Remember proxy access? After decades of effort, investors achieved a decent (although not optimal) form of proxy access in the Dodd-Frank Act (DFA). A couple of years later, the Federal District Court in DC struck down the SEC’s proposed regulations. The idea remains largely un-implemented.

Leave it to some aggressive pension funds to move it along. The New York City Comptroller, Scott Stringer, also runs the pension funds for city retirees. He organized his fund and a few others to push for proxy access at no fewer than 75 US companies. We love it, although we do quibble with some of the details.

Proxy Access Refresher

(Aficionados can skip this section.)

Basically, if an investor wants to elect independent directors, you need to run a parallel campaign. The company and you each nominate candidates, and create and promote separate proxy materials. It’s redundant and expensive, especially since the incumbent directors use company money for their proxy materials, and investors use their own money for theirs.

Proxy access doesn’t demand great sacrifices from companies. It requires the company merely to include investor nominees in company proxy materials. Importantly, it doesn’t guarantee that shareholders win the board positions. On the other hand, as the New York Times reported inaccurately, it also doesn’t mean that investors could just now nominate director candidates - we always can do that, even without proxy access.

The DFA and the SEC regulations required most US companies to follow a uniform proxy access structure. Corporate interests persuaded a friendly court to strike down the SEC regulations. However, the DFA also allows shareholders to propose proxy access at individual companies. By now, investors have compelled proxy access at a very small number of companies. Hence, Stringer’s opening.

The Boardroom Accountability Project (BAP)

This grandiosely-named effort proposes proxy access at 75 large corporations. Stringer and seven other pension funds submitted non-binding resolutions at Exxon Mobil, eBay, and Chipotle, among others, for vote at 2015 annual meetings.

The project website has much more information. The Race to the Bottom blog has a superb summary and analysis. It appears that the project was motivated in part by an extensive analysis from the CFA Institute of the practicality and cost of proxy access.

This project looks a lot like the Shareholder Rights Project (SRP), Prof. Lucien Bebchuk’s initiative at Harvard Law School to declassify BoDs. The SRP won support from may of the same pension funds involved in the BAP. We hope the BAP succeeds as well as the SRP did.

Our Quibbles

We include proxy access among our top priorities for corp gov changes that PMs should support. This specific proposal raises some questions and concerns.

First, the BAP imposes relatively high restrictions for investors to gain access. Investors (one or a group):

1. ❖need 3% of outstanding shares
   

2. ❖need to own their shares for at least three years
   

3. ❖can elect up to 25% of the BoD using proxy access.
   

This is consistent with the earlier proposed SEC regulations, and is a high standard. The SEC requires companies to include other non-binding proposals if the shareholder has $2,000 of shares for one year. Any shareholder with as little as a single share can nominate a director. We prefer much lower requirements for including shareholder nominees in company proxy materials.

The BAP also submitted non-binding resolutions to the companies. To win, the BAP proposals require a majority of votes cast. But, they do not obligate the company to do anything. Alternatively, BoDs might adopt proxy access with much higher ownership thresholds - Whole Foods just tried this tactic. BoDs do either at the risk of proxy advisors opposing directors at the next election. At some companies, the adverse (to entrenched incumbent directors) consequences of proxy access is worth the risk of that opposition.

We prefer binding bylaw amendments. These have a higher approval threshold, typically a majority of shares outstanding. Yet, they would obligate the company to provide proxy access, as specified by investors, not the company. Also, the BAP would need to research individual bylaw amendments at each of the 75 companies, and propose something specific. This demonstrates to other shareholders more commitment than lobbing in the identical resolution at all 75 companies.

Finally, we don’t love how the BAP chose the 75 companies. It looked for one of three attributes:

1. ❖“carbon-intensive” energy companies
   

2. ❖few woman and minority directors
   

3. ❖failed say-on-pay votes.
   

Notably, they don’t consider company performance. While a few of the selected companies underperform the market chronically, most meet or beat large company benchmarks over a long time period. So, not only does the screen sacrifice some votes, it makes the BAP look a little naive to regular PMs.

At the 75 companies, the BAP resolutions will win support from corp gov junkies: CII members, proxy advisors (ISS and Glass Lewis), and some huge mutual funds that have started to support corp gov reforms. Alas, at least a few hedge funds and other investors will likely ignore the proposal. They avoid opposing management at portfolio companies that have performed well. These investors also won’t take quite so seriously what amounts to a corp gov proposal at a company whose principal flaw is (for instance) it lacks a diverse BoD.

Despite these quibbles, we love this initiative. PMs that own one or more of the 75 companies must vote with the BAP.