If one of your largest shareholders asked your company to join the more than 450 U.S. public companies that have adopted proxy access, would you know how to respond? Would it surprise you that since the beginning of 2015, the percentage of companies in the S&P 500 Index that have adopted proxy access has risen from less than 5 percent to more than 60 percent?
A hot topic at shareholder meetings for the last three years, proxy access is likely to impact corporate governance for years to come. With the 2018 proxy season quickly approaching, now is the time for executives to catch up on major developments from the last year and consider what your company should do to be prepared.
Proxy access is a method for shareholders to gain representation on the boards of public companies. Unlike a waging a proxy contest, utilizing proxy access does not require shareholders to bear the cost of preparing and distributing their own proxy materials. If your company does not already have proxy access procedures in place, a shareholder may propose changes to the company’s governing documents. Alternatively, your company could proactively amend its bylaws to provide for proxy access. In either case, once procedures are adopted, shareholders may demand that their director nominees be included in the company’s proxy materials (though no one has successfully had their nominees included using proxy access).
“Consider how open your company is to SHAREHOLDER suggestions. Have you communicated your willingness to engage? Can you demonstrate that you are listening?”
Here are the most significant trends and developments to keep in mind:
· More than 60 percent of the S&P 500 Index and more than 10 percent of the Russell 3000 have adopted proxy access. We expect the trend toward adoption to continue.
· The vast majority of proxy access bylaws require the nominating shareholder (or a group of up to 20 shareholders) to hold at least 3 percent of the company’s shares for at least 3 years in order to nominate up to 20 percent of the board. Many companies that initially adopted more onerous requirements have since amended their bylaws to align with these terms.
· Activist investor Mario Gabelli became the first known shareholder to attempt to use proxy access. Gabelli withdrew his nominee shortly after the company rejected his nominee for failure to meet the procedural requirements of their proxy access bylaw. It remains an open question under what circumstances proxy access will be used.
With these new developments in mind, we recommend taking the following steps:
· Stay apprised of where your shareholders stand. Many institutional investors support proxy access, but views are still evolving. For example, Fidelity Investments, which previously opposed all proxy access proposals, reversed its position in 2017.
· Evaluate your level of shareholder engagement. Investors championing proxy access often complain that their opinions on the selection of directors are not being heard. Many criticize the companies they target for not giving proper attention to issues such as board refreshment and diversity. Consider how open your company is to suggestions from shareholders. Have you communicated your willingness to engage? Can you demonstrate that you are listening to suggestions?
· Formulate a plan with your board. Be prepared to make a recommendation to your board on whether to proactively adopt proxy access. Regardless of what you decide, be sure you are prepared to act quickly if a shareholder raises this issue.