State officials oppose GOP governance reforms

New York comptrollers and others back current shareholder proposal process

Republican efforts to water down corporate governance regulations – including those governing the ability of investors to file motions at annual meetings – face opposition not only in the Senate but also from a range of state officials who act as major institutional investors.

A coalition of state fiduciaries led by New York State comptroller Thomas DiNapoli and New York City comptroller Scott Stringer last week sent a statement to all 435 members of the House of Representatives in support of the use of shareholder proposals as what they call ‘an essential tool in maintaining corporate transparency and accountability’. Collectively, the signatories represent more than $1 trillion in assets to fund retirement and other benefits for more than 5 million public employees and retirees.

The statement was filed in response to provisions of the Financial Choice Act (FCA), which was passed on June 8 by the Republican-led House. The FCA in large part seeks to undo many provisions of the Dodd-Frank Act regarding banks and other financial services firms, but it also includes a number of corporate governance reforms.

‘This act attempts to silence investors, large and small, that seek a vote on corporate action that could put our investments at risk and diminish corporate accountability,’ DiNapoli says in a statement. ‘Publicly owned companies are responsible to their shareholders, but this act is trying to overturn that core principle by allowing only a select few of the largest investors to question corporate behavior.’

Attorneys with Skadden Arps Slate Meagher & Flom summarize the legislation’s corporate governance provisions in a recent notice. They explain that, in regards to shareholder proposals, the bill would direct the SEC to modify the eligibility requirements for submission of shareholder proposals under the Securities Exchange Act Rule 14a-8 from the existing requirement that a shareholder own at least $2,000 of company stock for at least one year to requiring a shareholder to hold at least 1 percent of the issuer’s shares for at least three years.

The attorneys also note that the FCA would require the SEC to raise the resubmission thresholds under Rule 14a-8 – ‘in other words, the minimum level of support required for a proposal to be eligible for inclusion in a company’s proxy statement in subsequent years’ – to 6 percent of the vote if the proposal was voted on once in the last five years, 15 percent if voted on twice in the last five years or 30 percent if voted on three times in the last five years. These would be increases from the current thresholds of 3 percent, 6 percent and 10 percent, respectively.

In addition, the bill would prohibit a company from including in its proxy materials ‘a shareholder proposal submitted by a person in such person’s capacity as a proxy, representative, agent or person otherwise acting on behalf of a shareholder.’

The FCA further includes a measure – described by the Skadden Arps lawyers as ‘long desired by the corporate community but viewed as unnecessary by many members of the institutional investor community’ – that would require proxy advisory firms to register with the SEC. Proxy advisory firms would have to establish, maintain, enforce and disclose policies and procedures relating to managing conflicts of interest.

Among other things, the bill would amend the requirement that companies hold say-on-pay votes at least once every three years to demand such votes only in years ‘in which there has been a material change to the compensation of executives of an issuer from the previous year.’ It would eliminate the requirement that companies hold a say-on-frequency vote at least once every six years.

‘UNDERMINE SHAREOWNER RIGHTS’
‘There is nothing about the Choice Act that provides choice. It’s a deliberate attempt to undermine shareowner rights and erode accountability at companies big and small,’ Stringer says. ‘This legislation was written by corporate executives, for corporate executives – at the expense of the rest of us.’

DiNapoli and Stringer have both used shareholder proposals on a variety of issues, including executive compensation and corporate accountability and transparency. For example, a motion filed by DiNapoli asking ExxonMobil to report on how its business model will be affected by global efforts to limit the average rise in temperatures to below 2°C received 62.3 percent support (CorporateSecretary.com, 6/2).

‘Shareholder proposals provide an orderly means to mediate differences between a company’s management, board of directors and shareowners,’ officials write in the statement. ‘The proposals allow shareowners to signal issues of concern in the interest of enhancing long-term company value and provide a framework for the company to respond with information about its strategy, governance and risk-management approaches to the issues raised.’

They add that ‘advancements in US corporate governance practices and regulation’ that they believe would not have occurred without the current shareholder proposal process include: independent directors, annual election of directors, majority voting for the election of directors, shareowner proxy access and advisory votes on executive compensation.

It has been reported that the FCA may struggle to pass the Senate. In the meantime, the Skadden Arps attorneys advise that companies ‘continue to comply with existing disclosure requirements and prepare to comply with upcoming disclosure requirements – such as CEO pay ratio disclosure – until any such repeals are enacted into law (if self-executing) and/or the SEC takes the necessary action to enact the necessary rule amendments or otherwise suspend the effectiveness of any rules.’

SIGNATORIES
In addition to comptrollers DiNapoli and Stringer, and Council of Institutional Investors executive director Kenneth Bertsch, signatories to the statement include: