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March 19, 2012
New York City Pension Funds File Corporate Governance Resolutions at 13 Companies
    by Robert Kropp

Shareowners request that Chesapeake Energy and Nabors Industries permit proxy access, and additional resolutions address board declassification, an independent board chair, and a majority voting standard.

Four separate shareowner proposals filed at 13 companies by New York City Comptroller John Liu and the $113 billion New York City Pension Funds aim to improve the corporate governance practices of those companies through enhanced proxy access and other means.

Resolutions requesting that long-term shareowners be permitted to include their own nominees for board director positions were filed at Chesapeake Energy and Nabors Industries. Stating that "long-term shareowners should have a meaningful voice in nominating directors," the resolution filed at Chesapeake observes, "The Board has awarded excessive CEO compensation and perquisites despite long-term underperformance, approved extensive related-party transactions with the CEO, and been unresponsive to shareowner concerns."

In 2008, for example, a year in which the stock price of Chesapeake Energy fell 60%, Aubrey McClendon, the CEO, was awarded a $77 million bonus. And according to GovernanceMetrics International (GMI), the failure of management's say-on-pay proposal to gain 70% of shareowner support last year suggests that Chesapeake Energy is at risk of a failed say-on-pay vote in 2012.

"Entrenched directors who are not accountable breed lax oversight and often damage their companies in the process," said Comptroller Liu. "Long-term shareowners need the ability to remove or replace directors who destroy shareowner value or are unresponsive to investor concerns."

Proxy access has been an ongoing concern for sustainable investors and corporate governance advocates for years. They applauded the inclusion of a provision for proxy access in the Dodd-Frank financial reform bill, passed by Congress in 2010. However, efforts by the Securities and Exchange Commission (SEC) to issue regulations were stymied when a Court of Appeals struck down Rule 14a-11, stating in its decision that the Commission "was arbitrary and capricious" in its implementation.

The request by the Pension Funds that Chesapeake Energy and Nabors Industries adopt proxy access bylaws was filed under SEC Rule 14a-8, which permits shareowners "to require companies to include shareholder proposals regarding proxy access procedures in company proxy materials." However, the terms of the shareowner proposal mirror those of Rule 14a-11, which requires a much higher ownership threshold for nomination of directors.

In September, corporate governance advocate James McRitchie told, "The thresholds of Rule 14a-11 left SRI (socially responsible investing) funds out in the cold, unless they could rally public pension funds."

A flagrant example of Chesapeake Energy's relationship with shareowners on matters of corporate governance was its response to an overwhelming majority vote supporting board declassification. The American Corporate Governance Institute (ACGI) found that classified, or staggered, boards, in which directors serve overlapping terms, "could be associated with lower valuation and worse performance."

By 2011, only one-third of S&P 500 companies still had a classified board.

In response to the shareowner vote, however, Chesapeake Energy "successfully lobbied for a change in Oklahoma law that actually required classified boards at large, publicly-traded firms incorporated in the state," Liu and the New York City Pension Funds pointed out.

The Pension Funds filed resolutions at four companies this year requesting that they adopt declassified boards and require all directors to be elected annually. The resolution was withdrawn at Juniper Networks when the company agreed to the request. A similar resolution on last year's proxy ballot at Juniper received 98% of shareowner support.

Resolutions filed at Philip Morris International and Mylan request that the companies separate the positions of Chairman and CEO. In addition, four proposals were filed requesting that companies adopt majority voting standards for director elections. The resolutions were withdrawn at HollyFrontier and Hersha Hospitality when the companies adopted the standard.


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