photo by Adrian Scottow
All companies belong to their owners.
This principle seems simple, but it can often get lost as companies grow and especially after they go public. But regardless of whether a company is public or private, it does not belong to anyone but its owners – not the directors who control the company at any given point in time, and certainly not the managers who are hired to run it (except to the extent of those individuals’ shareholdings, of course).
This principle animates the discussion of “proxy access:” the principle that major shareholders should have the power not only to vote for the company’s directors (as all shareholders do), but to nominate individuals for board seats as well.
While the Securities and Exchange Commission considered the idea as far back as the 1940s, it was the Dodd-Frank Act in 2010 that triggered the current shift in business norms. Dodd-Frank granted the SEC explicit authority to adopt a proxy access rule, applicable market-wide, which the Commission did that same year. The courts subsequently struck down the rule but allowed shareholders to request proxy access themselves through the process of amending an individual company’s bylaws.
Many shareholders have pushed for just such a change in the years since. According to ISS Corporate Solutions, nearly 60 percent of S&P 500 companies now offer shareholders proxy access. Most of these companies allow owners that hold at least 3 percent of their shares for at least three years to propose some significant portion of the board member ballot, typically 20 to 25 percent. This framework mirrors the SEC’s 2010 rule and has become widespread in the past few years. The prevalence of proxy access is likely to keep growing too; both corporate governance lawyers and shareholder proponents told Bloomberg last year that they expected the topic to be the most common shareholder proposal in 2017’s annual meetings.
Some companies, however, continue to resist shareholders’ request for greater say in who occupies the boardroom. The question will be before IBM’s investors today at the company’s annual meeting, but the company’s most recent proxy statement made clear that the board was not pleased by the idea. Proxy access would reduce the board’s role “in evaluating director nominees,” and could allow special-interest groups to “promote their own agendas, potentially at the expense of the long-term interest of stockholders,” the statement said, according to The Wall Street Journal.
Charles Schwab Corp.’s leadership has recently articulated some of the same complaints. The California Public Employees’ Retirement System (CalPERS) and the New York Retirement Systems have called for their fellow Schwab shareholders to vote in favor of a proxy access proposal at a meeting in May. In its proxy statement, Schwab warned that under the proposal, “contested director elections could occur every year, leading to high turnover, inexperienced directors with insufficient knowledge and understanding of our current and past business, and directors who could promote the influence of special interests over the interests of all stockholders.”
CalPERS and the New York City pension fund countered that “Without effective proxy access, the director election process simply offers little more than a ratification of management’s slate of nominees.”
IBM, Schwab and other companies that resist allowing significant shareholders to nominate directors and running competitive elections for those posts are simply wrong. First, the concern that shareholders will overrun boardrooms with pet concerns has proved baseless. Thus far, only one investor has attempted to take advantage of the new process; Gamco Investors Inc. put forward a director candidate for National Fuel Gas Co. this year, but withdrew the potential director before the vote. So there has hardly been a flood of new candidates, inexperienced or otherwise, since shareholders secured the proxy access they requested.
But the more important point is that shareholders are the company’s owners and deserve a real say in how the company is run. If management thinks certain director candidates would be disruptive, or that changes in board membership are unwarranted, it has every right to communicate those views to shareholders before a vote. That is what proxy statements are for. But they have no right to block shareholders from asserting control over their own company.
There isn’t much to like in the Dodd-Frank legislation, but to the extent it blocked entrenched managers and hand-picked directors from creating self-perpetuating clubs at the top of publicly owned corporations, it accomplished something useful. That accomplishment is now bearing fruit as companies acknowledge that managers serve owners, not the other way around.