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Oct 18, 2015

Lingering suspicion of motives for proxy access

Pension funds see the ability to nominate directors as a way to keep boards accountable rather than something that will be used with any frequency

Unsurprisingly, PwC’s newly released 2015 Annual Corporate Directors Survey shows more than a quarter of the nearly 800 directors of public company boards polled continue to oppose proxy access in any form. And more than half think proxy access is appropriate at 5 percent ownership for five years or more, rather than the 3 percent ownership over at least three years that many investors prefer.

Proxy access proposals were the most visible success of the 2015 proxy season, with roughly 58 percent of the 100 or so proposals filed garnering majority approval by shareholders. Governance advisers expect another surge of proxy access proposals to hit public firms in the upcoming proxy season.

In an editorial published in FTI Consulting’s in-house FTI Journal in August, Steven Balet, managing director of the firm’s strategic communications segment, says: ‘Proxy access, which may seem like a step toward greater openness in corporate governance, actually privileges a special shareholder class’ by giving these investors a kind of free pass to activism that traditional activist investors have proved willing to pay for, winning or settling 75 percent of their engagements over the past three years. Balet goes on to question whether institutional proponents of proxy access may have narrower agendas than maximizing shareholder value and, in the case of public retirement funds, may be more interested in advancing the careers of the elected officials who manage these funds.

Balet sees proxy access as unfair because most individual retail shareholders could never hope to use it as their holdings are so small. But even the largest public pension funds in the US are unable to go it alone if it’s a case of wanting to nominate a director to a board. ‘Most pension funds – even those under the supervision of a city or state comptroller – typically own less than 0.5 percent [of a company’s outstanding shares],’ says Bess Joffe, managing director of corporate governance at TIAA-CREF, in an email. ‘TIAA-CREF’s holdings are usually below 1 percent and public pension funds are smaller than us in terms of assets under management.’

Because of that, pension funds say they’re very unlikely to make the effort needed to round up other institutional investors with significant holdings in a target company to try to get alternate directors elected to the board except where they see a galvanizing governance crisis and an unresponsive board.

‘As long-term investors, there's nothing more important to us than the composition of the board. And over the past 15 years we’ve all watched as weak directors have failed to catch accounting fraud at companies like Enron and WorldCom, and we’ve seen how failure to rein in excessive risk-taking led to the 2008 financial crisis,’ says New York City Comptroller Scott Stringer in an email. (Stringer’s office drew much attention at the end of 2014 when it filed proxy access proposals at 75 of its portfolio companies.) ‘That said, the power of proxy access isn’t that there are going to be wholesale nominations of directors; it’s the prospect of a nominee that we believe will make boards more responsive. It’s our view ‒ and the view of the SEC ‒ that it will be rarely used. That's been the experience in other markets, including markets in which there are lower ownership and holding-time thresholds.’

Even if a pension fund succeeds in cobbling together a big enough ownership stake to nominate a director, that nominee still must garner the support of a majority of all the shareholders in order to win a seat on the board, says Aeisha Mastagni, portfolio manager at CalSTRS. And once that person is elected to the board, he or she has a fiduciary obligation to all shareholders, not just the 3 percent that nominated him or her. ‘[Proxy access is] a shareholder right and we see it as a mechanism for an accountability measure that would only be used in very extreme circumstances,’ Mastagni says. ‘If you look at other countries in the world that have proxy access I think it’s only been used twice and it was so long ago. ‘

For Mastagni, nominating an alternate board candidate would be warranted only at a company that is severely underperforming financially, whose board continues to ignore shareholder proposals that have passed, and a portion of whose directors aren’t being elected with majority support. ‘We spend a lot of time and a lot of due diligence at CalSTRS to make sure we hire the right managers to engage with companies and improve companies for sustainable long-term value because that is our goal,’ she says. ‘Our goal is to produce a return that can provide benefits to the teachers of California. The idea that we have another agenda besides that just isn’t true.’

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary