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
"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."
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."
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."
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
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."