Monday, December 05, 2011

Corporate Secretaries Society Endorses ISS Case-by-Case Approach to Proxy Access Shareholder Proposals

The Society of Corporate Secretaries and Governance Professionals supports the ISS continuation of its policy of a case-by-case approach to proxy access shareholder proposals based on a number of factors, including the proponent’s rationale for the proposal, the ownership threshold proposed in the resolution, the maximum number of directors that shareholders may nominate, and the method of determining which nominations should appear on the ballot. In a letter to the Institutional Shareholder Services, the Society urged the ISS to apply standards assuring that access may be sought only by long term shareholders who have owned a significant stake for a reasonable period of time. Also, the standards should assure that neither the purpose nor the effect of access would be to change or influence control or facilitate electing a group of directors that could be divisive or hold allegiances to anyone other than all the shareholders.

In order to accomplish this, said the Society, a proposal should clarify that access would only be allowed where the nominating shareholder held a net long beneficial ownership position for a substantial period of time, and here the Society suggested the three-year period that was contemplated by Rule 14a-11. Similarly, a proxy access proposal should require the nominating shareholder of an access candidate to certify that the election of the candidate would have neither the purpose nor the effect of changing or influencing control of the company.

Thus, in the Society’s view, a proposal should provide that the access scheme would be limited to a very small number of nominees. Also, to effectuate the intent of access, any proposal should provide that nominees be independent of the nominating shareholder and the company under existing SEC regulations and listing exchange rules as well as a company’s independence policies.

Another thing to consider is whether the proposal is binding or precatory. The Society would expect that the ISS would condition its support for a binding proposal on it being capable of implementation as submitted. Because it is difficult to amend a by-law provision, reasoned the Society, a precatory approach is preferable since it would allow the board to develop the appropriate mechanisms and permit it to draft the technical by-law amendment language. The details will matter, emphasized the Society, noting that a proposal referencing the board’s eligibility requirements or its nominating committee review procedures needs to be clear and executable.

Moreover, the Society urged the ISS to review binding proposals not simply on the basis of whether the proposed proxy access scheme is better than no access at all, but also on the basis of whether the proposed access scheme truly represents best practices and is appropriate for that particular company. While companies have some flexibility to include elements considered best practices in response to a successful precatory proposal, said the Society, they may be limited in their ability to do so in response to a successful binding proposal, even if most shareholders would prefer such elements.