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Proxy Season Roundup

April 16, 2015

Proxy season 2015 is starting off with an unprecedented series of capitulations by major corporations on what may turn out to be the most significant shareholder initiative to date: proxy access.

New York City Comptroller Scott M. Stringer’s Boardroom Accountability Project includes 75 shareholder proposals calling on portfolio companies to give shareowners the right to nominate directors at U.S. companies using the corporate ballot.

Of the resolutions filed, with some overlap included, 33 were at carbon-intensive coal, oil and gas, and utility companies, 24 at companies with little to no diversity on their boards, and 25 at companies that received significant opposition by shareholders to excessive executive compensation put to an advisory shareholder vote in 2013.  Similar proposals have been filed by TIAA-CREF, CalPERS, and individual investor James McRitchie, among others.  In general, they call for companies to allow board candidates submitted by holders of at least three percent of the stock for at least three years to be included on the company’s proxy.

Even if these proposals received a majority vote from shareholders, the company would not have to adopt them.  And of course even if they did adopt them and shareholders nominated one or more candidates, they would not be elected unless they received majority support from shareholders.  This follows a successful challenge to the SEC’s rule that would have imposed proxy access on companies pursuant to a provision in the Dodd-Frank legislation.  When the rule was invalidated by the courts for inadequate cost-benefit analysis, the SEC put any further attempts to implement the provision on hold.

And yet, a number of major companies have agreed to adopt proxy access, including General Electric, Citigroup, Wendy’s, and Prudential.  Institutional Shareholder Services Inc. Special Counsel Patrick McGurn told Pensions & Investments magazine, “Proxy access is really the 800-pound gorilla for this proxy season. It’s actually surprising access has had an impact on the broader list of topics this season.”

An outlier is Whole Foods, which was so flummoxed by McRitchie’s proxy access proposal that the company tried to block it with their own proposal, which they argued was essentially similar, even though it would have imposed a mathematically insurmountable threshold for submitting candidates.  Initially the SEC agreed, but when they reversed their ruling, Whole Foods responded by postponing its annual meeting for six months.

This progress on proxy access shows that shareholders realize the most significant proxy issue is who serves on the board, and that the best assurance of genuine independence is communicating to directors that they are elected by shareholders, not appointed by management.  It also shows that corporate managers and boards are beginning to understand that accountability to shareholders is the best guarantee of a robust, sustainable business.

The other big issues for the 2015 proxy season include continued focus on excessive executive compensation, disclosure of political spending, and sustainability/environmental issues.  The AFL-CIO has submitted proposals to stop “government service golden parachutes,” payments from corporations (primarily financial services companies) to employees who leave for government service, and CtW Investment Group is calling for a “no” vote on the “say on pay” executive compensation proposal at Domino’s Pizza.  Marco Consulting Group has coordinated proposals for 15 institutional investors concerning separating the CEO and board chair positions, pay, proxy access, and majority vote.  UAW’s proposals include focus on stronger clawback policies and better disclosure on the way clawbacks are used.  We are also beginning to see some concerns about cybersecurity risk.

One of the most innovative proposals of the year was submitted to Citigroup by Bartlett Naylor.  The proposal would require a significant portion of executive pay to be deferred and if penalties are assessed against the company, applied to pay the fines.  Naylor noted in his supporting statement:

On July 14, 2014, the Department of Justice “announced a $7 billion settlement with Citigroup Inc. to resolve . . . claims related to Citigroup’s conduct in the . . . issuance of residential mortgage-backed securities (RMBS) prior to Jan. 1, 2009. The resolution includes a $4 billion civil penalty – the largest penalty to date under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). . . . Citigroup acknowledged it made serious misrepresentations to the public.”  This monetary penalty was borne by Citi shareholders who were not responsible for this unlawful conduct. Citi employees committed these unlawful acts. They did not contribute to this penalty payment, but instead undoubtedly received bonuses.

In 2014, Citi refined its clawback policies. In addition to recouping incentive compensation for employees who violate the law, the Compensation Committee “may also cancel awards if an employee failed to supervise individuals who engaged in such behavior.”

This refinement is welcome. It reflects that the Board agrees that compensation serves as an appropriate tool for deterrence and that restrictions should apply more broadly than simply to those determined to have violated the law. We believe the further refinement in our resolution can help strengthen Citi’s policy by making compliance with the law a group concern.

President William Dudley of the New York Federal Reserve outlined the utility of what he called a performance bond. “In the case of a large fine, the senior management . . . would forfeit their performance bond. . . . Each individual’s ability to realize their deferred debt compensation would depend not only on their own behavior, but also on the behavior of their colleagues.  This would create a strong incentive for individuals to monitor the actions of their colleagues, and to call attention to any issues. . . . Importantly, individuals would not be able to ‘opt out’ of the firm as a way of escaping the problem.  If a person knew that something is amiss and decided to leave the firm, their deferred debt compensation would still be at risk.”

The statute of limitations under the FIRREA is 10 years, meaning that annual deferral period should be 10 years.

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