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August 03, 2012
Proxy Access Still Key to Changing Corporate Behavior
    by Robert Kropp

SocialFunds.com talks with James McRitchie of CorpGov.net about corporate governance shareowner proposals and the case for improved proxy access for individual investors.


A review by Ernst & Young of this year's proxy season thus far provides a compelling indication of the strides investors have made in calling attention to governance shortcomings at many corporations.

As recently as 2005, shareowner resolutions calling for a majority voting standard for board nominees received less than one percent support. This year, the support has exceeded 80%. And average support this year for annual rather than staggered elections of board members has also exceeded 80%.

Support for calls for independent board leadership have also become commonplace, as even a resolution requesting the separation of the positions of CEO and Board Chairman at JPMorgan Chase received 40% of the shareowner vote. James Dimon currently holds both positions; Lisa Lindsley, director of capital strategies at American Federation of State, County & Municipal Employees (AFSCME), said while introducing the resolution at the company's annual general meeting in May, "Looking for an infallible CEO is a fool's errand."

Despite the notable gains achieved by shareowners addressing corporate governance this proxy season, some of the most significant resolutions have yet to come to a vote, according to James McRitchie, a longtime corporate governance advocate and the founder and publisher of CorpGov.net.

In the coming weeks, three companies—Forest Labs, Medtronic, and H&R Block—will face shareowner resolutions designed to provide individual investors with proxy access by empowering them to nominate directors for their boards.

Based on a model resolution created by the United States Proxy Exchange (USPX), a service for individual investors, the resolutions request that nominations for board directors be allowed. Any party of one or more shareowners that has collectively held, continuously for two years, one percent of a company's securities, or any party of shareowners of whom fifty or more have each held continuously for one year a number of shares of a company’s stock worth at least $2,000, would be eligible to make one nomination or a number of nominations equal to 12% of the current number of board members.

"In all three proposals you're limited to one nominee per nominating party," McRitchie told SocialFunds.com. "It's an unusual part of our proposal. What we're trying to get away from is the idea that putting somebody different on the board is a contest."

"The company should not look at it as a change in control," he continued. "We're trying to think of corporations more as communities, and we think the mechanism of limiting nominations from any single group will encourage greater diversity. We're hoping proxy access can be used to make less dramatic changes in corporations, but also from a variety of sources."

The model resolution designed by USPX was made possible by amendments to Security and Exchange Commission (SEC) Rule 14a-8. When the SEC's proposed Rule 14a-11 was struck down by a Court of Appeals, SEC Chairman Mary Schapiro stated that through Rule 14a-8, "Shareholders and companies have the opportunity to establish proxy access standards on a company-by-company basis."

USPX objected to provisions of Rule 14a-11 that required a high ownership threshold of three percent of a corporation's outstanding stock in order to nominate, and limited the total number of shareowner nominations to 25% of the number of board members. Of its model proposal, USPX stated that it "provides a reasonable—but not necessarily easy—means for most long-term shareowners to participate in nominating directors."

In a recent p ress release, the Florida State Board of Administration—the nation's fourth-largest pension fund—announced that it had voted in favor of all nine proxy access proposals submitted by investors during the first half of 2012. Resolutions submitted at Chesapeake Energy and Nabors Industries—companies with severe corporate governance problems—received majority votes from shareowners.

Proxy access proposals at Wells Fargo, Western Union, and Princeton National Bancorp each gained about one-third of shareowner votes.

"While our targets aren't in death spirals, we think they are poorly run," McRitchie said. "They've underperformed over the past five years, and have executive pay issues." Other issues cited by McRitchie include concerns over succession planning, directors owning no stock in the companies, and the inability of shareowners to call a special meeting.

"You can't really change companies by social and environmental proposals alone," McRitchie observed. "You might change around the edges, but you have to be able to vote in people who believe what you believe."

"Currently, corporate elections are too often either like those in dictatorships," he continued. "Vote the party or not at all, or the company is up for grabs by corporate raiders who want to extract value, rather than add to it. We hope our proposals, limiting proxy access to one nominee per non-coordinating group, will move corporations to become communities where diversity of background, skill-sets and thought are welcome. The added DNA could revitalize companies, making them not only more profitable but with values more in tune with a salubrious environment."

 

 
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