Mark Latham came up with a brilliant idea in the late 1980s: Shareowners should use their corporation’s funds to pay for external evaluations of governance and performance of the board and management. Shareowners would vote to choose among competing organizations to provide this service.
It was a simple concept but SEC rules made subsequent proposals unnecessarily complex and excluded advice on director candidates, often among the most critical decisions on a proxy.
In 1999 we submitted the first in a series of proposals to pay competing proxy advisors. Although we achieved votes as high as 20%, we decided to forgo further submissions until the proposal could be further refined and until rules provided a more favorable climate.
Years of practical experience with student bodies and cooperatives led Latham to simplify and shorten the process. In the meantime we finally convinced the SEC to restore proxy access. Years later, after several further refinements to get through the SEC’s “no-action” process, including an attempt by Cisco management (See SEC response of August 9, 2013), Cisco shareowners will be the first in many years to vote on a proxy advisor competition and the first in more than a dozen years to vote on a proposal that includes evaluation of director candidates.
Compared to our earlier proposals, this new version would support four advisors instead of just one; it would take two years to implement instead of three years; and shareowners would vote after seeing the proxy advice instead of before. These changes are based on successful test implementations at the University of British Columbia — see “Experiments in Voter Funded Media” at votermedia.org/publications.
The Congressional Committee on Financial Services hearing, “Examining the Market Power and Impact of Proxy Advisory Firms,” invited testimony from several experts. All had criticisms of the current system. Review the written material, watch the hearing, watch Darla Stuckey, Senior Vice President – Policy and Advocacy, Society of Corporate Secretaries & Governance Professionals, summarize a few of the issues on This Week in the Boardroom.
Here is our Cisco proposal:
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.)
From Latham’s VoterMedia Finance Blog
The idea is that we shareowners can use our voting power to hold boards accountable more effectively if we have high quality professional voting advice. Although many institutional investors pay for proxy advice from the two major U.S. advisors, ISS and Glass Lewis, there is not enough economic incentive to pay for more than a minimal amount of proxy research, as explained on page 82 of “Proxy Voting Brand Competition.“ The result: complaints about lack of insight, and insufficient competition.
“… one of the primary complaints from corporate issuers is that proxy advisory firms rely heavily on a ‘cookie cutter’ or ‘one-size-fits-all’ approach, and may base recommendations on inaccurate and unreliable information in particular cases.” [page 9]
“The investment manager for one of the world’s largest sovereign wealth funds indicated that it would like to see measures taken to promote competition among proxy advisory firms.” [page 31]
The above Proxy Advisor Competition Proposal would increase competition among proxy advisors, and pay them enough to provide higher quality advice, tailored to the specific corporation. The proposal organizes a corporation’s shareowners as a group, pays for proxy advice once, and shares the advice with the whole group. This “advice consumers’ union” approach may well get better analysis for lower cost than the current system of paying for advice one (institutional) investor at a time. It would also make the advice available to all Costco shareowners, including retail investors who typically do not get professional voting advice now. This proposal is designed as a template to improve the governance of any publicly traded corporation.
Why Cisco (CSCO)?
The proposal uses a generic template that could be submitted to any public US company and we welcome its use by shareowners at other companies. However, Cisco is an excellent candidate for a proxy advisory competition for the following reasons:
- According to GMI Analyst, Cisco routinely faces shareowner proposals each year. In fact, there have been shareowner proposals on each proxy since 2002, with the exception of the year 2004. Let’s get advice on these proposals that is specific to our company, not just based on abstract “best practices.”
- GMI Analyst also gives Cisco a failing grade with regard to pay. “CEO remuneration practices at Cisco Systems do not appear to be well aligned with sustainable shareholder interests.” Shareowners might like to have access to an independent analysis when casting their “say on pay” proxy vote.
- Two of our directors hold no actual shares in Cisco. Why not?
- More than half the board has served for over 10 years and almost half are aged 60 or over.
- Ten years ago Cisco traded at a heavy premium to the broader market. Today it trades at a discount. The enterprise-technology market has changed. Is today’s board savvy enough to move our company forward?
- Additionally, Cisco faces new threats from heavyweights such as Google and Facebook, which are starting to design their own tech equipment such as servers, storage hardware, chips and network switches. (Facebook and Google Try Self Help, WSJ, 8/25/2013)
According to Yahoo! Finance, Cisco Systems, Inc.’s ISS Governance QuickScore as of Aug 1, 2013 is 1. The pillar scores are Audit: 1; Board: 6; Shareholder Rights: 1; Compensation: 3. Scores range from “1” (low governance risk) to “10” (higher governance risk). The board is already rated below average. What rating will it have next year when the results of a proxy advisor contest could be available?
Last year Cisco’s proxy alone was 70 pages long. Contestants are likely to access much more publicly available data, including all the other documents Cisco files with the SEC. Browse through this data for a few minutes and ask yourself if you wouldn’t like proxy advisor contestants to analyze all that data as well as more from other sources for you. If the contest proposals passes, you’ll be able to vote intelligently, while avoiding most of the work. That’s good for both you and our company.