Does Proxy Access Benefit Shareholders?

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CFA Institute recently commissioned a report on a proxy access rule developed by the US Securities and Exchange Commission (SEC) that was vacated by a court decision. The study indicates that proxy access can be beneficial to shareholders and markets, but the matter needs a comprehensive assessment by the SEC. Proxy access allows major shareholders to make their own nominations for board members instead of accepting only those candidates proposed by a governance or nominating committee. The practice is commonplace in markets around the world for shareholders who hold a minimum number of shares. The US is a notable exception, in the sense that shareholders do not have the ability to nominate directors to the corporate ballot unless a company’s bylaws allow it. The SEC tried to make the practice mandatory under Rule 14a-11, but the proposed rule was struck down by the DC Circuit Court in July 2011. Supporters of proxy access say shareholders should be able to nominate their own representatives in order to ensure board accountability and that a board member’s job is, in part, to represent shareholders. Opponents of proxy access usually point to the chance that activist shareholders might pursue special interests if they gain access to the board with a representative. Matt Orsagh, CFA, director of capital markets policy at CFA Institute, worked closely with the research institute that produced the report. “We want to raise the idea of proxy access again,” he said. “Our study shows that proxy access can be beneficial to shareholders and the markets at very little cost to the market. We invite the SEC to do its own study on the matter.” More companies appear to be deciding to implement proxy access under “private ordering,” which allows investors to put forth a resolution to change a company’s bylaws to allow proxy access. For example, Hewlett-Packard’s board proposed proxy access, and the proposal passed with 68% support in 2013. The threshold was set at 3% of shares outstanding, held for three years, with a nomination threshold of up to 20% of board seats. The same year, Verizon Wireless also passed a proposal having the same thresholds with 53.3% support. The proposal was made by C.W. Jones, the head of the Association of BellTel Retirees, and it passed despite the board’s recommendation against the proposal.