After 70-Year Fight, This Investor Request Is Met Left and Right

  • Proxy access eases options for shareholders choosing directors
  • More than 30% of S&P 500 companies have agreed to new rules

Large U.S. companies are giving investors new powers to directly nominate board members at a record pace. The changes are coming so fast that even supporters have been caught off guard.

Within the past week, Home Depot Inc., General Motors Co. and FedEx Corp. joined Inc. and McDonald’s Corp. among about 194 companies that since 2014 have empowered investors to nominate directors on their own. The moves are a reversal of the obstructionist approach corporations have taken over the past seven decades to limit investor influence on board membership.

“It’s unprecedented,” said Edward Kamonjoh, head of U.S. strategic research analysis and studies at Institutional Shareholder Services, which advises on proxy votes. He estimates that 162 of Standard & Poor’s 500 companies have agreed to new rules, up from seven in 2014. “By any measure, the campaign’s success has taken place at light speed.”

The change comes as boards have shown increasing willingness to engage with investors -- or face the growing power of hedge fund activists like Carl Icahn and Dan Loeb to depose directors and replace chief executive officers. Since the beginning of 2011, five of the biggest U.S. activist funds have sought at least 174 board positions and landed 108, according to data compiled by Bloomberg.

‘Fundamental’ Right

Under proxy access, most companies that adopt the changes permit a group of 20 or fewer investors who have owned 3 percent of shares in the company for at least three years to nominate their own slate of directors. The number of directors they can nominate is usually limited to 20 percent of the board, or two members. Their selections would be included in the company proxy ballot mailed to all investors at no extra cost.

“Proxy access is a fundamental investor right that studies show raises shareowner value,” said New York City Comptroller Scott M. Stringer, who oversees five pension funds with combined assets of about $160 billion. He has sought about 70 proposals this year for proxy access. “It gives investors a tool to hold boards accountable and favors the creation of long-term value over disruptive short-term activism,” he said.

Peltz, DuPont

At least a portion of the board of a publicly traded company faces a vote of shareholders each year. A company typically presents a slate of director candidates and any other issues to be voted on in the proxy filing. 

Getting a slate of directors on the ballot without a company’s cooperation can be expensive. Activist investor Nelson Peltz, for example, spent an estimated $8 million in his unsuccessful fight last year to get members elected to the board of DuPont Co. without the company’s support.

Stringer and a handful of individual investors led by shareholder advocate James McRitchie have been pushing the campaign for several years, Kamonjoh said. A total of 117 companies added proxy access last year, a record. Only 16 firms had adopted the provisions between 2003 and 2014, according to ISS. By year-end, Kamonjoh estimates that half of the S&P 500 companies will have agreed to the changes.

“There certainly has been progress made,” said McRitchie, who heads the group Corporate Governance, based in Elk Grove, California. He has won shareholder votes for proxy access at companies including Costco Wholesale Corp. and Cisco Systems Inc. and obtained agreements without votes at Clorox Co. and Microsoft Corp., among others, he said.

‘Wolf Pack’

Some corporate-governance experts, however, say the proxy-access movement is misguided. Bernard Sharfman, an adjunct professor at the George Mason University School of Business and a long-time critic of shareholder access, said board nominating committees are best qualified to pick candidates. Letting outside investors have easy access to those choices may produce a weaker slate, he said.

“You don’t want a proxy-access wolf pack,” Sharfman said. “Corporate governance is not about democracy. There is no fundamental right to proxy access.”

McRitchie said that even with the proxy changes approved recently at larger companies, it can still be almost impossible for only 20 investors to amass the 3 percent ownership needed to get on the ballot. He proposes that companies remove the limit and let any combination of investors with 3 percent of shares submit candidates. He also wants the right to elect a quarter of the board instead of 20 percent, he said.

Apple’s Stance

About 33 percent of Apple shareholders voted for his proposal Feb. 25 that would have eliminated the cap on the number of investors and increased the percentage of the board that could be replaced. Apple’s $573 billion market cap and eight-member board make it difficult to gain influence, McRitchie said. Apple had already adopted a proxy-access rule that allowed 3 percent of shareholders to elect 20 percent of the board, which is sufficient, the iPhone maker said in a proxy filing.

The U.S. Securities and Exchange Commission first unsuccessfully proposed letting shareholders nominate directors in company filings in 1942, according to ISS. The idea surfaced again periodically, usually in times of corporate misdeeds, without success. The Dodd-Frank Act of 2010 gave the SEC authority to create proxy-access rules that would apply to all companies, which the agency adopted. The U.S. Chamber of Commerce sued that same year to block the change, and the U.S. Court of Appeals struck down those rules in 2011. Now such proposals are proceeding, but only on a company-by-company basis.

“It’s really unprecedented for large companies to make changes this fast,” Kamonjoh said. “We’ve reached a threshold.”

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