In 2015, approximately 100 companies will face shareholder proposals seeking a proxy access right that would allow certain large, long-standing shareholders to nominate directors to a company’s board without going through a typical proxy contest. The lion’s share will come from New York City’s pension funds as Comptroller Scott Stringer announced in the fall of 2014 the intention to submit proxy access proposals at 75 companies.
On January 16, 2015 , the SEC announced that for the 2015 proxy season it will not opine on the application of Rule 14a-8(i)(9) that allows companies to exclude shareholder proposals, including those seeking proxy access, that conflict with a management proposal on the same issue. The SEC’s decision is a reversal from its initial approach that would have allowed Whole Foods (and likely other companies seeking similar no-action treatment) to rely on the conflict rule to exclude a shareholder-submitted proxy access proposal in favor of a management proposal despite substantial differences between the proposals’ terms, including a significantly higher minimum ownership threshold in the management proposal than in the shareholder proposal.
Glass Lewis will continue to review each proxy access proposal, along with the company’s response, on a case-by-case basis. Please refer to the Glass Lewis 2015 Proxy Paper Guidelines on Shareholder Initiatives to review the Glass Lewis approach to evaluating proxy access proposals /resource/guidelines/.
Glass Lewis believes that significant, long-term shareholders should have the ability to nominate their own representatives to the board. Given reasonable minimum ownership thresholds in both percentage of shares and length of ownership, we believe that a proxy access right will be rarely invoked and even more rarely successful since a majority (or plurality, if contested) of shareholders must then elect the shareholder nominee(s), preventing the election of directors not supported by most shareholders. Nevertheless, given that contested director elections are distracting and potentially disruptive to a company, its board and management, Glass Lewis believes it is therefore reasonable that the exercise of the proxy access right be subject to certain minimum ownership thresholds and holding periods as well as limitations as to the number of directors nominated through proxy access.
Consistent with our case-by-case approach to evaluating management and board responsiveness to shareholders in general, Glass Lewis will review a company’s response to the submission of a shareholder proposal on proxy access, including an alternative management proposal submitted to shareholders in lieu of or in addition to the shareholder proposal, based on the specific facts and circumstances of the company and its actions. Glass Lewis will analyze the reasonableness and proportionality of the company’s response to the shareholder proposal, bearing in mind that during the 2015 proxy season the SEC’s Division of Corporation Finance will not express views on the application of Rule 14a-8(i)(9).
For alternate management proxy access proposals, Glass Lewis will evaluate whether a company’s proposal varies materially from the shareholder proposal in minimum ownership threshold, minimum holding period and maximum number of nominees to determine whether the company’s response is reasonable or would thwart the intent of the shareholder proposal (e.g. establishing a minimum ownership threshold/period significantly higher/longer than that submitted by the shareholder, thereby rendering the provision all but unusable). In addition, Glass Lewis will review the company’s performance and overall governance profile, the board’s independence, leadership, responsiveness to shareholders and oversight, the opportunities for shareholders to effect change, e.g. call a special meeting, other differences in the terms of the competing proposals, the number/type/nature of the shareholders above the proposed threshold as well as the nature of the proponent. Glass Lewis will review the rationale provided by the company regarding its reaction to the shareholder proposal, including explanation for the difference in the terms of the management proposal compared to the shareholder proposal’s terms, and in limited cases may recommend against certain directors if the management proposal varies materially from the shareholder proposal without sufficient rationale.
Glass Lewis does not have a preferred number/percentage of directors that may be nominated through the proxy access procedure as we recognize the appropriate level may vary depending on many factors. However, we believe companies should strike a balance between allowing shareholders to nominate a meaningful percentage of directors to adequately represent them while providing safeguards against a relatively small shareholder seeking to nominate a disproportionate number of directors to a level that is tantamount to gaining control of the board.
In addition to examining proposed ownership thresholds and percentage limits on proxy access nominees, in evaluating proxy access proposals submitted by shareholders Glass Lewis will review all aspects of the proposal to ensure the terms are not overly prescriptive, do not introduce minimum ownership calculation methods open to abuse or would not impose undue or unnecessary burdens on the company or the board. Similarly, Glass Lewis will closely review the terms of a management proxy access proposal to ensure that provisions would not present overly burdensome hurdles such as excessive restrictions on shareholders working as a group that would by themselves or coupled with restrictive rules regarding ownership size, length and number/percentage of directors fundamentally vitiate the proxy access right.