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CII finds growing consensus on proxy access

Joe Mont | February 2, 2017

When it comes to proxy access, companies are falling in line with very similar approaches, according to a new report by the Council of Institutional Investors.

CII is a nonprofit association of pension funds, endowments, and foundations, with combined assets that exceed $3 trillion. Its latest research looked at proxy access bylaw provisions adopted by 347 U.S. public companies. It analyzed data collected by the law firm of Covington & Burling on access bylaws adopted by 2016. A key takeaway: a high percentage of the bylaws incorporate similar key provisions.

Nearly all access bylaws follow the “3 and 3” approach favored by institutional investors, under which a shareholder or group of shareholders seeking to nominate a director via proxy access must own at least 3 percent of outstanding shares for at least three years.

Ninety-nine percent of proxy access bylaws explicitly base ownership on net-long holdings, and 91 percent explicitly permit loaned shares to count toward the requirement, according to the report. Typically, the bylaw specifies that loaned shares must be able to be recalled within five business days’ notice. Proxy access bylaws deviating from the “3 and 3” model are increasingly rare. None of the 347 bylaws examined for the report feature a holding period greater than three years.

Other findings:

  • 87 percent of access bylaws permit no more than 20 shareholders to aggregate their holdings to meet the ownership requirement necessary to nominate a board candidate.
  • 89 percent of access bylaws let companies omit an access candidate if the nominating shareholder(s) is waging a proxy contest with another candidate on the dissident card.
  • 63 percent of proxy access bylaws cap the number of directors that shareholders can nominate at the greater of two candidates or 20 percent of the board.
  • Provisions barring re-nomination of access candidates, sometimes referred to as “lock-out” provisions, are routinely found in proxy access bylaws; 82 percent of proxy access bylaws have some type of re-nomination constraint.
  • Eighty-three percent of proxy access bylaws require disclosure of any external compensation arrangement relating to service or actions as a director.
  • Forty percent require disclosure of external compensation arrangements related to the nominee’s candidacy.

All proxy access bylaws reviewed for the report include notice requirements for utilizing proxy access. Seventy-nine percent of proxy access bylaws tie the advance notice requirement to the first anniversary of the mailing date of the previous year’s proxy statement, while 13 percent base their advance notice requirement on the anniversary of the previous annual meeting. The most popular notice period is 120-150 days before the first anniversary of the mailing of the proxy statement for the previous year’s annual meeting.

The SEC first considered the idea of proxy access in 1942, but it wasn’t until 2003 that the commission proposed a rule to institute proxy access on a market-wide basis. Although the Commission ultimately withdrew the 2003 proposal, the Dodd-Frank Act of 2010 granted it explicit authority to adopt a proxy access rule, which the commission did that same year. A federal appeals court later struck down the rule as “arbitrary and capricious,” but left in place the right of shareholders to file their own resolutions requesting proxy access, and companies retained the right to independently adopt proxy access through “private ordering” by amending their bylaws.

CII notes that 2015, marked a major turning point for proxy access. “The prime catalyst was a non-binding proxy access shareholder resolution campaign led by the New York City Comptroller on behalf of five New York City pension funds, joined by CalPERS, CalSTRS and others,” the report says. “A favorable SEC review of the proper scope of companies’ ability to exclude shareholder proposals from proxy materials helped too. In 2014, just 15 shareholder proposals requesting proxy access went to a vote and only four passed. By contrast, in 2015 and again in 2016, more than 80 such proposals went to a vote, and shareholders approved more than half.”

“As the number of companies adopting proxy access continues to grow, and early adopters re-evaluate bylaws already in place, boards across the market are giving careful consideration to every contemplated provision’s practical effect, both intended and unintended,” the report says. “Does the provision help ensure an orderly and reasonable process for long-term holders to put the mechanism to work? Or does the provision exist primarily to chill (or entirely prevent) the use of proxy access? Investors expect boards to tackle these questions forthrightly, keep the investor’s perspective in mind, and exercise responsible discretion.”