Proxy Access Efforts Fizzle

Companies, once concerned that proxy access would throw the boardroom doors open to shareholder activists, are breathing a sigh of relief; campaigns to gain proxy access haven't really materialized.

To the surprise of many, the 2013 proxy season has been quiet on the proxy access front, with only a few attempts by shareholders to obtain the right to nominate directors on the proxy statement at individual companies.

Given such strong results during the 2012 proxy season when shareholder-sponsored proxy access proposals won majority support at two U.S. companies—Nabors Industries and Chesapeake Energy—many were anticipating a surge in proxy access campaigns this year, explains Patrick McGurn, executive director at proxy advisory firm Institutional Shareholder Services.

“The big story is that it's not a very big story this year,” he says. “If anything, we're actually seeing a drop-off in the level of activity relative to last year.”

In July 2011, a three-judge panel of the U.S. Court of Appeals for the District of Columbia blocked a mandatory proxy-access rule that was originally included in the Dodd-Frank Act. The court, however, left intact an amendment that allows shareholders to seek proxy access on a company-by-company basis. Under this so-called “private ordering of proxy access,” targeted companies must include in their proxy materials shareholder proposals addressing the nomination of board candidates. Companies where shareholders pass such a resolution must then include director nominees by large shareholders in the company's proxy materials.

Once mandatory proxy access at all companies was eliminated, some thought investors would seek private ordering of proxy access at hundreds of companies, but that hasn't happened. During the 2012 proxy season, only 11 proxy access proposals made it to an actual vote. In conversations ISS has had with activist shareholders about their agendas for this proxy season, “we're maybe looking at half that number,” says McGurn.

The scarcity of proxy access efforts comes down to the politics of corporate governance and how various constituencies view the issue. “The hedge funds have never been big fans of proxy access,” says McGurn. “They figure if they want to do a proxy access fight, they're going to do it the old-fashioned way, where they put out their own materials and can run for as many seats as they want.”

Other large institutional investors—such as labor unions and public funds—while they generally favor proxy access, appear to have other priorities this year, including executive compensation, independent chair proposals, majority voting, and board diversity, says McGurn.

More of the Same

It's still early, however, to call proxy access a no-show for this year, given that the 2013 proxy season has barely begun. “At this point, we are still pre-proxy season,” says Robert McCormick, chief policy officer for Glass Lewis. The filing date for the bulk of most U.S. companies is March 16, he says, with most meetings taking place in April and May.

“What often happens is that proposals that do well one year tend to get resubmitted the following year in the same format,” says McCormick. So the 2012 proxy season was “a bit of a test” as to how shareholders may approach proxy access going forward, he says.  

Last year, proxy access efforts weren't so much about scoring wins as they were about setting the stage for future successes. Proxy access-minded shareholder groups spent most of their energy, “trying to work proxy proposals though the SEC no-action process,” says Jim McRitchie, a corporate governance advocate, who has submitted proxy access proposals to iRobot, Goldman Sachs, and Netflix. Based on the wording of early process access proposals, the SEC let many companies exclude them from the proxy, meaning they never went to a vote.

“The big story is that it's not a very big story this year. If anything, we're actually seeing a drop-off in the level of activity relative to last year.”

—Patrick McGurn,

Executive Director,

Institutional Shareholder Services

This season activists have revised the proxy-access proposal model, with the intent to obtain endorsements from ISS and Glass Lewis. “I think ultimately we'll be met with more success this year than we did last year,” McRitchie says.

If all goes well with the current governance model, next proxy season “we'll spend a lot more time picking targets and concentrating on actually winning proposals,” McRitchie adds. 

Some of the fine-tuning by proxy-access proponents centers on the thresholds shareholders would need to meet to be able to nominate directors. Proposals typically call for holdings of from 1 to 3 percent for periods from one to three years. Shareholders have shown more support for larger ownership requirements and longer stock holding periods for access. McRitchie says he is “disappointed” that the 3 percent ownership for three year threshold has become a standard for institutional investors, “instead of going for something that could apply to more companies.” To get 3 percent of shareowners together to hold their shares for 3 years is “very difficult,” he says.

High-Profile Cases

At least two high-profile annual shareholder meetings will take place this season where proxy access will be on the ballot. This month, Disney will face a vote on proxy access, spearheaded by pension-fund adviser Hermes Equity Ownership Services.

Unlike Nabors and Chesapeake Energy, which each faced significant long-standing corporate governance troubles, Disney will provide a “fairly clean read,” McGurn says, on what level of institutional support likely exists for the 3 percent for a three-year threshold. “It will be a very interesting test case,” he says.

In another high-profile case, Hewlett-Packard has a management proposal in its proxy statement that would enable a shareholder or group of up to 20 shareholders owning at least 3 percent of the company's stock to use corporate proxy material to nominate up to 20 percent of the directors. In attempts to block proxy access campaigns by activists, some companies have opted to put proxy access proposals with high access thresholds on the ballot themselves.

“That will provide an interesting opportunity to see how shareholders react when management puts a proxy access bylaw on the ballot,” says McGurn. “We're also expecting Chesapeake Energy toward the end of the season to put up their own management proposed proxy access bylaws as well.”

Targeted Companies

At companies that could be targeted with proxy access campaigns, compliance officers will want to assess the quality of their corporate governance practices from the viewpoint of investors and governance advocates.

PROXY ACCESS VOTING RESULTS

Below are the final voting results at Nabors Industries and Chesapeake Energy pertaining to shareholder proposals to adopt proxy access.

Nabors Industries:

For: 141,695,286

Against: 110,642,845

Abstain: 756,556

Non-Votes: 25,233,230

Chesapeake Energy:

For: 254,125,330

Against: 153,667,604

Abstain: 16,209,690

Non-Votes: 125,975,332

Sources: Chesapeake Energy Form 8-K; Nabors Industries Form 8-K.

Targets generally include companies that show “evidence of poor board oversight or lack of board responsiveness,” says McCormick. This year will probably result in a couple of dozen proposals at companies that are in shareholder crosshairs for one reason or another—either due to poor performance or poor oversight, he says.

“Public fund activists are very keen to challenge companies where they know there is going to be a receptive investor audience because there are a number of complaints already on the table,” says McGurn. 

It's not just governance weaknesses that determine whether a company might be a target of a proxy access resolution. McRitchie says he also looks at such factors as the company's accounting practices, or whether it currently faces any lawsuits or investigations.

Developments at the Securities and Exchange Commission could also play a large role in how proxy access plays out. Last year, the Commission took a fairly narrow view toward proxy access proposals, allowing several companies to exclude them. The big question, says McGurn, is whether Mary Jo White's nomination as chairman will change the Commission's outlook on proxy access. Some wonder if White might also reignite the agency's efforts to tackle a mandatory proxy access rule and answer concerns leveled by the court, he says.

Based on the outcome of this year's proxy season, McGurn says, institutional investors can then begin to determine whether—and to what degree—they want to seek proxy access proposals when the 2014 proxy season rolls around.