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Jan 13, 2015

Mounting proxy access jitters

No-action letters issued by the SEC to Whole Foods and other companies seeking to pre-empt shareholders' proxy access proposals begs closer look by SEC at company tactics

Corporate America – and at least one of its regulators – is running scared amid mounting challenges to entrenched boards of directors. Doubtless, the successful unseating of all 12 members of Darden Restaurants’ board by Starboard Value in October is partly responsible for these shockwaves.
It seems any goodwill and holiday bonhomie among the corporate governance community has dissipated with the dawn of the new year. As reported in the New York Times’ Dealbook blog earlier this week, a debate over an academic imbroglio concerning proposals filed through the Harvard Shareholder Rights Project to destagger the boards of 129 companies has escalated on the Harvard Law School Forum on Corporate Governance and Financial Regulation and in other venues. At issue is an allegation in an academic paper published in December that the sharp decline in staggered board structures, where only one third of the board can stand for re-election in any one year, has been based on flawed research. (The paper also implies that the project committed fraud by failing to disclose contradictory research supportive of staggered boards, though it doesn’t mention Harvard Law Professor Lucian Bebchuk, who directs the project.) 
And that controversial paper is at the center of a separate but related debate about how appropriate it is for a current SEC commissioner to accuse a private party of violating federal securities law without any sort of due process, as Columbia Law Professor Robert Jackson is quoted as saying in the Dealbook article. The paper’s authors are SEC commissioner Daniel Gallagher and Stanford Law Professor Joseph Grundfest (a former SEC commissioner).
Jitters about giving investors more control over elections of board members are also evident in Whole Foods Market’s questionable move to block a recent proxy access proposal by James McRitchie. By taking advantage of an SEC rule that allows a company to exclude a shareholder proposal from its proxy materials if it conflicts directly with the company’s own proposal, Whole Foods ensures that only its much more tame proxy access proposal comes to a shareholder vote. McRitchie proposes a structure where one shareholder, or a group of shareholders, owning at least 3 percent of outstanding shares for at least three years could nominate up to 20 percent of directors; Whole Foods’ structure would allow only a single investor – not a group – to nominate its own candidates for up to just 10 percent of the board seats, and then only if that investor has owned 9 percent of the company’s shares for no fewer than five years.
As the cover story in Corporate Secretary’s winter issue (published next week) reports, a prime reason why New York City Comptroller Scott Stringer has filed proxy access shareholder proposals at 75 of the portfolio companies owned by New York City Pension Funds is a need to ‘change the market by having more meaningful director elections.’ As long as a company has a process to regularly evaluate its board to ensure it has the appropriate skills and industry know-how to best steer the company, it shouldn’t be afraid of giving shareholders proxy access.
When Whole Foods sent McRitchie its ‘original deficiency letter, it made no mention of pursuing its own proposal… and, of course, WFM’s board can simply pass proxy access without putting it on the proxy,’ McRitchie wrote in an email yesterday. ‘Clearly, [its] proposal was in reaction to mine and is illegal. Let’s hope the commission sees the light.’

The SEC’s letter to Whole Foods saying it wouldn’t take enforcement action against the company for excluding McRitchie’s proposal from its proxy materials – apparently without fully understanding the company’s pre-emptive maneuver – is troubling. McRitchie says he’s had offers to help with a lawsuit. ‘Although I’m still weighing that option, my experience with federal courts in Texas makes that much less likely than if Whole Foods was incorporated elsewhere,’ he says.

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary