Proactive steps to resolve conflicts with shareholders
School is out for the summer and Mary Jo White has asked that issuers and investors play nicely and figure out how to resolve some key conflicts among themselves without the principal’s help.
That’s essentially the message the SEC chair delivered on June 25 to members of the Society of Corporate Secretaries and Governance Professionals at its annual conference in Chicago. Except that her request isn’t limited to the summer months. It’s no secret the commission has a lot on its plate these days, much of it intricate and controversial enough to delay some long-awaited rule making on executive pay and other critical matters.
White asked attendees ‘to consider what you could and should be doing to be more pro-active’, instead of relying on the commission to propose rules to guide companies and their shareholders, in these four areas:
• Delivery of preliminary proxy voting results to shareholder proponents, in addition to the companies whose proxies are being voted;
• Universal proxy ballots, which would grant shareholders who vote by mail or electronically the same right that those who attend the annual general meeting in person have to vote for individual directors from either management’s or an activist investor’s slate, rather than having to vote for all the nominees on one slate or the other, as is currently the case;
• So-called ‘unelected directors’, who continue to serve on the board after failing to be re-elected by a majority of shareholders;
• Proxy proposals.
Citing Broadridge’s decision to stop sharing with shareholder proponents the preliminary proxy voting results that it provides to companies after certain brokers objected to this in May 2010, White said, ‘It’s our view that equal access to information is necessary.’ The SEC’s investor advisory committee has criticized this selective sharing of information as ‘dangerous’, she added.
White said she understood that the Society, the Council of Institutional Investors and Broadridge had been trying to develop ways to resolve this issue when talks broke down. ‘This is unfortunate because there should be a way to work together toward the best solution without the need for an SEC rule,’ she said.
The tacit message, according to at least one corporate secretary I spoke with afterwards, was that companies would do themselves a favor by pro-actively working out solutions to everyone’s liking because they might not be happy with any rule the commission might devise.
There has been a lively debate at the SEC about the justification for universal proxy ballots, which has weighed the possibility of them motivating more activists to propose their own slates of candidates for board seats. She emphasized that no one has questioned the validity of allowing a universal ballot to provide investors voting proxies by mail the same rights as those voting in person at the AGM. ‘I took this as a breakthrough,’ White told the audience. The devil will be in the details, she added, such as whether a ballot should be optional or mandatory, and whether both management and the dissidents would use an identical ballot.
As for unelected directors, the SEC chairman marshaled recent research to drive home the point that failure to promptly boot such directors off the board is not consistent with good governance. One study, she said, shows that even directors who received a 30 percent dissent rate among shareholders were likely to leave the board soon after or be moved to a less prominent position on the board.
‘Every such company should consider that shareholders would want to know the reasons directors who don’t get a majority vote are asked to stay on the board,’ White said. Issuers should use subsequent filings and other communications to explain the board’s thinking on this, including why the director’s resignation wasn’t accepted and why the director’s experience is considered critical for the company’s future growth. ‘Be specific and avoid boilerplate [language],’ White stressed.
White’s remarks weren’t entirely devoted to chiding. She lauded the withdrawal of 15 to 20 percent of shareholder proposals this year before SEC staff provided their views, saying it suggests companies are working to improve their relationships with such shareholders. ‘I’m not saying companies should never object to a shareholder proposal,’ but they should consider possible alternatives other than asking for a no-action letter. She also urged any shareholder proponents who may have been listening to be mindful of the costs they force companies to bear by submitting a proposal.
‘I urge more companies to embrace engagement to incentivize more shareholders to choose direct engagement as their preferred method over proposals,’ she said.
Given how overworked the SEC is, it should make sense for companies to buy themselves some valuable goodwill in Washington by showing they’re willing to play nicely with investors.