At a roundtable discussion last week, corporate executives and shareholder advocates faced off on the topic of how much access shareholders should have in the director nomination process (see box at right for details).

And though the Commission still hasn't decided how it will proceed with its proxy access proposals, the issue is clearly heating up, and shareholders are trying to get related resolutions onto the proxies in time for this year’s annual meetings.

A Compromise At Marsh?

One of the first related proxy resolutions surfaced at Marsh & McLennan Cos. last month.

As Compliance Week reported Feb. 3, four pension funds hoped to become the first group to submit a resolution under the SEC's proposed director nomination rules. And though the passage of the rules was delayed (hence the roundtable), that didn't stop the pension funds.

However, Compliance Week has learned that Marsh and the shareholders — including AFSCME Employees Pension Plan, New York State Common Retirement Fund, California Public Employees' Retirement System and the California State Teachers' Retirement System — could agree to a compromise as early as this week.

According to a well-placed source, the compromise would keep off the proxy a binding shareholder resolution that could eventually lead to outsiders nominating their own slate of board directors.

According to sources, the shareholders and the company have been working hard at reaching a compromise that would keep the resolution off the proxy.

“I can’t comment on it yet,” says Richard Ferlauto, director of pension investment policy with AFSCME. “We have not finalized any deal with them yet. We are engaged with them on a variety of issues.”

Ferlauto and the company would not provide details.

According to the source, Marsh proposed a compromise, and now the unions are expected to respond.

One possible outcome could be that the shareholders get to nominate at least one director in exchange for dropping the resolution altogether.

Whatever the outcome, however, the thinking is that the issue must be resolved by the end of this week. That's because Marsh has to move on completing the proxy so it can be filed in time for the company’s annual meeting, scheduled for mid-May. Proxies must be filed a month before the scheduled meeting.

Last month, a Marsh spokeswoman confirmed the company is trying to keep the resolution from appearing on its proxy. "We have filed with the SEC our objections to the shareholder proposal," the spokesperson asserted at the time.

According to sources, the SEC has not officially responded to Marsh’s request because it is waiting to see whether there will be a compromise, which would not require an SEC ruling if the deal results in the resolution being kept off the proxy.

If there is no deal, then the SEC would need to quickly make its ruling so the proxy can be filed on time.

Trailblazing At Qwest

In addition to the Marsh resolution, two members of the Association of US West Retirees recently received the go-ahead from the SEC to put up for vote at the telecom company’s May 25 annual meeting a resolution that requests Qwest’s Board of Directors to include in the proxy the name of any Board nominee who has been nominated by a "qualified shareholder."

The group is defining a qualified shareholder as an individual or group holding at least 5 percent of the company's outstanding common stock for at least two years.

This would be the first shareholder proposal to appear in a proxy calling on a company to include from investors nominations for the board of directors.

Now, keep in mind that if the SEC’s proxy access rules are passed, they would not apply to Qwest. This is because the Retirees’ proposal is being sponsored by shareholders who own less than 1 percent of the company’s shares.

And under the SEC’s proposal, one of the two initial triggers required before certain shareholders could put up their slate of nominees demands that a shareholder, or a group of shareholders, owning at least 1 percent of voting shares outstanding for at least a year submit a proposal for a nomination procedure and there is a subsequent favorable vote on the demand by a majority of the votes cast. (The other trigger occurs if 35 percent or more of the votes cast for at least one director nominee are "withhold" votes.)

Since the Qwest sponsors own less than 1 percent of the company’s shares, if the

proposal does pass, it does not qualify as a trigger and it is not binding.

“If the proposal is adopted, it sends a powerful message,” insists Cornish Hitchcock, a Washington, D.C., lawyer representing the Retirees. “It also gives the company about six months to address these concerns.”

Verizon Connection

Qwest had tried to keep the proposal out of the proxy, but the SEC had rejected Qwest’s request. Undaunted, the telecom giant is not giving up.

On March 9, Qwest lawyers sent a letter to the SEC asking the Commission to reconsider its position. “We believe the Proposal is excludable under Rule 14qa-8(i)(8) because the Proponents, as holders of less than 1% of the Company’s voting stock, are not eligible to submit a ‘direct access proposal’ under (the proposed rule) and, as a result, the Proposal would create a shareholder nomination procedure that is different from Proposed rule 14a-11,” wrote Brian Lane, Qwest’s attorney

with Gibson, Dunn & Crutcher LLP.

Qwest did not return several phone calls.

Perhaps Qwest is buoyed by the fact that the SEC kept a similar proposal out of Verizon’s proxy.

However, the Verizon shareholders made a tactical error.

Their resolution called for investors holding 5 percent of shares for one year to be allowed to nominate directors. This was a big mistake, since it didn’t closely track the SEC’s proposal.

Under the SEC plan, if one of the two initial triggers is met, then investors holding 5 percent of the shares for two years can then nominate directors.

“The resolution at Qwest, unlike the one at Verizon, more closely tracked the SEC rule proposal,” points out Stephen Deane, vice president and director of publications of Institutional Shareholder Services, in a recent report.

Keep in mind that Qwest and the Retirees have had something of a contentious history of late.

At its recent December annual meeting — the company is switching to an annual spring schedule with the upcoming meeting — there were seven shareholder proposals up for consideration.

Shareholders approved three of them, including proposals that:

The company exclude as a factor in determining executive incentive compensation any impact on net income from pension credits;

The company declassify the board of directors; and

Shareholders approve future employment agreements with the company's executive officers that, upon termination of employment, provide cash and non-standard benefits exceeding three times the sum of a given executive's base salary plus a targeted bonus.

However, shareholders rejected four, including proposals that:

A majority of directors be independent;

All future stock option grants to senior executives have an exercise price that is indexed to the stock prices of industry peers,

Some portion of future stock option grants to senior executives have an exercise price that is indexed to the stock prices of industry peers or is otherwise performance-based; and

The company expense the costs of all future stock options issued by the company.

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