Global Governance Group Supports SEC Shareholder Access Proposal

A global corporate governance consortium broadly supports the SEC’s recent proposal to facilitate shareholder director nominations, which the group believes will spur boards and shareholders to engage more actively with one another on board composition and effectiveness. In its comment letter, the International Corporate Governance Network encouraged the SEC to keep the rules as simple as possible with as few impediments to proxy access as the Commission strikes the proper balance between ease of access and minimization of frivolous nominations. In that spirit, the group said that the proposed ownership threshold should be the only qualifying requirement. The group also encouraged the SEC to promote the cause of mandatory majority voting, which it said goes hand-in-hand with proxy access. It provides a meaningful warning signal to boards that shareholders are concerned about performance, reasoned the group, which can in turn prompt change from within.

Proposed SEC Rule 14a-11 would allow shareholders to include their nominees for director in the company's proxy materials if they have been shareholders of the company for at least one year and satisfy a minimum holdings test based on the company's market value. Shareholders would be eligible to have their nominee included in the proxy materials if they own at least 1 percent of the voting securities of a large accelerated filer, which is a company with a worldwide market value of $700 million or more or of a registered investment company with net assets of $700 million or more. Shareholders of an accelerated filer with market value of $75 million to $700 million would need to own at least 3 percent of the voting securities in order to be eligible. For a non-accelerated filer with less than $75 million, the ownership requirement is 5 percent. Shareholders would be able to aggregate holdings to meet the thresholds. The comment deadline on the shareholder access proposal is August 17, 2009.

In its comment letter, the ICGN noted that shareholders collectively or individually with the requisite levels of ownership have sufficient economic interest in the company to justify the expense and time involved in putting forward a director nominee. However, the network believes that all shareholders with the necessary threshold interest should be able to participate, regardless of how long they have been shareholders. In the ICGN’s view, the ultimate protection from weak or biased director nominees, should they get on the ballot, is that they still need to get at least 50 per cent plus one vote to be elected to the board. The group reasoned that shareholders are not going to act against the interests of the companies in which they invest very large sums of capital.

The ICGN supports the premise that normally the board should identify and
nominate directors who have the appropriate skills and experience to achieve a fit with the existing group. The ICGN pointed to an interesting paradox in that having director nomination and other shareholder rights can sometimes lessen the need to use them. For example, in many British Commonwealth countries, shareholders representing five per cent of the issued capital can propose resolutions and with ten per cent can call extraordinary general meetings, yet it is very rare for shareholders to use these rights to remove directors. Directors aware that they have lost shareholder support tend to resign of their own volition. Similarly, in the Continental European markets, where even one share entitles a shareholder to file a resolution or a counter motion, spurious proposals are spurned by mainstream, responsible shareholders.

It is even rarer for shareholders to use their rights to nominate their own candidates to the board. Experience in markets where shareholders have the power to nominate and remove directors suggests that it is rarely used because it acts as a powerful incentive for consultation between companies and their shareholders. Boards that wish to maintain good relations with shareholders make real efforts to engage on issues that might otherwise lead to shareholder dissent or shareholder proposed resolutions. The strong preference is to ensure that there is a board nomination process on which shareholders can rely and that may, if circumstances dictate, facilitates some shareholder input at an early stage.

.