Council of Institutional Investors

Business Roundtable Appeals to Proxy Advisory Firms for Leniency
Thursday, January 29, 2015
by: Rosemary Lally

Section: CII Governance Alert

In the latest installment of the saga involving the SEC’s recent interpretations of Rule 14a-8(i)(9), the Business Roundtable sent a letter to Institutional Shareholder Services and Glass Lewis pleading for leniency toward companies that omit shareholder proposals in reliance on the rule.

The January 23 letter stresses the SEC’s January 16 announcement that it will express no views on Rule 14a-8(i)(9) during the current proxy season, “does not mean companies are unable to rely on that rule as a basis to exclude a shareholder proposal from their proxy statements.” Furthermore, it says, the rule “remains in full force and effect unless and until the commission takes formal action to amend or suspend the rule.”

The correspondence also warns that companies have every right to litigate shareholder proposals, and just because they have not done so in the past does not mean they will not in the future. The BRT points out that even though companies have this right, given the timing of the SEC’s announcement, they may not be able to litigate these matters in advance of the deadlines for finalizing their proxy materials. As a result, the letter advises that “it would be inappropriate for ISS and Glass Lewis to apply their voting policies in a way that substitutes their own judgment as to the appropriate course of action in place of the board’s judgment.”

Specifically, the BRT urges the proxy advisers to “exercise restraint as they consider how they will assess the response of companies that exclude shareholder proposals from their company proxy materials based on solid SEC precedent governing ‘conflicting’ company proposals.”

Last week, the New York City Comptroller’s Office, CalPERS, CalSTRS and the UAW Retiree Medical Benefits Trust said they plan to vote against (or withhold votes from) the re-election of directors at companies that omit or litigate against shareholder proposals based on the fact that the firms are submitting to a vote management proposals on the same topic. In addition, these CII members plan to cast their ballots against management proposals on proxy access that have more onerous thresholds than those in the SEC’s 2010 rule. The proxy access model in that rule had a 3 percent ownership threshold, three-year holding period and 25 percent cap on director nominees.

CII sent a letter to ISS and Glass Lewis January 29 suggesting that directors nominated by companies proposing proxy access proposals affected by the SEC Division of Corporation Finance’s announcement merit “special review.” The letter says a board decision to litigate or to not include both proposals could be interpreted as an endorsement of the gamesmanship that many companies seem to be engaging in to keep these proposals out of their proxy statements. “CII believes this is inconsistent with the purpose of the shareholder proposal rule and a departure from the good-faith process of respectful dialogue on governance issues that has prevailed, with very few exceptions, to this point,” it adds.

“ISS appreciates hearing the BRT’s views on this evolving issue. We will consider those, along with the viewpoints of our clients and other industry constituents, as we determine the application of ISS’ proxy voting guidelines with respect to public companies impacted by the recent developments on Rule 14a-8(i)(9),” said an ISS spokesperson.

Glass Lewis posted on its Web site a lengthy explanation of how it plans to respond. The proxy adviser says it will “review a company’s response to the submission of a shareholder proposal on proxy access, including an alternative management proposal submitted to shareholders in lieu of, or in addition to, the shareholder proposal, based on the specific facts and circumstances of the company and its actions.” It then goes on to explain that its considerations will include:

• whether a company’s proposal varies materially from the shareholder proposal
• the minimum ownership threshold
• the minimum holding period
• the maximum number of nominees
• the company’s performance and overall governance profile
• the board’s independence, leadership, responsiveness to shareholders and oversight
• the opportunities for shareholders to effect change (e.g. call a special meeting)
• the rationale provided by the company regarding its reaction to the shareholder proposal

Regarding the last consideration, Glass Lewis says in limited cases it may recommend a vote against certain directors if the management proposal varies materially from the shareholder proposal without sufficient rationale.
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