When The AES Corporation managed to exclude a shareholder proposal that would have lowered the ownership threshold for calling a special meeting, it thought it had avoided a recurring headache. In the end though, disregarding investors may prove to be a bigger pain.
Although they are rarely called, many investors view their ability to call special shareholder meetings as an important corporate governance feature. While this view is shared widely among the investor community, shareholders differ significantly in their views of what constitutes an appropriate ownership threshold for calling a special meeting.
At AES’s 2015 annual meeting, 70% of outstanding shares supported an advisory management proposal concerning shareholders’ right to call a special meeting. The management resolution, which proposed an ownership threshold of 25%, garnered more votes than a competing shareholder proposal on the same ballot that requested the ability for owners of 10% of AES’s stock to call such a meeting. Accordingly, the management proposal went into effect and in December 2015, AES amended its bylaws to allow any shareholder (or group of shareholders) holding 25% of its shares to call a special meeting.
During the 2018 proxy season, however, the topic of shareholders’ right to call a special meeting was again a prominent feature of AES’s annual meeting. In the autumn of 2017, AES received another shareholder proposal requesting that it lower its special meeting threshold to 10 percent. The company responded by submitting its own proposal that would ratify the existing 25% threshold; it then petitioned the SEC to exclude the shareholder proposal from the ballot, arguing that it would directly conflict with management’s ratification proposal.
The SEC sided with management and allowed AES to exclude the shareholder proposal, so long as they informed shareholders in their proxy statement that a vote in favor of management’s proposal was “tantamount to a vote against a proposal lowering the threshold.” This rationale stemmed from the SEC Division of Corporation Finance’s interpretation of no-action requests under the Code of Federal Regulations Rule 14a-8(i)(9) and based on “whether a reasonable shareholder could logically vote for both proposals.”
Although AES did receive no-action relief for the shareholder proposal, investors clearly expressed their discontent concerning the issue. Whereas similar resolutions at other companies received an average of 86% shareholder support, the proposal at AES narrowly passed with only 59% shareholder support. Similarly, Holly Koeppel, the chair of AES’s nominating, governance, and corporate responsibility committee, received only 66% shareholder support. While it appears that AES won the battle by ensuring that the shareholder proposal did not go to a vote, it may have lost the war. As a result, shareholders will likely be looking to AES to demonstrate responsiveness to these votes in the coming year.
Glass Lewis’ Perspective
Glass Lewis believes that a lower special meeting threshold better allows shareholders the very important ability to address matters outside the annual meeting cycle. In most cases, we believe that a 10-15% threshold is desirable. Given this belief, when presented with a management and shareholder proposal concerning the special meeting threshold, we generally recommended that shareholders support the lower special meeting right and vote against the higher special meeting right or the ratification.
In this case, shareholders didn’t have that option. Instead, the management proposal was used a means to circumvent the inclusion of the shareholder proposal. We were concerned by this response from the board. Ratifying the existing right would not offer enhanced shareholder rights nor would its approval (or rejection) appear to alter the company’s existing governance provisions. We believed that shareholders would be better served by having the ability to vote on the shareholder proposal, even if that proposal was placed against a competing management proposal.
Given our concerns regarding the exclusion, and noting the absence of any consequences for rejecting the proposal, we recommended voting against the ratification of the existing 25% right. Moreover, we believed that the board’s actions in this regard warranted a vote against the chair of the nominating, governance, and corporate responsibility committee.
The Bigger Picture
2018 was arguably the year of the special meeting. The most recent proxy season saw 62 shareholder proposals requesting that companies adopt or adjust special meeting rights, roughly triple the number in recent years. Boards pushed back, buoyed by the SEC’s recent guidance that so-called ‘conflicting’ proposals could be excluded in favor of a ratification, so long as shareholders were informed that a vote in favor of ratifying the existing special meeting right is “tantamount to a vote against a proposal lowering the threshold.” As a result, shareholders at CF Industries Holdings, Inc., JPMorgan Chase & Co., and eBay didn’t get a chance to vote on a lower special meeting threshold. Shareholders at Skyworks Solutions Inc. didn’t even have a special meeting right until four months before the meeting; however, in response to a 10% special meeting shareholder proposal, Skyworks’ board unilaterally adopted a 25% threshold, which it proceeded to ratify at its annual meeting, to the exclusion of the shareholder proposal.
Not everyone took this approach: six companies (American Airlines Group, Anthem, Inc., CBRE Group, Inc., Quest Diagnostics Incorporated, Marriott International, Inc., and Spirit AeroSystems Holdings, Inc) allowed both management and shareholder proposals on the ballot. Investors appreciated the gesture, favoring the management proposal over the shareholder proposal in all but one case (though it’s worth noting that almost all of the shareholder proposals received at least 35% support).
Indeed, when treated with respect, investors were usually quite willing to defer to management. In situations where the board allowed conflicting proposals on the ballot, the management proposal received average support of 84%. By contrast, when shareholder proposals were excluded, the remaining management proposal only received 58% support on average.
The SEC’s current approach to ‘equivalent’ proposals is problematic, and may be subject to further review. The Council of Institutional Investors raised objections that AES was “forcing shareholders into a dilemma” with the inclusion of its ratification proposal, and has urged the SEC to reconsider its approach to shareholder proposal exclusion. It’s also worth noting that AES did not have to exclude the shareholder proposal in the first place — and it’s a decision that may erode shareholder confidence in the board. When given the chance to consider two limits, investors tend to defer to management. When the choice gets taken away, they tend to target the directors responsible for governance oversight.
Glass Lewis’ Case Study season reviews provide insights gained from specific meetings and agenda items relating to board elections, executive pay, ESG practices, shareholder activism, stewardship and engagement, and other notable trends. Case Study reviews are available for a variety of markets at https://www.glasslewis.com/special-reports/