhold” recommendations from Institutional Shareholder Services (ISS) and Glass Lewis. ISS’s withhold policy will take effect in 2014 for board inaction on shareholder resolutions that are approved by a majority of votes cast at a single annual meeting (i.e., 2013) rather than at multiple annual meetings. Glass Lewis will scrutinize board responses, and possibly oppose board members, beginning this year for shareholder proposals that received 25% or more support in 2012. Both proxy advisors expect issuers to disclose in their public filings how they have responded to the votes, including any outreach with top holders.

U.S. Proxy Exchange (USPX) members helped me create the basic language of my current proxy access proposal. We spent considerable effort ensuring it would pass no-action threats. Then we faced scrutiny from ISS and Glass Lewis. Unfortunately, central USPX efforts have been temporarily suspended but I have pushed forward with proxy access, having been deeply involved with the issue since well before my rulemaking petition to the SEC on the subject in August 2002.

As explained in Proxy Access: A New Version for 2013, I revised the proposal to address concerns expressed by proxy advisors that the minimum floor for ownership should be higher than $100,000. The new version sets a minimum floor of 1/2%. Thresholds are as follows:

The Company proxy statement, form of proxy, and voting instruction forms shall include, listed with the board’s nominees, alphabetically by last name, nominees of:

a. Any party of one or more shareowners that has collectively held, continuously for two years, at least one percent but less than five percent of the Company’s securities eligible to vote for the election of directors, and/or

b.  Any party of shareowners of whom 50 or more have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000 and collectively at least one half of one percent but less than five percent of the Company’s securities eligible to vote for the election of directors.

We will soon see if this new minimum floor of 1/2% will meet the concerns of proxy advisors. In addition to IRB, I filed similar resolutions at Goldman Sachs (GS) and Netflix (NFLX).  Neither company filed no-action requests. John Harrington filed a similar proposal at Bank of America (BAC). I don’t think his proposal was challenged either.

I’ll have more to say about these companies as proxy vote deadlines near.  I would be happy to work with others who wish to submit the proposal at additional companies. One bit of advice, especially to those thinking about introducing the proposal at very troubled companies, start early.

For lessons learned, see PNBC 1st to Allow USPX Model Proxy Access Proposal and Princeton National Bancorp (PNBC): How I Voted – Proxy Score 12.5. We were contacted very late in the game for PNBC (now Citizens First National Bank). I purchased a very small number of shares and sold them after the unsuccessful vote. Dave Monier led a valiant effort but the bank is now in default. I asked Monier what happens now. Here’s his response.

As far as I can tell, the bank directors get sued for their D&O insurance money. The FDIC collects the insurance. Everyone pats themselves on the back and the shareholders and taxpayers (TARP money was defaulted) foot the bill. No one in the management or administration is held accountable. And it is we, the shareholders, who dropped the ball. It is you who are providing the leadership and insight, Jim. I just followed your lead, but too late.

Dave is too modest. He poured a lot of effort in but didn’t get enough help from other shareowners. Even with the deck stacked against them, Monier and his allies were able to muster 32% of the vote. Not bad, considering that ISS recommended a vote against the proposal, based on the low threshold (for that earlier model proposal it was $200,000). Those of you who are curious to learn more might like to read the failed bank review by the Office of Inspector General. (See OIG-13-033, pdf. Click again on the next page to download the document.)

While actual shareowner proposals contain statements demonstrating the need for proxy access and company specific arguments, posted below is the common “resolved” language and point-by-point justification of the model proxy access proposal that I am currently using.

Draft Resolved Language

RESOLVED, Shareowners ask our board, to the fullest extent permitted by law, to amend our governing documents to allow shareowners to make board nominations as follows:

1. The Company proxy statement, form of proxy, and voting instruction forms shall include, listed with the board’s nominees, alphabetically by last name, nominees of:

a. Any party of one or more shareowners that has collectively held, continuously for two years, at least one percent but less than five percent of the Company’s securities eligible to vote for the election of directors, and/or

b.  Any party of shareowners of whom 50 or more have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000 and collectively at least one half of one percent but less than five percent of the Company’s securities eligible to vote for the election of directors.

2. For any board election, no shareowner may be a member of more than one such nominating party. Board members and officers of the Company may not be members of any such party.

3. Parties nominating under 1(a) may collectively, and parties nominating under 1(b) may collectively, make nominations numbering up to 24% of the company’s board of directors. If either group should exceed its 24% limit, opportunities to nominate shall be distributed among parties in that group as evenly as possible.

4. If necessary, preference among 1(a) nominators will be shown to those holding the greatest number of the Company’s shares for at least two years, and preference among 1(b) nominators will be shown to those with the greatest number who have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000.

5. Nominees may include in the proxy statement a 500 word supporting statement.

6. Each proxy statement or special meeting notice to elect board members shall include instructions for nominating under these provisions, fully explaining all legal requirements for nominators and nominees under federal law, state law and the company’s governing documents.

Explanation of Provisions
  • Direct access to the company proxy has long been considered the most direct and cost effective method of allowing shareowners a meaningful role in the nomination and election process. As Les Greenberg and I argued in our petition to the SEC for proxy access more than ten years ago, “entrenched managers and directors will only improve corporate governance when they can be held accountable, e.g., voted out of office and replaced with directors chosen by shareholders.”
  • I set the bar for nominating directors under “option a” higher than that used by Norges Bank this year by requiring shares be held continuously for two years, rather than just one. Norges received substantial support but the higher holding period may ease concerns about use of the proposal by hedge funds or special interest groups.
  • For “option b” I chose the same threshold level as for submitting proposals under SEC Rule 14a-8, since this time-honored standard is surrounded by court decisions, SEC guidance, and no-action letters. However, “option b” requires 50 shareowners and with this revision the group must now collectively hold at least one half of one percent but less than five percent of the Company’s securities eligible to vote for the election of directors, a substantial amount. ISS said the previous proposal “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, which has turned out to be much more robust than Britannica in many respects.  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.
  • Provision two is designed to ensure no single entity or group of shareowners can nominate anything close to what might be a controlling number of directors by restricting them to 24%. The provision also ensures the company does not short-circuit the access process through side agreements with nominees or nominators.
  • The aim of provision three is to allow a substantial change in board composition without triggering a change-in-control, since the total number of shareowner nominees is limited to 48%. Previous versions of the USPX model restricted any one party to a single nominee to encourage board diversity. This revision allows two directors to be nominated by a single party, which might increase the chances of a party undertaking the work involved to make such nominations and elect their chosen nominees. The chances of winning a change-in-control fight through proxy access would be minimal, since other shareowners usually expect to be paid a change-in-control premium by a controlling acquirer. Obtaining approval from ISS, Glass-Lewis and other proxy advisors is considerably harder for a change-in-control slate than for a short slate. Change-in-control could also trigger provisions in debt instruments, employee agreements, severance agreements and other contracts resulting in costly disruptions.
  • Limiting shareowners to two nominees per option will better ensure an influx of new ideas and perspectives, as well as greater independence. Boards will more likely be presented with not only a “plan B,” but also a “plan C,” in exceptional circumstances. It also addresses concerns that “special interests” will take over boards under proxy access. These concerns have been overblown, since directors have a fiduciary duty to the whole company and must win by a majority of all shares voted. However, it is a way of reassuring groups like the US Chamber of Commerce and Business Roundtable that no shareowner gains what these special interest groups would consider “undue” influence through the proxy access process.
  • The language of provision four provides some minimal guidance to boards on how to fairly prioritize competing submissions. For “option a” groups, priority is given to groups with the greatest number of shares, since that option emphasizes substantive long-term owners.  For “option b” groups, those with the largest number of qualifying shareowners are given preference, since that option is designed to encourage the value of participation and input by all owners.
  • Provision five is to ensure a somewhat more level playing field with regard to disclosures in the proxy and their accessibility by shareowners.
  • Provision six ensures everyone knows the rules. Since the company would be listing shareowner nominees in their proxy, they will need to ensure they meet all legal requirements such as SEC Rule 14a-4(d)(4), which prohibits a nominee from being listed unless they have consented to being named in the proxy statement and to serve if elected. Otherwise they may face liabilities and shareowners would be voting for ineligible candidates. Legal standards are generally minimal, like not having declared personal bankruptcy or not having been found legally insane, so the cost of such an exercise should be minimal. Yes, we can expect some boards to game the system with unfair standards. Hopefully, ISS, Glass-Lewis and others will call them on it and recommend voting against directors that play such games.


Proxy statements are legally company documents, not management documents. As such, access to the proxy for the purpose of listing director nominees should be available to all shareowners, not just the board’s nominating committee.

In 1977 the SEC held a number of hearings to address corporate scandals. At that time, the Business Roundtable (BRT) recommended amendments to Rule 14a-8 that would allow access proposals, noting such amendments

… would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.

Soon, we saw several proposals. In 1980 Unicare Services included a proposal to allow any three shareowners to nominate and place candidates on the proxy. Shareowners at Mobil proposed a “reasonable number,” while those at Union Oil proposed a threshold of “500 or more shareholders” to place nominees on corporate proxies.

One company argued that placing a minimum threshold on access would discriminate “in favor of large stockholders and to the detriment of small stockholders,” violating equal treatment principles. CalPERS participated in the movement, submitting a proposal in 1988 but withdrawing it when Texaco agreed to include their nominee.

These early attempts to win proxy access through shareowner resolutions met with the same fate as most resolutions in those days. As of 1986, only two proposals of the thousands submitted had ever been approved—but the tides of change were turning. A 1987 proposal by Lewis Gilbert to allow shareowners to ratify the choice of auditors won a majority vote at Chock Full of O’Nuts Corporation and in 1988 Richard Foley’s proposal to redeem a poison pill won a majority vote at the Santa Fe Southern Pacific Corporation.

In 1990, without public discussion or a rule change, 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.

Tensions over this giant leap backward rose until AFSCME v AIG (2006). That case involved a 2004 bylaw proposal submitted by the American Federation of State, County & Municipal Employees (AFSCME) to the American International Group (AIG) requiring that specified nominees be included in the proxy.  AIG excluded the proposal after receiving a no-action letter from the SEC and AFSCME filed suit.

The court ruled the prohibition on shareowner elections contained in Rule 14a-8 applied only to proposals “used to oppose solicitations dealing with an identified board seat in an upcoming election” (also known as contested elections).

The SEC subsequently adopted a rule banning proposals aimed at prospective elections. But in 2010, the commission adopted both a new Rule 14a-11, specifying a minimum proxy access requirement for all public corporations, and amendments to Rule 14a-8(i)(8) to allow shareowners to submit proposals for more robust proxy access.

The US Court of Appeals for the DC Circuit found the new Rule 14a-11 “arbitrary and capricious.” This means our only current option for achieving proxy access is through shareowner proposals filed on a company-by-company basis under the amended Rule 14a-8.

For additional background, see The Case for Proxy Access.


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