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Conference Panel Discusses Shareholder Proxy Access

Rumors of the death of the SEC's proposed shareholder proxy access rule are exaggerated, according to John Olson, a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher LLP. Olson was among the panelists discussing proxy access at a recent conference held by the Practising Law Institute. Martin Dunn, a deputy director in the SEC's Division of Corporation Finance, confirmed that the proxy access rule is not dead. The SEC received 16,000 comment letters, he advised, which are still being considered by the staff.

With respect to the SEC's new disclosure rules on nominating procedures, Dunn said he has seen instances in which a company reported that it does not have a nominating committee. That is not sufficient, he said. The company still has to disclose how nominations are handled.

When asked which measuring season the SEC would use if it proceeds with the proxy access rule, whether it would be last year or this year, Dunn said the trigger date should not sneak up on anyone, based on the proposal. If the SEC changes the triggering season, that would be sneaking up, he said. Dunn believes that the proposal has changed behavior already. Margaret Foran, vice president-corporate governance and corporate secretary of Pfizer Inc., agreed that behavior has changed based on the SEC's actions. She also agreed that a mechanism is needed to address bad boards, but many companies do not believe the SEC's proposal does that.

Foran said it is a myth that shareholders cannot obtain access to boards with respect to issues of concern. Companies would never close the door on large shareholders, she said. Foran added that she is not sure this matter belongs in the SEC's domain, and that it should be a state matter.

Foran said the access proposal is a marker for the frustration of institutional investors. Companies should listen to them, she said, because they would rather speak to the company than submit shareholder proposals. Foran predicted that the days of saying "it's only precatory, we don't have to act on this," are gone. The nomination process has to be more vigorous so companies are paying more attention to directors who do not attend meetings, those serving on too many boards or those with conflicts of interest.

Ann Yerger, deputy director for the Council of Institutional Investors, believes there is a disconnect between corporate reality and investor reality. She said that a proxy contest for one or two seats is not practical. As to whether the matter is best left to the states, Yerger said to let the SEC adopt a rule and then fight it out in the courts. CII is filing precatory proposals on access that mirror the SEC's proposal, aimed at companies where there is a good chance of a strong vote. Some may be structured as a binding vote, she added. The issue of binding proposals has not gone to court, she said, but that day will come. CII's withhold vote campaigns will also continue.

Foran said there should be a way to get to the five or six problem companies instead of imposing a rule on the entire community. Dunn replied that the notion was that the SEC's proposal would apply to only a few companies. Out of the 16,000 comment letters, no one suggested a better way --they either said "you're a moron" or "yea," he added.

In wrapping up the panel discussion, Olson noted that shareholders are not the enemy, they are the companies' owners. He urged companies to reach out to see what their owners are thinking. Watch what you disclose about your nomination process, he advised, but then live up to it and choose bullet-proof directors. Management should be more involved in the process, in Olson's view. He said that potential directors should sit down with the CEO and CFO to see if they are people with whom the directors want to be associated. Finally, his prediction for this time next year is that panelists will still be talking about how bad, expensive and ineffective the communication process is.