After finding some “off-beat” proposals made at Fortune 250 firms and posted to ProxyMonitor.org, Laura J. Finn thinks the following might be Five Coming Trends in Shareholder Proposals (Corporate Board Member, July 11, 2013). I provide a brief evaluation of each and add a couple of my own.
- Curb Excessive Directorships – filed by Kenneth Steiner at three companies this year: AIG, Bank of America, and Exxon Mobil to limit directors to serving on no more than three boards. None of the proposals received more than 6% of votes cast in favor, but Steiner raised the point that overextended directors may be bad for corporate governance.
Evaluation: This type of proposal might do better by recommending the policy of the Council of Institutional Investors (CII).
Absent unusual, specified circumstances, directors with full-time jobs should not serve on more than two other boards. Currently serving CEOs should not serve as a director of more than one other company, and then only if the CEO’s own company is in the top half of its peer group. No other director should serve on more than five for-profit company boards.
- Re-incorporate in Delaware – filed by Gerald Armstrong at Chesapeake Energy Corp., incorporated in Oklahoma where all corporations with more than 1,000 shareholders are required to have a classified board of directors with three-year terms for each director. Armstrong filed this proposal to have Chesapeake re-incorporate in the state of Delaware because the state “is known for fairness and integrity.”
Evaluation: I like the proposal. Essentially it is a proposal to declassify the board but most shareowners didn’t understand that the first time around. Shareowners voted overwhelmingly for a proposal to do just that (For: 394,185,805; Against: 4,903,994l; Abstain: 1,417,013; Broker Non-Votes: 146,619,157) but Chesapeake claims it didn’t get the required 67%. That only appears to be true if they counted the broker non-voters, which I don’t believe they should have. Unfortunately, their certificate of incorporation allows them to do just that.
- Adopt Policy on Board Diversity – filed by NYC Pension Funds at Freeport-McMoRan Copper & Gold, which has no women or minorities on its board, so the purpose of the proposal is four-fold: to include women and minority candidates in the pool of board candidates, expand director searches to include non-traditional environments, review board composition periodically to find and fill knowledge gaps, and report on the process to shareholders. Shareholders will vote on this proposal on July 16
Evaluation: Certainly, something needs to be done to bring more women and minorities onto boards. Short of legislation of the type being used in Europe, this effort at private ordering seems our best bet.
- Director Term Limits – filed by Dennis Rocheleau at General Electric. He argued that term limits “apply to the President of the United States and are in effect for directors at a number of Fortune 500 firms.”
Evaluation: I favor the UK approach, increasingly adopted in other countries, that assumes directors are no longer independent after nine years of service. That’s not a hard term limit but it certainly encourages faster turnover than we currently see in the US.
- CEO Succession Planning – filed by Laborers’ District Council & Contractors of Ohio at Google. A dozen similar proposals have been filed at Fortune 250 companies in the past three years, though none have received majority support.
Evaluation: While the Laborers’ cited NACD studies, they could also cite CII policy. This may eventually take hold at other companies. However, the only proposal really worth submitting to Google at this time would be something to equalize the vote.
- Proxy Monitoring Contests – Large institutional investors generally subscribe to proxy advisory services such as those provided by Institutional Shareholder Services (ISS) and Glass Lewis. These services provide analysis of issues and advice on how to vote at thousands of companies. While there is much debate concerning just how influential such services are, researchers report anywhere from 3.5% to over 50%. Choi, Fisch and Kahan, for example, found ISS accounted for a 6%-10% vote shift (The Power of Proxy Advisors: Myth or Reality?). See also, Voting Decisions at US Mutual Funds: How Investors Really Use Proxy Advisers by Robyn Bew and Richard Fields.
Regardless of how influential such services are, many institutional investors and most retail investors don’t benefit from their services because they don’t subscribe. According to Mark Latham (Proxy Voting Brand Competition):
The biggest obstacle to paying advisors is the shareowners’ free-rider problem. Whether you are an individual or an institution, if you pay for advice to improve the quality of your voting, that helps all other shareowners even if they do not pay for or receive the advice. For example, if you own 1% of a company’s shares then only 1% of the beneﬁt from your voting comes back to you. So most shareowners have almost no incentive to pay for voting advice.
The solution Latham proposed eliminates the free-rider problem:
By paying as a group, we shareowners would beneﬁt from better voting advice than any we have now. All shareowners of a company would get the advice instead of just the minority that currently subscribes to such research. Competition for advisor reputation would maintain pressure for high quality and moderate pricing.
Holding a contest for the best advice could bring in new proxy advisors specializing in specific industries or companies. In-depth analysts might comment not only on items on current proxies but might provide investors with key comparisons with competitors and could delve into issues on the horizon, many of the same issues analyzed by shareowner activists as described by Gilson and Gordon. Costco: Proxy Advisor Contest Proposed, discussed a proposal we submitted last year but which failed to win a no-action challenge because of a couple of technical issues. Revised language addressed these issues and was submitted to Cisco (CSCO), reading as follows:
PROXY ADVISOR COMPETITION
WHEREAS Cisco is so widely held that no principal shareowners or blockholders effectively monitor our Board;
WHEREAS some shareowners hire proxy advisors to help them vote in the best interest of their clients, but most do not;
WHEREAS many shareowners lack the time and expertise to make the best voting decisions, yet prefer not to always follow directors’ recommendations;
WHEREAS shareowners could benefit from greater competition in the market for professional proxy voting advice;
THEREFORE BE IT RESOLVED that Cisco Systems, Inc. shareowners request the Board of Directors, consistent with their fiduciary duties and state law, to hold a competition for giving public advice on the voting items in the proxy filing for the Cisco 2014 annual shareowners meeting, with these features:
- The competition would offer multiple cash prizes totaling no more than $50,000.
- Winners would be determined by shareowner vote on the Cisco 2014 proxy.
- To insulate advisor selection from influence by Cisco’s management, any person or organization could enter by paying an entry fee.
For example, the Board could choose competition rules such as:
- The competition could be announced and open for entries six months after the Cisco 2013 annual shareowners meeting. Each entry could be announced publicly, promptly after it is received. Entries’ names and website addresses (linked) could be shown promptly on a publicly accessible Cisco website page, in chronological order of entry. Entry deadline could be a reasonably brief time before Cisco begins to print and send its 2014 proxy materials.
- The competition could offer a first prize of $20,000, a second prize of $15,000, a third prize of $10,000, and a fourth prize of $5,000. The entry fee could be $2,000.
- The Cisco Board could include this voting item in that proxy: “Which of the following proxy advisors do you think deserve cash awards for the usefulness of information they have provided to Cisco shareowners? (You may vote for as many advisors as you like. See each advisor’s website for their information for Cisco shareowners. Prizes, of $20,000, $15,000, $10,000 and $5,000 will be awarded to advisors based on the number of shares voted to approve the usefulness of their advice.)” Then the name and website address of each advisor entered could be listed in chronological order of entry, followed by check-boxes for approval, disapproval and abstention for each entry. The advisor receiving the most approval votes could get first prize, and so on.
- It could be expected that each proxy advisor would publish advice on its website regarding the Cisco 2014 proxy, but there need be no formal requirement to do so. The incentive to win shareowner voting support and to maintain the advisor’s reputation could be considered sufficient motivation for giving quality advice.
- The decision of whether to hold such a competition in subsequent years could be left open.
(Further information on proxy advisor competitions: “Proxy Voting Brand Competition,” Journal of Investment Management, First Quarter 2007; free download at http://votermedia.org/publications.)
If ISS and Glass Lewis do use something of a check-box approach, who can blame them, considering the amount they are paid for their research? The answer is not to exclude shareowners from influencing corporate governance. The answer to provide shareowners easy access to better analysis, tailored to the needs of each specific company. We might even attract hedge funds like ValueAct Capital and Relational Investors, with years of experience serving on boards, to perform the analysis. Of course, ISS, Glass Lewis and other proxy analysts would also be able to join the competition but would have to provide their analysis to all shareowners, not just their subscribers. Proxy advisor contests could become the first step toward activism if problems are found. If no problems are found, they provide greater assurance that existing governance is working.
Although corporate representatives complain loudly that current proxy advisors publish misleading reports based on faulty information, they continue to fight our proxy contest proposal. Perhaps they fear more thoroughly researched advice even more? You can follow the saga of the current no-action request by Cisco at Division of Corporation Finance Incoming No-Action Requests Under Exchange Act Rule 14a-8. Although they’ve posted Cisco’s request, they haven’t yet posted our rebuttal. My latest essential arguments in rebuttal are as follows:
I believe the arguments given in my previous letter (dated July 10, 2013) are sufficient to show why the Proposal may not be properly omitted from the Cisco 2013 proxy. The proposal does not propose a “promotion” as defined by California Penal Code §§ 319 et seq. because skill in providing useful proxy advice, such as that currently provided by Institutional Shareholder Services and Glass Lewis to their subscribers, far outweighs chance, such as picking the winners of horse races, as in Finster v. Keller, or which predetermined cartoon headings will be favored by judges, such as in People v. Rehm. Current subscribers to proxy advisory services aren’t paying for lucky guesses. The proposal simply seeks to open up such proxy advisory services to greater competition and the likelihood of much better advice. The current model depends on a few subscribers paying for minimal service, whereas my proposal would allow much higher expenditures for such research per company spread out among all shareholders through payments made primarily by the company.
With regard to the supposed violation of Rule 14a-8(i)(8)(v) because the proposal could affect the outcome of the election of the Company’s directors, the rule clearly refers to “the” upcoming election of directors, not two years down the road. By Mr. Winnike’s line of reasoning, the SEC would grant no-action letters for any proposal to declassify a board or to seek a majority vote requirement for director elections, since such proposals could impact future director elections.
- Proxy Access – Proxy access is a topic that should be familiar to regular readers. It would help shareowner activists by substantially reducing the cost of running candidates. As Gilson and Gordon indicate, the average proxy contests costs about $11 million. Those costs are reduced substantially if candidates can appear on the corporate proxy, instead of having to solicit their own proxies.
As I have written extensively elsewhere (The Case for Proxy Access, NACD Directorship, and my 2002 rulemaking petition to the SEC), directors will never be accountable until they can be voted out of office and replaced by shareowner nominees. Even with proxy access, we still cannot expect most diversified mutual funds to nominate candidates, since they won’t even file shareowner proposals, which involve only minimal costs.
Depending on the holding period and threshold levels required (I have filed proposals requiring at least 1 year ownership by 50 shareowners collectively holding 1/2% of outstanding stock), we could easily double the number of competitive seats each year. A similar proposal will be on the proxy at later this year at FedEx (FDX).
The outcome of most such contests will be decided by large funds with little incentive to spend much analyzing governance issues. Many depend on analysis by ISS and they have indicated 1/2% 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. Half a percent at FDX would require the 50 shareowners to hold $171M. That doesn’t seem like relatively few shares to me and enactment would add to the power of larger long-term holder, not subtract, since they could nominate under the provisions giving such rights to 1% holders that have held the stock for two years. If the September proposal fails at FDX, I will consider raising the minimum threshold to 1% in an attempt to mollify ISS.
Proposal 4* – Proxy Access for Shareholders
WHEREAS, Stock appreciation at FedEx trails S&P 500 and UPS over two/five years. Our company has no lead director and a GMIAnalyst ESG Rating of F. 50% of our Board served ten years or more. 50% serve on at least three boards or are full-time CEOs.
In three years, we paid $1 million toward CEO security, additional costs for tax gross-ups, personal aircraft use, tax services, financial counseling, and insurance. Our CEO made $94 million from stock options over four years, has a $25 million pension, and gets $36 million on a change of control.
FedEx rewards management handsomely, leaving little for shareholders. Absent significant changes, our board reinforces pay for non-performance and leaves little hope of change in the near term.
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.
Vote to protect shareholder value:
Proxy Access for Shareholders – Proposal 4*
The popular 3% held for 3 years threshold that has passed at several companies will have little or no impact because it completely leaves retail shareowners out of the mix. Individuals submit more than twice as many proposals as labor unions or pension funds, forty times more than hedge funds (FactSet). Unless they have some role in proxy access the dream of meaningful elections, where shareowners have a choice between candidates, won’t be realized. Corporate elections will continue to use the language of democracy (elections, voting, candidates) without the substance. Even Putin had token opposition; don’t we deserve better?