Few Bay Area companies allow proxy access, study finds

Most companies in the San Francisco Bay Area are yet to adopt bylaws allowing long-term shareholders to put alternative board candidates on the ballot for annual shareowner meetings, according to a new report.

The finding comes from research by law firm Orrick, which looked at the corporate governance structures of 153 publicly traded companies based in the Bay Area, which includes Silicon Valley, with market capitalizations exceeding $750 million.

According to the report, less than 20 percent of the companies examined have adopted provisions allowing groups of up to 20 stockholders with a combined minimum of 3 percent of a company’s common stock for at least three years to nominate directors for up to 20 percent of the board.

That is among the most common forms of proxy access provisions, which allow groups of up to 20, 50 or an unlimited number of stockholders that have collectively held at least 3 percent of a company’s shares for at least three years to nominate up to 20 of a company’s board nominees to be included in the company’s annual meeting proxy materials, the report’s authors note.

Although some governance activists have pushed for a limit on nominees at 25 percent of the board, the vast majority of adopting companies in the survey chose the 20 percent cap, which the authors describe as ‘the emerging de facto standard.’

Nationally, several very large companies have adopted such proxy access provisions, either proactively or in response to shareholder pressure, particularly from institutional governance activist funds, the authors state. According to the Council of Institutional Investors, at least 367 companies nationally – including more than half of the S&P 500 – have amended their bylaws to allow proxy access.

The adoption rate in the San Francisco Bay Area through 2016 is low – only around 16 percent of non-dual class companies have enacted proxy access, with all but one using the three years/3 percent/up to 20 percent of board/up to 20 stockholders together formulation – according to the survey. ‘That said, one expects this number to rise significantly, both as other companies use initial adopters for comfort and with the continued focus on this area by governance activists,’ the authors write.

Non-dual-class technology companies (17 percent) are more likely than non-dual-class life sciences companies (6 percent) to have bylaws containing proxy access for electing directors, according to the survey.


OTHER FINDINGS
Among other things, the research reveals that:

• Several proxy statements appear to inaccurately state either the voting standards and/or associated vote count procedures for things such as abstentions and broker non-votes. The authors describe this as ‘a not uncommon defective condition that has been noted with concern by senior staff at the SEC’
• The adoption of exclusive forum provisions, which limit stockholder derivative class action suits to a single legal jurisdiction, continues to surge. Almost 50 percent of the companies examined with non-dual-class common stock structures have adopted these provisions, the concept of which originated only a few years ago
• Director age limits continue to be in place at a minority of companies, with less than 25 percent of firms examined having adopted some age limit
• Majority voting formulations continue to be very popular. More than 70 percent of non-dual-class technology public companies have some variation of provisions requiring a director nominee to secure a majority of votes cast in an uncontested election. But almost all of these companies allow the board to use their judgment to retain a director, which as a practical matter has happened frequently in a failed vote
• Very few companies  – 5 percent or less of all categories  – have specified board tenure limits. ‘This is another area of increased attention from governance activists and thus may evolve over the medium term,’ the authors say.