Companies can define terms of proxy access by being more pro-active in presenting their own proposals for shareholder vote, says Manhattan Institute
The number of shareholder proposals rose this year and activists gained ground advocating for board declassification, the elimination of supermajority voting provisions and proxy access, according to the 2015 Proxy Monitor Report on Corporate Governance and Shareholder Activism published by the Manhattan Institute.
The report, which focuses on shareholder activism among Fortune 250 companies, shows that the number of proposals receiving majority shareholder support is up significantly. In 2015, 11 percent of shareholder proposals received majority support, compared with 4 percent in 2014. Most of the increase stemmed from 23 of the 35 proxy access proposals filed among Fortune 250 companies winning majority support.
Nearly half (47 percent) of shareholder proposals filed with companies covered by the study were about corporate governance, followed by 38 percent dealing with executive compensation and 17 percent related to social issues. The jump in shareholder proposals related to corporate governance from 36 percent last year was primarily the result of the New York City Pension Funds’ campaign to file proposals with 75 of its portfolio companies (23 of which are in the Fortune 250 cited in the Proxy Monitor report).
The increase in support is tied partly to the fact that more shareholder proposals have been allowed on proxy ballots this year. The report notes that the SEC suspended its ‘conflicting proposals’ rule, which permits issuers to exclude shareholder proposals that are largely identical to management proposals from proxy ballots. ‘In 2015, the SEC issued 82 no-action letters to petitioning companies and denied or refused to take a position on 68; in 2014, the agency issued 116 no-action letters and denied only 50,’ the report says.
These developments demonstrate that corporate governance proposals are gaining traction. Manhattan Institute Center for Legal Policy director James Copland says board declassification proposals, which call for all directors to be elected annually, and proposals to end supermajority voting are attracting more support these days because they help eliminate takeover defenses.
The significance of the strides made by proponents of proxy access, which would let investors that meet certain ownership requirements nominate a small number of directors to that company’s board on the proxy ballot, is that investors could potentially gain a bigger say on board composition without having to launch a formal proxy fight, says Copland.
The New York City pension funds’ 75 proxy access proposals fueled the rise in proposals overall. Copland says the funds targeted companies based on three criteria – their policies on executive compensation, climate change and board diversity. ‘They have been very successful in getting majority shareholder support for these proposals: 18 out of the 23 that they introduced won majority support,’ he says.
Given the magnitude of shareholder support for proxy access, Copland says companies should consider creating their own proposals to address it.
‘I do think most large publicly traded companies will move in the direction of having some sort of proxy access rule because of the success of this campaign,’ he says. ‘They are not going to alienate a large group of their shareholders.’
And, by being more proactive, ‘there is some scope for companies to decide exactly what [proxy access] looks like,’ Copland says. ‘It may or may not be along the lines of what the SEC’s mandatory rules imply.’
Although the Manhattan Institute report finds that public pension funds’ activism through shareholder proposals does not add to share value for the average investor, the steady increase in shareholder activism indicates that shareholders may not agree, Copland says. A recent report on shareholder activism by the EY Center for Board Matters finds that 72 percent of investors surveyed believe whether activism is beneficial over the long term depends on the particular circumstances involved. Another 11 percent of those surveyed are convinced activism has a positive effect on companies’ financial growth, while 17 percent say it does not.
