A funny thing happened on the way to a 2015 annual meeting season long expected to be polarized by the return of proxy access. Actually, three things happened: Whole Foods, Monsanto, and General Electric.
Now, against all odds, we may be glimpsing the sunset of market-wide hostilities over shareholder access to the proxy statement—and widespread adoption of a proxy access standard in the United States.
How did we get here? First, let’s remember the bad old days—the era that ended seemingly five minutes ago—when even dropping the word “access” into polite governance conversation could lead to verbal explosion.
Access was one of those rare black-and-white, zero-sum issues. Corporations saw it as a scheme for short-term investors to gain a whip hand over boards. In 2009, for instance, the law firm Wachtell Lipton thundered that “proxy access is a serious mistake, likely to impair the ability of public companies to attract and retain quality directors and lead to a further politicization and balkanization of the boardroom, with attendant negative consequences for American capitalism and competitiveness.”
On the other hand, investors continue to see proxy access as “a fundamental shareholder right that will make directors more accountable and contribute to increased shareholder value,” as New York City Comptroller Scott Stringer put it recently. Not much common ground between those camps.
The two sides had fought to something of a stalemate by the end of 2014. In the Dodd-Frank Act, Congress had mandated the Securities and Exchange Commission craft proxy access rules. The Commission did exactly that (Rule 14a-11) in 2010, but the following year the U.S. Chamber of Commerce persuaded the D.C. Circuit Court to freeze the regulations before they could go into wide effect. The impasse meant that access slipped into the relative background for two consecutive proxy seasons.
Then, in August last year, the CFA Institute broke the slumber with a report titled “Proxy Access in the United States: Revisiting the Proposed SEC Rule.” The effort at first seemed quixotic; if the SEC itself hadn’t bothered to contest the court’s decision, why should anyone else? But the CFA’s analysis gamely sought to address the merits of the court’s finding that the SEC had failed to quantify the cost companies would have to shoulder implement access.
As much as they don’t like it, company executives seem to be coming to terms with the likelihood that the time for proxy access has finally arrived. The debate now shifts to terms and timing; and our bet is that the SEC/New York City/GE standard of 3x3 will emerge as the template.
The report concluded that “proxy access was received more positively than negatively by financial markets.” Moreover, “when we extended study results to estimate potential implications for overall market capitalization, we estimated that proxy access had the potential to benefit overall market capitalization by as much as $140.3 billion, or 1.134 percent of the current U.S. market capitalization.”
With that empirical groundwork in hand, New York City Comptroller Stringer’s office launched its Boardroom Accountability Project last November. It filed non-binding proxy access shareholder resolutions at 75 U.S. corporations. The measure asked that investors holding 3 percent share ownership for at least three years be permitted to nominate director candidates amounting to up to 25 percent of a corporate board. The move triggered expectations that access would roar back to dominate the 2015 proxy season and drive a wedge between boards and shareholders even as engagement between them had been expanding.
That was the landscape when Whole Foods, one of Stringer’s target companies, thought to head off a potentially embarrassing vote outcome by offering an alternative, management-sponsored access proposal so strict as to be almost impossible for investors to use. Shareholders would have to muster 9 percent of stock and have held it for at least five years. Whole Foods then went to the SEC, with what could only be described as chutzpah, asking to bar the investor’s access proposal on grounds that the company’s proposal and Stringer’s were similar, and that having both on the ballot would be confusing.
Whole Foods’ cynical maneuver—perhaps magnified by its striking divergence from the company’s brand image as honest and accountable—stoked shareholder dismay. But it was the SEC’s response that prompted real anger. A staffer’s no-action letter agreed with Whole Foods and allowed the firm to delete the shareholder proposal. Getting the message, some 20 other companies filed similar substitute management resolutions granting access if investors could meet hopelessly high eligibility thresholds. Like Whole Foods, they hoped to swap these for the investor proposals.
The Bombshell Lands
Then, out of the blue, came SEC Chair Mary Jo White’s announcement late on Friday Jan. 16 that the staff had erred; the Whole Foods decision would be reversed. Pending further analysis, the agency would no longer issue no-action letters if a company sought to scrap one access proposal for another. Whole Foods’ dodgy defense was gone.
Just days later, in the first major access vote of the season, some 53 percent of shareholders at Monsanto backed a resolution opposed by the board. TIAA-CREF and other funds wrote companies asking for access while proxy advisers threatened to recommend against directors who balked at access. Investors—even mainstream mutual funds—were now clearly ready to back moderate proposals on the subject.
The key word here is moderate. The SEC’s 2010 rule had proposed access rights for a 3 percent holder owning stock for three years. That’s the formula Stringer picked for his New York resolutions. In earlier years shareholders were split; some wanted 1 percent for one year, others more or less. In 2015, though, the investor community (with exceptions) is coalescing around “3x3” as pragmatic.
In truth, of course, few on any side expect even a 3x3 access right to be used except in extreme circumstances. And even if it were (say, by activists), sober mainstream investors would normally have to vote for the dissidents for them to win. That wouldn’t happen unless the company were in dire straits or stubbornly bad at listening to its owners—in which case a board shakeup would be warranted. So the sturm und drang over proxy access has stemmed more from fear than actual governance practice.
Then came GE. In something of a bombshell announcement, GE declared on Feb. 11 that it would adopt a 3x3 access provision. Among U.S. corporate giants, only Hewlett-Packard and Verizon had installed such a provision previously. But the move came in the wake of turmoil over the Whole Foods decisions, and from a position of strength. GE was on no institution’s access target list, but boasts a confident board.
The shift is seen as a potential harbinger: As much as they don’t like it, company executives seem to be coming to terms with the likelihood that the time for proxy access has finally arrived. The debate now shifts to terms and timing; and our bet is that the SEC/New York City/GE standard of 3x3 will emerge as the template. Predicts one big investor: “I wouldn’t be surprised if by the end of 2015 we have 100 companies adopting access.”
The irony, of course, is that few believe proxy access will have wide effect on the way governance works in practice. In fact, in our very first column ever for Compliance Week—back in 2004—we predicted that a proxy access rule would be both controversial and have minimal effect if it ever came to pass. We also acknowledged, however, that it is a powerful symbol in the battle over the balance of power between shareowners and corporate boards.
As it turns out, the cold war over proxy access lasted more than a decade. But recent developments give us hope that, at long last, we can replace the long and nasty conflict over access with board-investor dialogue over factors that produce real value.