Proxy access, the governance tool that gives shareholders the right to nominate their own directors, has been adopted by more than 100 companies, but it is used sparingly by shareholders for good reason: It’s hard to implement.
In fact, proxy access has yet to be used. “Will it be a right that lays dormant for very long?” asks Sabastian V. Niles, partner at Wachtell, Lipton, Rosen & Katz and advisor to companies on corporate governance issues. “Regardless, companies should take a measured and thoughtful approach to creating a new right that, in theory, is a last resort, while safeguarding the broader interests of the shareholder base and the company from potential abuse and misuse.”
Large institutional shareholders such as CalPERS and CalSTRS, and governance-focused investors such as the New York City Comptroller, continue to clamor for proxy access because they see it as a critical part of board accountability and transparency. For advocates, proxy access is the hammer that tells directors they better act in the shareholders’ best interest, or else.
“When we started hearing about our shareholders’ interest in proxy access, I took it to our board, even though it wasn’t a current proposal, but alerting them it could be a proposal next year,” says Margaret M. Foran, chief governance officer, senior vice president and corporate secretary for Prudential Financial Inc.
Instead, the board discussed the issue, and on March 10, 2015, announced that it approved a “proxy access” amendment to its bylaws that enables eligible shareholders to nominate and list their board nominees in the company’s proxy statement. Prudential took the step independently and proactively, without a shareholder proposal.
As one of the first companies to adopt proxy access, Prudential received kudos for its commitment to strong corporate governance practices.
Here’s the hard part: Proxy access requires that a shareholder, or a group of shareholders, own 3 percent or more of the company’s outstanding shares continuously for at least three years in order to nominate directors who will be listed alongside the company’s nominees for directors in the company’s proxy.
To some degree, shareholder engagement has superseded proxy access. Companies like Prudential that maintain ongoing contact with their shareholders are aware of what their priorities are. “If you’re regularly engaging with your shareholders, you know their issues,” said Foran.
While activists have not yet used proxy access to push board changes, this potential tool may provide leverage for garnering institutional stakeholder support for a shareholder proposal to gain board concessions. For example, ValueAct Capital viewed Microsoft as undervalued but did not go the route of proxy access. Instead, it used its 0.8 percent position to sign a cooperation agreement with Microsoft, which included a board seat for ValueAct president Mason Morfit.
“Proxy access is really a third path for shareholders,” Niles points out. “Shareholders have always had the right to suggest director candidates to the board and skillsets they would like to see represented. And they can always launch an independent proxy fight to nominate their preferred directors. So proxy access enables shareholders to use the company’s proxy to do what they otherwise could do on their own. The extent of unintended consequences will depend on how proxy access is used.”