The decades-long battle to give investors more say in who stands for election to a company’s board of directors is heating up again.
In the past week or so, shareholders of at least two companies, MEMC Electronic Materials and Textron, have submitted shareholder proposals for the 2012 proxy calling on the companies to adopt a so-called proxy access policy, according to The U.S. Proxy Exchange (USPX), an advocacy group for small investors.
The non-binding resolutions in both cases are based on a model proposal put out by USPX. It calls on companies to permit shareholders to nominate one director, or if greater, a number of nominations equal to as many as 12 percent of the current number of board members, if they have continuously held 1 percent of the company’s stock for two years, or if they are part of a group of at least 100 shareholders, each of whom has owned at least a $2,000 stake in the company for one year.
The Securities and Exchange Commission last year proposed a rule, which a federal court subsquently disallowed, that would have required investor groups to own at least 3 percent of the company’s stock for at least three years, and capped the number of seats they could gain to 25 percent.
Activist and gadfly Kenneth Steiner, a Great Neck, NY, investment advisor, sponsored both resolutions, although he did have help from others, including fellow gadfly and retired aerospace engineer John Chevedden, with the MEMC proposal. Keep in mind that Steiner is something of a serial filer of proxy proposals, having sponsored the fourth largest number of shareholder resolutions during the 2008 through 2010 period, according to Proxy Monitor, a scorekeeper sponsored by the Manhattan Institute.
Currently, a company’s board of directors has sole responsibility for nominating directors. In a majority of cases, they can be elected if they receive one “yes” vote.
In order for investors to seek election of their own slate of directors, they must launch a very expensive proxy fight.
There have been a number of attempts by investors to gain the right to nominate their own candidate under certain conditions going back at least three decades, but to no avail.
The SEC proposal, Rule 14a-11, which would have required companies to include shareholders’ director nominees in company proxy materials under certain circumstances. However, it was vacated by the U.S. Court of Appeals last summer, which asserted the commission’s actions were “arbitrary and capricious” when it instituted the rule.
The SEC chose not to seek a rehearing of the decision or seek Supreme Court review. Instead, it chose a different track.
When it adopted Rule 14a-11, it also adopted amendments to Rule 14a-8, the shareholder proposal rule. Under those amendments, it gave eligible shareholders permission to require companies to include proxy access resolutions in company proxy materials. The goal was to make it easier for shareholders to pursue proxy access on a company-by-company basis. In contrast, Rule 14a-11 would have required all companies to offer proxy access. The MEMC and Textron proposals followed the guidelines recently laid out by the United States Proxy Exchange (USPX), a grassroots shareholder activist group for individual investors.
“The first year is a test,” says Glyn A. Holton, executive director of U.S. Proxy Exchange, which published a model proposal for would-be proxy access sponsors to follow. “If they are successful,” Holton adds, “there will be many more [proxy access resolutions].”
He stresses the key to the proxy access resolutions is that they have safeguards to prevent using this device to seek change of control at the company. This is why he does not plan to seek ties with activist hedge fund managers. His group also plans to target companies with governance policies they disagree with.
Both the MEMC and Textron resolutions criticize compensation polices at the two companies.
The MEMC resolution points out that more than half of active board members hold no shares in the company. It also points out that the CEO’s options, which are not contingent on performance, were worth over $14 million in 2009 and that the company superseded Compensation Committee guidelines in 2010 to award the CEO a discretionary payment. It also noted that the stock fell 63 percent in the year ending November 9, 2001.
In the case of Textron, the proposal asserts that cash-based long-term compensation does not tie executive performance to long-term shareholder equity value. It adds that a potential $39 million payout to the CEO “is not in the interest of company shareholders” and notes that in their last elections, five out of 12 directors received a negative vote of at least 17 percent, and two of them more than 30 percent.
Meanwhile, on Thursday, ISS disclosed the results of comments it received from the investment and corporate community regarding all of its planned proxy policies for 2012. Regarding proxy axccess, it point outs ISS’s updated policy is designed to retain flexibility to address the wide variety of approaches to the issue.
This is shaping up to be a more interesting proxy season than the SEC’s court defeat earlier this year would’ve led one to expect.
