In an age when people rely on the internet for so many aspects of their daily lives, it seems antiquated to deny flexibility to investors voting for directors in contested board elections who aren’t able to attend shareholder annual meetings in person.
The Council of Institutional Investors (CII) is trying to correct that with a petition it sent to the SEC on January 8. The petition requests an amendment to the rules for contested board elections that would let each side in a contest distribute ‘universal’ proxy cards listing all director nominees, enabling shareholders to vote for any combination of management and dissident nominees they want to represent them.
Currently, the ‘bona fide nominee’ rule the SEC adopted in 1966 restricts shareholders from voting for nominees from different slates. That rule requires opposing sides in a proxy contest to get the consent of opposing candidates before they can list them.
Typically, at least one side refuses to give consent, forcing both sides to distribute their own proxy cards listing only their nominees. Shareholders who vote by proxy can use just one card, while those who attend the annual meeting in person have the option to ‘split their ticket.’ Attending the annual meeting in order to be able to vote for candidates from both slates is often expensive and impractical.
‘It’s a fundamental question of freedom of choice,’ says CII deputy director Amy Borrus. ‘The SEC is supposed to make sure the proxy voting process is as close as possible to voting in person and this is one of the fundamental ways where it’s not. And CII believes it’s time to rectify that.’
The ‘short slate’ rule the SEC adopted in 1992 provides a carve-out from the consent requirement when a shareholder nominates candidates representing a minority of the board. The rule allows dissident shareholders’ proxy slates to list their preferred combination of dissident and management nominees, but it denies them complete mix-and-match capability.
‘We’re asking the commission to close the loop on that,’ says Borrus.
Donna Dabney, executive director of the governance center at the Conference Board, sees CII’s petition as ‘a solution in search of a problem’ given her estimate that less than 20 percent of cases are full slate proxy contests where shareholders seek a complete change in control of the board.
The National Association of Corporate Directors declined to comment on the petition.
Support for universal proxy ballots isn’t limited to the CII, Borrus points out. Last July, the SEC’s own Investor Advisory Committee (IAC) recommended that the commission consider relaxing the bona fide nominee rule.
In its recommendation letter, the IAC referred to the many cases in which shareholders who had tried to split their tickets by attempting to vote for both shareholder and management nominees on a single card had been disenfranchised when their votes were invalidated. Invalidating these votes was also unfair to nominating shareholders who sought minority representation on the board.
The CII board’s policies committee recommended that CII support universal proxy cards and CII members approved the policy in September, paving the way for the petition. But the IAC’s recommendation to the SEC in July didn’t directly precipitate CII’s decision, says Michael McCauley, head of investment programs and governance for the Florida State Board of Administration and chair of the policies committee.
‘The topic has been gaining some traction over the last two or three years,’ he says. While the current chairman of CII’s board, Anne Sheehan of CalSTRS, also serves on the IAC, the timing reflects a ‘natural overlap in terms of policy views, but not a coordinated effort,’ he adds.
With the SEC’s plate overflowing with long-awaited rule-making requests, the chances of its making universal proxy cards a priority are slim. Still, Borrus says, ‘This is an important issue and we hope it would consider a change in due time, particularly because it’s own investor advisory committee has been encouraging them to move in this direction.’
