When the Securities and Exchange Commission’s Division of Corporation Finance announced it will not offer no-action relief for companies seeking to exclude a shareholder proposal because it conflicts with one of their own this proxy season, a big question was how proxy advisory firms would react. While Institutional Shareholder Services has not weighed in (“We’ll have to decline comment at this point,” we were told by a spokesman), rival Glass Lewis has now detailed its approach.
In 2015, approximately 100 companies will face shareholder proposals seeking proxy access, 75 of them from an organized effort by New York City’s pension funds and NYC Comptroller Scott Stringer. On Jan. 16, the said it will not offer traditional assessments on the application of Rule 14a-8(i)(9), which allows companies to exclude shareholder proposals that conflict with a management proposal on the same issue. The decision is a reversal from an initial opinion that allowed Whole Foods to exclude a shareholder-submitted proxy access proposal in favor of a management proposal despite a much higher minimum ownership threshold.
In an advisory issued this week, Glass Lewis said it will review each proxy access proposal, along with the company’s response, on a case-by-case basis. Its 2015 Proxy Paper Guidelines on Shareholder Initiatives details that overall approach. It will therefore analyze the “reasonableness and proportionality” of the company’s response to the shareholder proposal.
For alternate management proxy access proposals, Glass Lewis will evaluate whether a company’s proposal varies materially from the shareholder proposal in minimum ownership threshold, minimum holding period, and maximum number of nominees to determine whether the company’s response “would thwart the intent of the shareholder proposal.” It will also review the company’s performance and overall governance profile, the board’s independence, leadership, responsiveness to shareholders and oversight, the opportunities for shareholders to effect change, and the number/type/nature of shareholders above the proposed threshold.
Importantly, Glass Lewis says it does not have a preferred number or percentage of directors that may be nominated through the proxy access procedure. Companies, however, “should strike a balance between allowing shareholders to nominate a meaningful percentage of directors to adequately represent them while providing safeguards against a relatively small shareholder seeking to nominate a disproportionate number of directors to a level that is tantamount to gaining control of the board.”
Glass Lewis will also review all aspects of the proposal to ensure “the terms are not overly prescriptive, do not introduce minimum ownership calculation methods open to abuse, or would not impose undue or unnecessary burdens on the company or the board.” Similarly, it will closely review the terms of a management proxy access proposal to ensure that provisions would not present overly burdensome hurdles.
The policy statement comes on the heels a letter from John Engler president of the Business Roundtable, an influential trade association, to ISS and Glass Lewis. The SEC’s announcement “was not a statement by Chairman Mary Jo White or the SEC staff that companies may no longer exclude a proposal under that rule and in no way changes the legal effect of the rule or prior precedent concerning the rule,” he wrote. Neither does the announcement “affect a shareholder's or company's right to resort to court to adjudicate the exclusion of a shareholder proposal.”
“The boards of public companies have a responsibility to make sure that the matters presented for a shareholder vote comply with the federal proxy rules,” Engler wrote. “However, the announcement means that companies may have no choice but to consider litigation if they want to adjudicate their rights under Rule 14a-8. Due to the timing of [the] announcement, it may not be realistic for companies to litigate the matter in advance of the deadline for finalizing their proxy materials. [We], therefore, believe that it would be inappropriate for ISS and Glass Lewis to apply their voting policies in a way that substitutes their own judgment as to the appropriate course of action in place of the board's judgment.”
The letter urges the firms “to exercise restraint as it considers how it will assess the response of companies that exclude shareholder proposals from their company proxy materials based on solid SEC precedent.”