At first glance, the phrase “proxy access” doesn’t exactly send shivers down anyone’s spine. But it’s become the subject of intimidating letters, accusations of gamesmanship, threats of lawsuits, and tit-for-tat measures by shareholders and companies.
Put plainly, companies typically nominate their own director candidates for the board; proxy access allows long-term shareholders to add their own candidates to the official list. Sounds democratic, but corporate America wants none of it.
Proxy access has long been a dream of governance activists, and it almost made it into the Dodd-Frank reform act introduced after the financial crisis. Powerful business interests prevented that and lobbied politicians to block the bill altogether if such a measure was included in the legislation.
So, shareholders decided to go it alone and submit their own access proposals to individual companies. This tactic has only been successful at two companies so far—Chesapeake Energy and Nabors Industries, both corporate governance problem children and targets of shareholder activists.
A proxy access proposal came close to passing at Oracle’s annual meeting last year, with almost 45% of shareholders supporting the resolution. It would have passed resoundingly if Larry Ellison’s 25% ownership was excluded from the vote. A proposal at Walgreen received 43% support, but of the eight other resolutions at Fortune 500 companies last year, most garnered only around 10% support.
So, what brought the issue back to the table this year?
The first shot in the skirmish was fired by New York City Comptroller Scott Stringer, who is in charge of the city’s massive public pension funds, with $160 billion in assets. Stringer launched the Boardroom Accountability Project, which filed 75 proxy access proposals in the biggest campaign ever for shareholder-nominated directors. Previously, most proposals were filed by individual shareholders, which is what happened at Whole Foods.
In December 2014, shareholder James McRitchie sent Whole Foods a proxy access proposal. All proposals limit nominations to significant and long-term shareholders and cap the number of directors who can be nominated. In the McRitchie-Whole Foods version, a shareholder, or group of shareholders, must own at least 3% of the company to nominate directors making up a fifth of the board, or at least two directors.
Whole Foods then proposed its own proxy access resolution. What brought that on, you might ask? A sudden onset of corporate democratic sentiment at the grocery store chain? Whole Foods told Fortune it had a policy of “not commenting on proxy-related matters.”
Under SEC rules, a company can reject a shareholder resolution if it’s proposing the same thing itself. Whole Foods’ proxy access proposal was similar, but not the same. Its requirements were far more stringent: a single shareholder must own at least 5% of the company for five years to propose a maximum of 10% of the board, or one director. It’s almost impossible, certainly unlikely, for a single shareholder to own 5% of any Fortune 500 company; 5% of Whole Foods is about $1 billion. The proposal was a clear spoiler, and was not intended to provide proxy access at all. These actions don’t exactly square with the company’s conscious capitalist image.
All of a sudden, companies have been falling over themselves to file proxy access resolutions, 16 of them so far, including many on Stringer’s list. Fortune contacted Citigroup and Chipotle Mexican Grill—which set an even more unrealistic ownership threshold of 8% to give shareholders the right to nominate board directors—as well as Whole Foods, to see if they would comment. But corporate America is keeping quiet.
There’s a reason.
The Council of Institutional Investors, whose members hold $3 trillion in assets, wrote to the SEC to ask it to reconsider allowing Whole Foods to replace the shareholder proposal with the company’s watered down version. CII Executive Director Ann Yerger wrote, “If shareholders defeat Whole Foods’ management proposal, it will not be clear to the company if the vote reflects opposition to access generally or opposition to Whole Foods’ much less useful access formulation (and/or possibly to the gamesmanship many observers perceive Whole Foods as having engaged in here).”
In an unusual move, the SEC decided to review the way its proposal swapping rule works. And for the current proxy season, the regulator said it “will express no views” on the rule, which has been taken by most observers to mean that companies will not be able to replace shareholder access proposals with their own.
That galvanized the Business Roundtable, which sent its own letter, this time to proxy advisors ISS and Glass Lewis, which advise shareholders on how to vote at annual meetings. The letter asked ISS and Glass Lewis not to provide any advice to its clients on this issue. The Roundtable said it “believes that it would be inappropriate for ISS and Glass Lewis to apply their voting policies in a way that substitutes their own judgment as to the appropriate course of action in place of the Board’s judgment.” But this is precisely what ISS and Glass Lewis do every proxy season; it’s what they are paid to do.
On January 28, five days after the Business Roundtable letter was sent, Glass Lewis Chief Policy Officer Robert McCormick published a blog post indicating that the Business Roundtable should keep its nose out of Glass Lewis’ business. “Glass Lewis believes that significant, long-term shareholders should have the ability to nominate their own representatives to the board,” wrote McCormick, adding that it would consider all proposals, looking at “whether the company’s response is reasonable or would thwart the intent of the shareholder proposal … thereby rendering the provision all but unusable.”
It’s unclear how any of this will pan out, but shareholders feel that companies are playing games with them. Share owners, it should be remembered, actually own the companies they are attempting to influence, so their right to do so should not be a matter of debate.