As I have mentioned in other posts (see especially Proxy Access Lite: Victories at Whole Foods, H&R Block), several companies have adopted proxy access ‘lite’ with provisions that make implementation excessively difficult and less effective than they would have been under the SEC’s universal proxy access Rule 14a-11.
Although I withdrew proposals at several companies, based on the fact that even adoption of proxy access lite represented real progress, I vowed to circle back and seek more robust provisions through subsequent amendments. I recently filed the first such proposal at Whole Foods Market. Let’s start fixing proxy access lite.
The most problematic provision at Whole Foods is the limitation on groups to twenty members. As I said at the time,
While commercial funds like Vanguard may vote for proxy access candidates, they aren’t likely to nominate them. (As you can imagine, it might be hard to sell 401(k) services to a company where you are taking action to replace directors.)
The role of nominating candidates under proxy access seems most likely to fall to public pension funds. The largest block of stock held by a public pension fund is 0.27% of shares by New York Common Retirement Fund. Combining the six largest holdings of public pension funds gets us to less than 1.2% of Whole Foods. After that, public fund holdings drop off precipitously. Therefore, under proxy access lite, shareholder nominations are highly unlikely, because the limitation of 20 participants will make nominations extremely difficult.
My current proposal aims to fix that problem and several others. For an excellent discussion, see Proxy Access: Best Practices, published by CII on August 5, 2015. I’m sharing the proposal with readers in case any of you wish to submit similar proposals. We don’t have to wait until all companies have adopted proxy access lite to begin a second wave of curative proposals. In fact, if we win a few of these, maybe companies will adopt workable proposals in the first place.
Filing, and especially negotiating, proxy access proposals isn’t for the novice. To do a good job, you’ll need to get familiar with Rule 14a-11, as well as CII’s best practice guide. Then read though several sets of proxy access bylaws. Feel free to use my proposal as a guide but be sure to tailor it to address the proxy access provisions adopted at each specific company. For those filing at companies with no proxy access, see my template at Avoiding Proxy Access Lite: QUALCOMM Proposal.
Fixing Proxy Access Lite
RESOLVED: Shareholders of Whole Foods Market, Inc (the “Company”) ask the board of directors (the “Board”) to adopt, and present for shareholder approval, revisions to its “Proxy Access for Director Nominations” bylaw, such as the following, to ensure they meet best practices according to investors:
- The number of shareholder-nominated candidates eligible to appear in proxy materials should not exceed one quarter of the directors then serving or two, whichever is greater. Having at least two nominees helps ensure that, if elected, directors can serve on multiple committees and bring an independent perspective to Board decisions.
- Loaned securities should be counted toward the ownership threshold if the nominating shareholder or group represents that it has the legal right to recall those securities for voting purposes, will vote the securities at the annual meeting, and will hold those securities through the date of that meeting.
- There should be no limitations on the number of shareholders that can aggregate their shares to achieve the 3% Required Ownership Percentage. Even if the 20 largest public pension funds were able to aggregate their shares, they would not meet the 3% criteria at most of the companies examined by the Council of Institutional Investors.
- There should be no prohibition of otherwise legally allowed compensation arrangements between shareholder nominees and parties other than the corporation. However, any such compensation arrangements should be disclosed.
- There should be no limitation on the re-nomination of shareholder nominees based on the number or percentage of votes received in any election. Such limitations do not facilitate the shareholders’ traditional state law rights and add unnecessary complexity.
- To the extent possible, the Board should defer decisions about the suitability of shareholder nominees to the vote of shareholders.
The SEC’s universal proxy access Rule 14a-11 (https://www.sec.gov/rules/final/2010/33-9136.pdf) was vacated after a court decision regarding the SEC’s cost-benefit analysis. Therefore, proxy access rights must be established on a company-by-company basis. Subsequently, Proxy Access in the United States: Revisiting the Proposed SEC Rule (http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2014.n9.1) a cost-benefit analysis by CFA Institute, found proxy access would “benefit both the markets and corporate boardrooms, with little cost or disruption,” raising US market capitalization by up to $140.3 billion. Public Versus Private Provision of Governance: The Case of Proxy Access (http://ssrn.com/abstract=2635695) found a 0.5 percent average increase in shareholder value for proxy access targeted firms. Proxy Access: Best Practices (http://www.cii.org/files/publications/misc/08_05_15_Best%20Practices%20-%20Proxy%20Access.pdf) by the Council of Institutional Investors, “highlights the most troublesome provisions” in recently implemented access bylaw or charter amendments.
Although the Company’s board adopted a proxy access bylaw, it contains troublesome provisions that significantly impair the ability of shareholders to use it, rendering it largely unworkable. Adoption of revisions, such as those suggested in this proposal, would largely remedy that situation.