ExxonMobil resoundingly lost a vote over a shareholder resolution Wednesday that would enable large shareholders, with 3 percent or more of outstanding shares, to nominate their own candidates for the board directly on the company's ballot. During the meeting, a representative of three New York City municipal employees’ pension funds said that ExxonMobil’s board was the least diverse of the six biggest international oil and gas companies and that it ran the danger of “group think.”
Shareholders agreed, with nearly 62 percent of the shares voted supporting the measure. In a filing, the company defended its current method of choosing board members, citing high vote tallies for those directors and saying the system would “undermine a business model that has long served the interest of shareholders well.”
As a result, ExxonMobil became the biggest company yet this year to see investors approve what's known as "proxy access," a wonky but potentially powerful change that's quickly reshaping investors' ability to influence corporate boards. For years, shareholders have sought that right, which they say is a far less expensive and direct way to have a say in who gets considered for a company's board.
Suddenly, they're actually getting it, as the number of companies changing their bylaws to allow for proxy access grows at a record-setting pace. The proxy adviser Institutional Shareholder Services reports that before 2014, less than one percent of companies in the S&P 500 gave investors the ability to put their own candidates on the company's ballot. As of Tuesday, 36 percent are offering it -- including General Electric, Apple and Citigroup.
Adoption is happening so fast, says ISS special counsel Patrick McGurn, that it's not unrealistic to say that half of all the largest public companies could have the rule in place within a year. "Since 2014 -- in the course of two years -- the numbers have gone from nothing to virtually a third," McGurn said. Compared to the pace of change on other rules about how corporations are governed, "there's only a couple of issues that have even been in the same ballpark," McGurn says, and even then, the change came slower.
So what does the sea change on this arcane corporate rule mean for companies and investors, both large and small? And why is it changing so rapidly? McGurn and Nell Minow, vice chair of the governance consulting firm ValueEdge Advisors, helped explain why investors see this as such a critical change.
So what is "proxy access," exactly, and why does it matter?
The nominating committee of every board selects directors -- the powerful people at the top of every major corporation who hire and fire the CEO, advise on strategy and represent shareholders' interests -- and shareholders vote on them. But investors aren't typically involved in choosing the candidates, and their votes against directors they see as doing a poor job don't always result in exits from the board.
As a result, shareholders have complained for years that they don't have enough say in who is chosen to hold these powerful positions. "We’ve always bizarrely used the term 'election' when we talk about picking directors, but it doesn’t reflect any dictionary definition of elections," Minow says.
Until recently, in order for investors to select directors of their choosing as candidates, they had to wage a costly proxy contest, which requires investors to spend millions to do things such as mail out separate ballots, buy lists of shareholders, and pay a host of lawyers, Minow says. While some investors--such as deep-pocketed hedge funds or activist investors--may be willing to do that, it's not something that interests many large shareholders.
Companies, meanwhile, argue that proxy access isn't necessary because it could disrupt their processes for choosing independent directors, undermine board effectiveness and even be harmful if it injects people into these powerful roles who don't represent the views of all shareholders. For instance, ExxonMobil's board said in a company filing that "we do not believe that there is any meaningful evidence that proxy access would improve corporate governance or enhance market capitalization" and that "most concerning is the potential risk for the proposal to increase the influence of special interest groups and lead to single-issue participants on the board."
What -- or who -- is behind the recent push?
The Dodd-Frank Wall Street Reform and Consumer Protection Act authorized the Securities and Exchange Commission to implement a proxy access rule, and the SEC passed one, but business groups challenged the rule in court, leaving it on the shelf for now. So instead, shareholders have taken what Minow calls a "company by company" approach, mounting campaigns to win the right.
The person leading that charge is Scott Stringer, the comptroller of New York City, the person responsible for city employees' pension funds. He filed 75 proposals in 2015, and he has filed 72 proposals in 2016, helping to spur many more by individual investors, bringing the total to some 200 resolutions this year, a number McGurn says is is the largest on a single topic in one proxy season ever: "I've described this as sort of a parade that was waiting for a drum major, and I think that’s clearly what happened here."
Why are more corporations agreeing to the demands?
Stringer's success, Minow says, comes from carefully picking targets where shareholder sentiment might be ripe for wanting more say about the company's board. "He's been very successful at getting a lot of companies to adopt it voluntarily and getting a high level of shareholder support," he says. "He's been very smart about picking companies where shareholders are looking to make a change."
Though there have been some contentious votes, many other companies have negotiated with shareholders or voluntarily changed their bylaws, a capitulation that appears to recognize the concept is headed toward becoming a standard practice. Many "are seeing the handwriting on the wall," McGurn says. "If you're pretty sure it's going to receive majority support, why not go ahead and voluntarily adopt the standard, rather than get into a multi-year battle with shareholders?"
But how will this really affect individual investors?
Before getting too interested in nominating your own favorite corporate guru to the ballot of a company where you hold shares, you should realize the concept is designed to help very large, long-term shareholders have more say in the process. The majority of the proposals and bylaw changes that have been adopted require investors or groups of investors who want to put a director on the ballot to hold at least three percent of a company's stock -- a massive number of shares at the largest corporations -- for at least three years.
Still, Minow says she believes the changes will eventually prompt boards to be even more conscious of their independence, strengths and accountability to avoid the threat of investor-nominated directors. "When I first got into this business [30 years ago], O.J. Simpson was on five boards. A CEO’s father was on the compensation committee [of] a public company. Boards have come a long way since then, and this is the next step, so they’ll do even better in the future."
So have any directors been elected this way yet?
No, McGurn says. That's the odd thing about this fight: Though investors have tried to win this right for years, no directors have yet been named through proxy access. That could be because it's so new, or because investors see it as a "last resort" -- a kind of nuclear option -- only intended to be used after the two sides engage, negotiate, vote against existing directors and the like. But that could evolve. "It's only a matter of time before we see some test case use of proxy access itself," McGurn says. "I do believe in the long run it’ll be a right shareholders exercise more frequently."
But even then, the numbers are likely to stay low, Minow says. "My view is that even if every company in the country tomorrow adopted proxy access you would see it used in a fraction of one percent -- and that's appropriate," she says. "You will see it only in the most extreme cases. ... The boats will not be rocked."
Steven Mufson contributed reporting.