Proxy Access: A Tipping Point?

Few corporate governance issues have stirred as much controversy as shareholder access.  Access provides shareholders with a specified percentage of shares (3% is typical) that have been held for a specified time period (three years is not unusual) with the right to submit a short slate of directors for inclusion in the company's proxy statement.  Access effectively reduces the costs of nominating directors to the board.

The SEC adopted a rule requiring shareholder access.  The agency had done so in the aftermath of the "clarification" by Congress in Dodd-Frank that the SEC had the authority to adopted a shareholder access rule.  See Section 971 of Dodd-Frank (amending Section 14(a) of the Exchange Act).  For a history of shareholder access, see The SEC, Corporate Governance, and Shareholder Access to the Board Room.

After the DC Circuit struct down the SEC's proxy access rule (on the basis of an allegedly defective cost benefit analysis in a very poorly reasoned decision), the SEC went dormant on the rule.  The Agency has given no signs that it would repropose anything in this area.  Shareholder access does not appear on the SEC's agenda of future rulemaking.

Proxy access, therefore, has been left to private ordering.  Access proposals were slow to get off the ground and involved multiple models.  That, however, has changed.  A more or less common model has emerged (3% shareholders; 3 year holding period) and the number of proposals has grown.  So has the support.

According to ISS, the number of proposals has increased from 2013 to 2014 (20 filed this year; 16 last year) as has average support (39.4% in 2014; 33.1% in 2013). Proposals passed at Nabors Industries Ltd., Big Lots Inc., International Game Technology, Boston Properties Inc., Abercrombie and SLM Corp.  See Ning Chiu, Success of Proxy Access Proposals Depends on Threshold Ownership Levels, Davis Polk Briefing, June 20, 2014 ("At the other end of the spectrum, shareholder proposals asking for access to nominations through company proxies for shareholders owning 3% of shares for three years have passed by a majority of votes in support (without counting abstentions or broker non-votes) at four companies: Big Lots (65.8%), Boston Properties (64.5%), International Game Technologies (57.8%) and Nabors (51.8%).").  

Moreover, slowly but surely, the number of companies with access policies or bylaws have increased. According to one recent study, six companies now have an access bylaw in place.   

• Three companies—CenturyLink, Chesapeake Energy, and Verizon Communications—followed up on past majority votes with management resolutions to adopt 3%/3-year access rights. All of the proposals passed, bringing the ranks of large-cap companies with proxy access to six, including Hewlett-Packard, Nabors Industries, and Western Union.

Apparently, American Railcar Industries Inc. also is subject to shareholder access.  

At least one company has already committed to the submission of a proxy access bylaw to shareholders in 2015, including McKesson, while others have been forced to address precatory proposals adopted by shareholders.  The Abercrombie proposal merely "ask[ed] the board of directors (the “Board”) to adopt, and present for shareholder approval, a “proxy access” bylaw."  See Abercrombie Proxy Statement, at 97.  The proposal passed at Abercrombie with 55% of the vote, by a vote of 33,296,327 to 26,980,286.  The company apparently intends to "consider the outcome of the vote and determine the best course of action in the best interests of all shareholders".  

With an average support of almost 40%, shareholder access may duplicate the success of majority vote provisions.  Moreover, as support grows, the proposals may increasingly become mandatory rather than precatory.

To the extent that proxy access becomes common, shareholders have a more direct avenue for influencing the board.  One suspects that many of the other proxies for shareholder influence (say on pay, proposals to separate chair/CEO, majority vote provisions) will decline in importance.  In short, companies with shareholder access may well see a reduction in shareholder activism in other areas.