Proxy Access at Bank of America May 8th

Re opposition to John Harrington’s proxy access proposal at Bank of America ($BAC), based on language that I helped develop.  For background, see Bank of America (BAC) Faces Proxy Access on May 8th. I hope opponents will reconsider. From one analysis recommending a vote against:

While this amount ($660 million) is significant in absolute terms, shareholders may have divergent views on whether it constitutes a meaningful ownership interest for the purpose of nominating board candidates. Historical voting results show little investor support for proposed access rights with low ownership thresholds, particularly when such thresholds fall well below the 3 percent threshold adopted by the SEC in its now-vacated proxy access rule.  (my emphasis and addition of the $660M figure)  

The 3% ownership level adopted by the SEC ensured only the largest of institutional shareowners could participate in nominating. Of course, this was a political decision, made in part to keep the cost of printing and distributing the proxy materials down for the cost/benefit analysis. The SEC still lost on the cost issue when the Chamber and Roundtable argued companies would have a fiduciary duty to defend their candidates, even when challengers were limited to 25% of the seats, because their nominees would be more qualified than proxy access candidates. The Court bought the argument, agreeing the board had a duty to resist proxy access initiatives and characterizing such fiduciary obligations as substantive, when, in fact, the duty of care is process driven.  As long as the process is proper, the board can decide to resist or not resist an access challenge. Unfortunately, there was no political will to appeal the decision to the Supreme Court… especially given its makeup.

The idea that “historically” there has been “little investor support” for thresholds below the 3 percent level is based on very limited history. As AFSCME v AIG demonstrated, investors had submitted a wide variety of proxy access proposals before the SEC reversed course. These early attempts to win proxy access through a variety of shareowner resolutions met with the same fate as all resolutions; they failed.

The tide turned when 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. When shareowners started winning proposals, the SEC reinterpreted their rules and banned proposals seeking proxy access, without going through the legally required rulemaking process.

“Historically,” once given the right to file proxy access proposals again, most large institutional investors decided it was safer to go with 3% held for 3 years in order to get a track record of solid victories, which they hoped would encourage the SEC to again take up a universal proxy access rule. Latham & Watkins expected lower threshold proposals and advised its clients 3/3 could be a fallback.

Unfortunately, it took a year for members of the United States Proxy Exchange to come up with lower threshold language that was airtight with the SEC. There really has only been one year of proxy access “history” and while we didn’t win at any companies with our lower thresholds a small group got 32% using our prior version at Princeton National Bank. To say that “historically” there has been little support for lower thresholds is misleading because history has been limited to a few short months.

“Historically,” proxy proposals haven’t come from large institutional investors. Take a look at the top 10 filers for 2012. Individuals file twice as many proposals as labor or pension funds. Unfortunately, the move to index type funds has unintended consequences. If Vanguard, Fidelity and BlackRock each own 1% of a company, any changes Vanguard makes at that company will benefit all three funds (their competition) equally but Vanguard will incur all the expense. Therefore, most funds are rationally passive.  For more on why we can’t depend on large institutional investors to file proxy access proposals, see arguments recently made by Ronald J. Gilson and Jeffrey N. Gordon, as well as those of Robert AG Monks 

For “option b” we 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” also 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.

Where shareowners hold 5% or more, we expect them to go through the normal solicitation process. One of the proxy advisors 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 (1% held for 2 years) 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 nominees on the proxy is not the same as electing nominees. They still need to be approved a majority of share votes.

If we look outside the US for lessons in history, we see that groups of 100 shareowners have been able to place nominees on the proxy in the UK and Australia for years, without the minimum threshold demanded by some in the US. The $660 million threshold at Bank of America was, in fact, a compromise aimed at winning the favor of critics of the 2012 version. More from a critical  analysis:

While the limit would not allow shareholders nominating directors though proxy access to cause a change in board control, investors may be concerned that that the limit is unacceptably high and could disrupt the election process and could permit a substantial change in board composition.”  (my emphasis)

I’m not sure how the election process would be “disrupted. Voters would have more choice. Is that a disruption? Regarding “substantial change” in board composition. Yes, in theory under our proposal up to 48% of a board could be replaced… six of 13 directors at Bank of America. However, the critics fail to fully consider one of the unique features of our proposal. No outside party could nominate more than 3 directors using the access proposal and parties using option (a) or (b) can’t coordinate. 

Only 3 directors could be replaced if nominators use only option (a) or (b). No party can overlap or use both. If two shareowner nominating parties arose, invoking both options then 6 could possibly be replaced. That might be considered “substantial change,” but not in the conventional sense, since neither party comes close to “control.” We are hoping to create a new model of corporate governance where no one party “controls” the corporation. Such a multiparty structure will increase the likelihood that corporations are presented with alternatives… not just the company’s Plan A, or a challengers Plan B but also maybe a Plan C.

Corporate elections are just beginning a transition from contests among oligarchies to something more akin to democracy. The idea of multi-party elections may seem novel or foreign to the corporate governance industrial complex that has grown accustom to contests in which one side or the other is awarded with a victory, not much different than the spoils of war. Let’s not end the evolution of proxy access based on one year of “history.” I hope the critics will reconsider their recommendation at Bank of America and I hope they will also support proxy access votes when they come iRobot ($IRBT) on May 22, Goldman Sachs ($GS) on May 24 and Netflix (NFLX) on June 1.

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