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Aug 10, 2015

Does a new era of shareholder rights loom?

Overwhelming success of proxy access proposals in 2015 proxy season is likely to spur greater commitment by issuers to shareholder engagement

In the 2016 proxy season it will be interesting to see the extent to which incumbent directors will face challengers when standing for re-election to their board seats. The overwhelming success of proxy access proposals during this proxy season – whether they originated from shareholders or management – raises many questions about whether investors, once empowered to run competing short slates of alternative directors, will exercise that right.

As ISS’ Preliminary 2015 US Postseason Review, released on August 4, shows, the average level of shareholder support for the 84 resolutions where vote results were available as of July 29 was 54.4 percent, versus average support of just 34 percent last year. Nearly 60 percent (49) of those 84 resolutions received majority support, while another six garnered at least 49 percent support, thus narrowly falling short of the majority support level. ISS says it is tracking 41 companies that have adopted or made loose commitments to adopt proxy access either this year or next year. Altogether, about 5 percent of S&P 500 companies have now either adopted or committed to adopting proxy access.

To put some perspective on this success rate, ISS compares it to the timespan over which majority voting rules, which require that directors in uncontested elections get re-elected by a majority of the company’s shareholders, have become the standard among the largest publicly listed US companies. Compared with 2004, when just 7 percent of S&P 500 firms had adopted a majority vote standard, nearly 90 percent of S&P 500 firms now have that standard in place. ‘While it took about three years for the majority-vote standard campaign shareholder proposals to attain average majority support, the 2015 proxy access campaign broke the average majority support barrier in its inaugural year,’ the report states.

But ISS allows for the possibility that despite the SEC’s refusal to sanction (through no-action letters) the exclusion of shareholder resolutions by issuers that had put forth a management proposal on the same topic, the commission ‘could stop the access campaign in its tracks’ by reverting to the previous staff interpretation of Rule 14a-8(i)(9), which allowed issuers to block very different proposals on the same topic through the use of counter-proposals.

If the latter scenario doesn’t come to pass, however, there is little doubt that continuing momentum for proxy access is likely to fuel increased interest by issuers in shareholder engagement. That’s all to the good. As this season’s stats demonstrate, companies seem to have fortified their commitment to engagement with proponents of environmental and social proposals, judging by the fact that 40 percent of such proposals were withdrawn before a proxy vote could take place.

As I reported last month, SEC chair Mary Jo White made it clear to attendees of the Society of Corporate Secretaries and Governance Professionals’ annual conference at the end of June that she would prefer to see issuers and investors work together to resolve certain long-standing issues, including universal proxy ballots, rather than rely on rule making by the commission. This requires a stronger commitment to shareholder engagement. Given this and the progress under way on proxy access, it’s reassuring to contemplate what a new era of increased respect for shareholders’ rights and perspectives might look like.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary