Council of Institutional Investors The Voice of Corporate Governance

Proxy access is shorthand for a crucial mechanism that gives shareowners a meaningful voice in corporate board elections.  It refers to the right of shareowners  to place their nominees for director on the company's proxy card.  This lets nominating investors avoid the enormous cost of of sending out their own proxy cards.

Shareowner access to the proxy has been standard practice for years in many countries, but not the United States, where board elections are one-sided affairs: The company mails proxy ballots that list only its slate of nominees for board seats. That is about to change.  After decades of debate, the Securities and Exchange Commission (SEC) on August 25 approved a proxy access rule that makes it easier for shareowners to nominate their own candidates for director when they are dissatisfied with the board's oversight. 

The rule, which will take effect in time for the 2011 proxy season, is groundbreaking for U.S. shareowners.  Acess to the proxy will invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies.  

Winning access to the proxy has been a top Council priority for years. In 2008, Council members approved a policy that calls on public companies to allow an investor or group of investors owning 3 percent of the shares for two years to nominate less than a majority of directors.

The new SEC rule, formally Rule 14a-11 of the Securities Exchange Act, requires public companies to include the names of all board nominees—not just the company slate—on the company’s proxy ballot.

To be able to nominate a director, an investor or group of investors must have owned 3 percent of the company’s shares for a minimum of three years and continue to own at least that amount through the date of the meeting at which director is elected. Investors can count securities loaned to a third party toward the 3 percent, as long as the shares can be called back, but not shares they have shorted.  A shareowner or group of shareowners will be able to nominate one or up to 25 percent of the company’s board of directors.

The SEC also amended Exchange Act Rule 14a-8 to allow shareowners to file proposals seeking less restrictive proxy access procedures. But if adopted, any new nomination procedures will be an additional avenue. Companies may not opt out of Rule 14a-11.

SEC Chairman Mary Schapiro said that giving significant, long-term shareowners a way to nominate board candidates was “a matter of fairness and accountability.” The new proxy access rule, she said, would “enhance investor confidence in the integrity of our system of corporate governance.”

But in a controversial move, the SEC gave small companies—defined as those with a public float of $75 million or less—a three-year deferral from compliance with the rule. While the SEC says compliance for small companies will be automatic at the end of three years, some observers expect Congressional opponents of proxy access will try to turn the deferral into a permanent exemption.

Why proxy access matters  The Council believes that a measured right of access is imperative. Directors are the cornerstone of U.S. corporate governance. Their job is to monitor management in the best interest of the company’s shareowners, whom they represent. Since the primary role of shareowners is to elect and remove directors, it makes sense that investors get a fair crack at running their own candidates without having to leap formidable financial and procedural hurdles. Weak director elections can breed complacent boards that take a minimalist approach to their oversight duties. If directors knew there was a good chance that they could lose their board seats in a contest, they might be more inclined to monitor and rein in a CEO who is pursuing an excessively risky strategy, and make sure that executive incentive pay is strongly tied to corporate performance.

The global financial crisis the erupted in 2008 underscored the need for proxy access.  The market meltdown represented a massive failure of overight--by boards as well as by regulation.  Proxy access gives investors a way to hold directors accountable so they will be motivated to do a better job of monitoring and, if necessary, reining in, management.

Access proposals  Over the years, the SEC considered different paths to proxy access. In 2003, the commission proposed giving all shareowners of U.S. public companies the right to nominate candidates for director in certain circumstances. The business community opposed the measure vigorously and the SEC eventually shelved it.

In 2006, a court ruling called into question the SEC's long-held determination that companies could exclude shareowner proposals relating to the election of directors.  As a result, in July 2007, the SEC proposed two conflicting proxy access initiatives: One would have definitively allowed companies to exclude proxy access shareowner resolutions from proxy statements, the other would have permitted an owner, or group of owners, that held 5 percent of a company’s stock for at least a year to propose changes in the company’s bylaws governing how directors are elected. The Council opposed both proposals. But on Nov. 28, 2007, the SEC voted 3-1 to let companies reject shareowner proposals that relate to board nominations or elections

SEC Chair Schapiro breathed new life into the campaign for proxy access when she took office in January 2009. On May 20, 2009 commissioners voted 3-2 to propose rules that would require companies to place shareowner board nominees on company proxy ballots and to include shareowner proposals on proxy access--binding or advisory--on proxy ballots, too.  The Council submitted a comprehensive comment letter to the SEC on Aug. 4, 2009  (see below). 

"Private ordering"  On December 14, the SEC announced it was reopening the comment period for another 30 days to consider additional data and analyses submitted after the original comment period ended. In particular, the SEC asked for comment on the idea of a "private ordering" approach to proxy access, in which companies and/or shareowners would be able to opt out of a federal access rule.  The Council opposes private ordering.  A rule that provides for a proxy access opt-out would permit public companies to continue to deny their shareowners the fundamental right to nominate and elect directors. The Council commissioned, jointly with ShareOwners.org, a white paper on private ordering that found serious drawbacks with this approach.   A second Council comment letter on proxy access, filed on Jan. 14, 2010 (see below), reiterates the Council's support for a uniform federal access rule that would apply to all U.S. public companies.

Legislation on proxy access  Congress paved the way for the SEC to act by including a provision in the Dodd-Frank Wall Street Reform and Consumer Protection Act that reaffirmed the commission's authority to adopt proxy access rules.

To view the Council's policy on proxy access, please visit the Council Policies page. The policy is sectiton 3.2 of the Corporate Governance Policies.

SEC News and Action

Council Testimony

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Comment Letters from Council Members