Council of Institutional Investors

More on CII's New Policies on Universal Proxy and Board Tenure
Tuesday, October 1, 2013
by: Amy Borrus

Section: CII Governance Alert




Why universal proxy cards? Proxy contests are pivotal events for both companies and their owners. It is critically important that shareholders are able to vote for whomever they wish when board seats, and in some cases, board control, are at stake.

Shareholders currently have limited flexibility when casting votes in proxy contests. Their choices are generally restricted to either supporting management’s nominees using management’s proxy card, or a shareholder-proponent's specified combination of nominees using the shareholder’s proxy card. If they wish to support a different combination, shareholders must obtain a legal proxy, attend the shareholder meeting in person and “split” the vote at the meeting; alternatively, if they are institutional investors, they can make special voting arrangements through a vote processor.

In embracing a universal proxy card, CII supports regulatory reform that would facilitate a proxy card naming all candidates, ensuring a less confusing, less cumbersome voting process.

Allowing for a “universal proxy” would require the Securities and Exchange Commission (SEC) to amend its “bona fide nominee” rule. Adopted in 1966, the rule requires opposing sides in a proxy contest to obtain consent before listing opposing candidates. The SEC’s 1992 “short slate” rule provided a carve-out from the consent requirement in cases where a shareholder nominates candidates representing a minority of the board. In those instances, shareholders have the ability to support the shareholder-specified combination of shareholder and management nominees. However, the short slate rule does not allow for full “mix and match” capability. Moreover, if a shareholder-proponent puts forward a “control slate” (i.e. a set of candidates that would constitute a majority of the board), the 1992 rule is inapplicable and shareholders cannot vote for their preferred mix of nominees using the shareholder-proponent proxy card.

Simply repealing the consent requirement is not enough. That might encourage proxy contest participants to circulate “semi-universal” proxy cards featuring more—but not all—candidates. Shareholders should have the freedom, via one proxy card, to vote for any combination of candidates that they wish to represent them.

The effective circulation and execution of a universal proxy in a 2012 proxy contest involving Canadian Pacific suggests that reform may be timely.

The concept may have gained wider sympathy in May of this year when a company involved in a proxy fight, Tessera Technologies, sought a universal proxy but was rebuffed by the dissident group.

More recently, in July, the SEC’s Investor Advisory Committee adopted recommendations relating to universal proxy ballots.

Why should boards evaluate director tenure? Investors expect independent directors to monitor managers with unbiased judgment. That can become increasingly difficult when a director’s tenure extends into its second, third or even fourth decade. Extended tenure can lead an outside director to start to think more like an insider.

The amended policy language is intended to prompt boards to consider carefully whether a seasoned director should no longer be considered independent. The policy also speaks to the value of board turnover: Extended tenure means fewer openings for new directors with fresh perspectives. A recent study found that S&P 500 boards acquired fewer new directors in 2012 than in any year since 2001. Lack of turnover also arose as an issue in a recent corporate director survey in which 57 percent of respondents reported that their board did not replace a single director in the last year.

Recent empirical research covering a broad index and 13 years of data suggests that firm value is enhanced at companies where the average director tenure is moderate. It is notable that 26 percent of all directors at companies in the Russell 3000 index have more than 10 years of service and 14 percent have more than 15 years.

The tenure issue may not “manage itself” via voluntary resignations. S&P 500 companies now pay independent directors an average of more than $250,000 per year for what are essentially part-time jobs that typically require less than six hours a week. Directorships provide coveted opportunities for professional development. And despite persistent calls in recent years for more active oversight and responsiveness to shareholders, a recent survey found that more than 92 percent of directors enjoyed serving on boards.

The policy does not endorse a tenure limit. Requiring all directors to step down after a certain number of years could rob the board of critical expertise. Other markets use non-binding approaches to board tenure. The European Commission advises that non-executive directors serve no more than 12 years. In the United Kingdom, directors with more than nine years of service are deemed non-independent unless the company can explain otherwise. 
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