Proxy access is the way of the future for board nominations
More and more companies are adopting the process, yet ExxonMobil remains reluctant
How should a company’s board of directors be elected?
This is one of those questions we should not need to discuss in 2016. Yet here we are.
Readers may recall my conversation with corporate governance expert Gar Emerson two months back, in which he posited that if institutional shareholders are truly serious about using their positions to effect, they need proxy access first.
For some readers, “proxy access” may not be part of their personal lexicon, but it should be. As Emerson says, in the absence of nominating access, the process of electing directors is reduced to “the board nominating the board.”
With proxy access, shareholders can put their own nominees on the slate to elect directors at the company’s annual meeting.
Why return to this topic now? Because while the oil and gas behemoth ExxonMobil Corp. defeated a series of shareholder resolutions at its annual meeting this week, the proposed resolution to ask its board of directors to adopt a proxy access bylaw passed with an impressively solid 62 per cent.
That proposal was filed by the New York City Pension Funds (police, fire, teachers, public servants). If you want to get a sense of shareholder activism in other jurisdictions, tap into what New York City comptroller Scott Stringer is up to.
In January, Stringer announced that as part of the city’s “Boardroom Accountability Project,” the pension funds, with a collective $153.9 billion (U.S.) in assets under administration, had filed 72 shareowner resolutions calling for the adoption of proxy access bylaws.
“We depend on boards to make the right decisions that create long-term value,” Stringer said in a release.
“The best way to ensure that we have the right people on those boards, those who are independent, diverse and accountable, is through proxy access. This reform gives us a seat at the table and ensures that boards are responsive to the concerns of its shareowners.”
It’s happening. In November 2014, only six U.S. companies had a proxy access bylaw in place. According to the California Public Employees’ Retirement System (CALPERS), which publicly endorsed the proxy access proposal at ExxonMobil, that number rose to 215 by May 1 of this year.
Adopters include five of the largest oil and gas companies in the U.S.
Chevron announced nine months ago that it too had adopted a proxy access bylaw.
Yet ExxonMobil recommended to shareholders that such a resolution should be voted down.
“The proposal could introduce nonconstructive and destabilizing dynamics into the board election process each year by potentially creating a shorter term orientation,” the company stated as part of its argument for voting against.
“It can also increase the influence of special interest groups and lead to single-issue participants on the Board, to the overall detriment of other shareholders and the Company’s general interests.”
The list of stated concerns is longer.
Certainly the U.S. Securities and Exchange Commission (SEC) considered the threat of destabilization when it drafted a proxy access rule with a 3-per-cent ownership threshold. Such a requirement, the SEC stated, should ensure that issuers not be exposed to “excessively frequent and costly election contests.” Yet the threshold was “not so high as to make use of the rule unduly inaccessible as a practical matter.”
The SEC rule was vacated by a U.S. court in 2011, though the guidelines created by it have become the stan- dard. The ExxonMobil resolution proposed by the New York Pension Funds stipulated that the nominator must have “beneficially owned 3 per cent or more of the Company’s outstanding common stock continuously for at least three years before submitting the nomination.”
So the proposals are tailored to the long-term institutional investor. According to a report card released earlier this year by the Nathan Cummings Foundation, the mighty BlackRock Inc. supported proxy access votes 93 per cent of the time in 2015. T. Rowe Price had a 99-percent support record. Fidelity Investments: zero. The Nathan Cummings Foundation, by the way, is named after a New Brunswicker who made good in the U.S. in the late 1930s. The foundation, with its twin purposes of addressing inequality and climate change, sees proxy access as a “key driver of enhanced shareholder value.” This train is unstoppable.
The key now will be whether ExxonMobil adopts a proxy access bylaw. That 62-per-cent vote was on a precatory, or non-binding, shareholder proposal. So it’s now up to, yes, the board of directors to determine its adoption.
The board could say nay. If so, it would make a mockery of the oil giant’s corporate governance. And it would leave the company absurdly out of step with its industry peers. jenwells@thestar.ca