Recent Legal and Regulatory Changes Create Uncertain Landscape for 2015 Proxy Season: Proxy Access on the Agenda

Introduction

April 15 is not only tax day in the United States but also the start of corporate America’s “proxy season,” when most large publicly traded companies hold annual meetings and shareholders vote on propositions introduced on proxy ballots. Among the items voted on are shareholder resolutions, which can be introduced, with some regulatory constraints, by stockholders of publicly traded companies who have held shares valued at $2,000 or more for at least one year.[1]

In 2015, the proxy season begins with significant uncertainty due to a series of recent regulatory and legal decisions:

• On June 30, 2014, the federal Securities and Exchange Commission (SEC) issued new rules that clarified the duties of proxy advisory firms.[2] Proxy advisory firms are private entities that issue guidance to institutional investors on how to vote on proxy matters; previous research has shown that the recommendations of the largest such firm, Institutional Shareholder Services (ISS),[3] can move shareholder votes on shareholder-sponsored ballot items by 15 percentage points.[4] Under the new rules, proxy advisors executing votes for client institutional investors are subject to federal proxy rules; proxy advisors must disclose business relationships that they have with a company upon which they are offering voting advice; and investment advisors are bound by fiduciary duties of care and loyalty but have some flexibility in determining how to vote their shares.[5] These new requirements may affect institutional investor voting on proxy matters in 2015.[6]


• As has been increasingly the case in recent years, litigation continues to generate uncertainty about proxy rules, with companies and shareholders alike filing suit to challenge SEC decisions. On April 14, 2015, the U.S. Court of Appeals for the Third Circuit issued a one-sentence order overturning the November 26, 2014 decision of a federal district court in Delaware concerning a proposal on Wal-Mart’s proxy ballot dealing with the store’s sale of firearms.[7] The SEC staff had previously issued a “no action” letter informing the company that it could exclude the proposal as being related to “ordinary business.”[8] In determining that Wal-Mart’s decisions about what to sell—as opposed to what to manufacture—involved social or policy concerns rather than ordinary business, the lower court’s decision would have overturned decades of agency precedent[9] and exposed companies that are retailers, customers, and third-party users to substantially more shareholder pressure through “social investing” activism; with the Third Circuit’s ruling, however, such SEC precedent would seem to be preserved.[10]


• On January 16, 2015, SEC chairman Mary Jo White ordered the agency’s staff to review “the proper scope and application” of the SEC’s rule permitting companies to exclude a shareholder proposal that “directly conflicts” with a proposal by management on the proxy ballot.[11] Concurrently, the agency’s Division of Corporate Finance declared that it would not permit publicly traded companies to exclude shareholder resolutions on proxy ballots, on that basis, for the 2015 season.[12] As such, shareholders in 2015 will, in some instances, be voting on competing proposals by shareholders and management, on the same topics.

This report previews the 2015 proxy season by examining these developments in the context of empirical evidence collected through the Manhattan Institute’s ProxyMonitor.org online database, which catalogs shareholder proposals submitted to the 250 largest U.S. publicly traded companies by revenue, as ranked by Fortune magazine (see box below).

Section I briefly reviews shareholder-proposal activity in 2014, in historical context, by summarizing trends in shareholder-proposal submission, subject matter, sponsorship, and voting results. Section II offers an early look at the 2015 season by examining shareholder proposals among the companies to have filed proxy statements with the SEC by April 3, 2015 (almost 40 percent of the Fortune 250), and early voting results at companies that held annual meetings by that date (8 percent of the total). Section III highlights upcoming annual meetings at which shareholder-proposal items of interest—proxy access proposals; proposals to separate corporate chairman and CEO positions; and proposals relating to corporate political spending or lobbying—will come up for a vote. Section IV concludes with analysis of the legal and regulatory issues discussed above in light of the empirical evidence.