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Proxy Access and What It Means for Shareholders
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By Marianne Jennings

4/21/2017

 

In 2014, the number of S&P firms with it was 1%.  In 2016, it was 21%. There are 58% of the S&P 500 firms that now have it. “It” is proxy access, which is the ability of longstanding shareholders to add names of candidates to the ballot used for electing directors to the company board. Generally, the shareholders eligible to add names to the director ballot must have held at least 3% of their shares for three years.  With that status, the shareholder can place the name of an individual for election right alongside the current directors seeking elections and any new candidates put forward by the company for board slots. 

 

 

 Some have referred to proxy access as giving shareholders “the keys to the boardroom.”  Also referred to as “boardroom entry,” this type of access is supported by large asset managers. For example, TIAA wrote letters to its top 100 companies in its portfolio asking them to improve their processes for shareholder nominations to the board of directors. As a result, two-thirds of those companies adopted proxy access. The New York City Comptroller (representing five pension funds) and Calpers (the California pension funds) were successful in having Texas Instruments, Phillips 66, and Consolidated Edison adopt proxy access. Joann S. Lublin, “Big Firms Resist Boardroom Entry,”Wall Street Journal, April 18, 2017, p. B2.

 

 The idea of proxy access was first considered by the SEC in 1942.  Another proposed rule was considered by the SEC in 2003. However, it was the passage of Dodd-Frank in 2010 that included provisions on SEC authority to develop rules on proxy access.  The SEC did develop a proxy access rule, but a lawsuit challenging the rule as arbitrary and capricious, or not supported by study and evidence, was successful. The court found that the failure of the SEC to consider the economic impact of the rule meant that it could not take effect unless and until such a study was completed.

 

Here the Commission inconsistently and opportunistically framed the costs and benefits of the rule; failed adequately to quantify the certain costs or to explain why those costs could not be quantified; neglected to support its predictive judgments; contradicted itself; and failed to respond to substantial problems raised by commenters. For these and other reasons, its decision to apply the rule to investment companies was also arbitrary.

 

Business Roundtable v. SEC, 647 F.3d 1144 (2nd Cir. 2011).

 As a result, the SEC shelved the effort to promulgate a proxy access rule.  However, the private sector took over and institutional investors as well as governance think tanks have undertaken the reforms via shareholder pressure. For a full history of proxy access and a timeline on its evolution, go to the Council of Institutional Investors here.

 

Companies with proxy access include Arch Coal, BorgWarner, Cabot Oil & Gas, CF Industries, Flowserve, HCP, Marathon Oil, Noble Energy, New York Community Bancorp, NVR, Oshkosh, Priceline Group and SBA Communications.

 

 DISCUSSION STARTERS

 

 Explain proxy access and what is means.

Discuss the history of the proxy access years.