In a New York Times (Nov. 30) article published in Wednesday’s NACD Directors Daily, columnist Stephen M. Davidoff commented on the SEC’s Concept Release on the U.S. Proxy System.
Davidoff highlighted how companies that are generally averse to government regulations are calling for additional rules for proxy advisory firms like Institutional Shareholder Services (ISS). These companies see a conflict of interest for proxy advisory firms that often offer both voting recommendations and advisory services.
In alignment with the NACD Key Agreed Principles of independence and transparency, NACD agrees that proxy advisory firms should be subject to enhanced disclosure regulations. On October 20, we submitted a comment letter to the SEC on the Concept Release, covering proxy advisory firm independence, as well as NOBO/OBO voting (see the Council of Institutional Investors summary of NOBO/OBO here). The comment letter includes recommendations for the separation of businesses that offer both shareholder voting and corporate governance advice.
For background, CalSTRS is the second largest public pension fund with over $134B under management. CalSTRS is a long-term shareowner and is considered a passive investor. Their mission is to act as the steward for California state teachers’ retirement funds—ensuring that California’s K-14 professors and teachers (kindergarten through community college) have sufficient funds available when they retire. Approximately half of CalSTRS’ portfolio is invested in equities across roughly 7,000 companies. Typically CalSTRS’ investment is around 0.5 percent of outstanding stock per company.
Anne’s comments were extremely important for directors of publicly traded companies, as CalSTRS leverages corporate governance practices to add value and minimize risk to their portfolio. CalSTRS looks to directors to oversee delivery of long-term growth and value for shareholders. It does not have a political agenda; it’s all about long-term value creation.
Aside from shareholder value creation, the goals of Anne’s team are focused on creating a dialogue with companies and boards. Importantly, the majority of CalSTRS requests are resolved through dialogue.
During our meeting last week, Anne provided a brief summary of recent proxy access rules—SEC Rule 14a-11 and amended SEC Rule 14a-8(i)(8)—and what they mean for directors. While many organizations have provided detailed descriptions of these rules, Anne emphasized the following four key points:
Boards need to proactively engage in shareholder communications and dialogue. While boards need to be aware of shareholders concerns and desires, boards do not have to do as all shareholders request. Frequently shareholders perceptions are simply based on not knowing why.
The new proxy access rules level the playing field.
If a board and/or senior management disregards and/or avoids a shareholder’s request for information, proxy access is the tool of last resort.
Proxy access is seen by large investors as the “ultimate weapon” to influence a board.
Net: If your board is looking for an independent, third party to help conduct a confidential and customized in-boardroom program on strategy, the current environment, or succession planning; or for assistance conducting CEO and/or director succession planning, or exchange-mandated board evaluations, NACD’s Board Advisory Services faculty of 100 percent current directors and leading governance experts is ready to help your board advance exemplary board leadership. NACD’s Board Advisory Services (BAS) team is poised to help boards perform as strategic assets for their shareholders and senior management.
By “personal,” I mean that when it comes to voting their proxies for director slates, shareholders will be focusing on individual directors in upcoming proxy seasons.
“Now, it’s personal” is an interesting phrase that I’ve heard more than once in recent conversations about director elections. By “personal,” I mean that when it comes to voting their proxies for director slates, shareholders will be focusing on individual directors in upcoming proxy seasons.
In companies with majority voting policies, individual directors deemed unworthy by shareholders won’t get their votes; enough abstentions and they’ll have to resign. And in the future, investors may be using proxy access to replace unwanted directors with their own individual candidates.
One target may be individuals serving on the compensation committee for companies where pay seems unrelated to performance. Shareholders may use “say on pay” to rebuke them collectively, and majority voting and proxy access to move them off boards.
Another target: audit committee members of boards that failed to anticipate and prevent financial crisis.
As for nominating/governance committee members, they may be targeted if there are overall failures in board performance—for example, perceived failures of oversight in company crises. In any case, they are on the front lines of communication to make sure that shareholders understand fully the value of the candidates they are recommending for the board and for service on key committees.
But there is a bigger picture to be seen. NACD’s resources drive home a key point: directors should never be seen solely as individuals. Even if shareowners are getting more “personal,” we have to help them see beyond individuals to the group. An undue focus on individual directors is the main risk in majority voting and proxy access because investors may hound out a director who possesses a rare expertise or trait that is a critical piece of the puzzle for a board. Conversely, there might be a “rock star” director who really does not add to the board. Only directors know this—and know exactly how boards function as a “whole.”
Boards and directors, long used to working collectively, can rise to this new challenge. Now, it is personal—but it’s also interpersonal. Directors can do a better job communicating who we are both individually and collectively, starting today.