What Boards Need To Know About Proxy Access As The 2018 Proxy Season Approaches

Would your board be ready to respond if a large shareholder asked the company to join the more than 450 U.S. public companies that have adopted proxy access? A hot topic at shareholder meetings for the last three years, proxy access is likely to impact corporate governance for years to come. With the 2018 proxy season quickly approaching, now is the time for boards to catch up on major developments from the last year and to discuss how to prepare.

Proxy access is a method for shareholders to gain representation on the boards of public companies. Unlike waging a proxy contest, utilizing proxy access does not require shareholders to bear the cost of preparing and distributing their own proxy materials. If your company does not already have proxy access procedures in place, a shareholder may propose changes to the company’s governing documents. Alternatively, your company could proactively amend its bylaws to provide for proxy access. In either case, once procedures are adopted, shareholders may demand that their director nominees be included in the company’s proxy materials (though no one has successfully had their nominees included using proxy access).

Here are the most significant trends and developments to keep in mind:

• More than 60 percent of the S&P 500 Index and more than 10 percent of the Russell 3000 have adopted proxy access. We expect the trend toward adoption to continue.

• The vast majority of proxy access bylaws require the nominating shareholder (or a group of up to 20 shareholders) to hold at least 3 percent of the company’s shares for at least 3 years to nominate up to 20 percent of the board. Many companies that initially adopted more onerous requirements have since amended their bylaws to align with these terms.

• Activist investor Mario Gabelli became the first known shareholder to attempt to use proxy access. Gabelli withdrew his nominee shortly after the company rejected the person for failure to meet the procedural requirements of their proxy access bylaw. It remains an open question under what circumstances proxy access will be used.

“More than 60 percent of the S&P 500 Index and more than 10 percent of the Russell 3000 have adopted proxy access. We expect the trend toward adoption to continue.”

Keeping these new developments in mind, we recommend boards take the following steps:

• Evaluate your level of shareholder engagement. Investors championing proxy access often complain that their opinions on the selection of directors are not being heard. Many criticize the boards they target for not giving proper attention to issues such as refreshment and diversity. Moreover, investors expect greater access to boards than they did in the past. How open is your board to suggestions from shareholders? Have you communicated your willingness to engage? Can you demonstrate that you are listening to suggestions?

• Start the conversation. Do not wait until the company receives a shareholder proposal to discuss proxy access. Boards should discuss whether it makes sense to adopt proxy access proactively or wait until a shareholder raises the issue.

• Formulate a plan with management. Regardless of whether the company decides to adopt proactively or not, it is prudent for the board to work with management to prepare a draft proxy access bylaw. Then, if the company does receive a shareholder proposal, the board will be able to act quickly if it chooses to proactively adopt the management-supported bylaw and request the shareholder to withdraw his or her proposal. If negotiations with the shareholder fail, the company could proactively adopt its own proxy access bylaw and ask the SEC to affirm that it would not object to excluding the shareholder proposal from the company’s proxy materials.

While the SEC will analyze each scenario individually, since 2016, more than 40 companies have been granted such relief on the ground that the proposal has already been substantially implemented by the existing bylaw. It remains to be seen how the SEC will address these shareholder proposals under the Trump administration.