Media Clips

Financial Week

July 14, 2008

Proxy access proxy?
Court could give the nod to investor groups' putting nominees on own ballot, with expenses repaid if they win
By Nicholas Rummell

A Delaware court ruling expected as early as this week could give shareholder activists the chance to nominate dissident directors to corporate boards. The catch: The loser picks up the tab.

Earlier this year, the American Federation of State, County and Municipal Employees filed what's called a proxy reimbursement proposal at CA Inc., a computer software maker in Islandia, N.Y. Under the proposal, the union would pay to put forth its dissident slate of directors on its own ballot—not the corporate proxy. However, the union would be reimbursed by the company for its costs if at least one of its nominees is elected.

“[Many] think it's a nice way out of the whole proxy access conundrum,” said Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware and one of the earliest proponents of the proxy reimbursement idea.

The right of investor groups to put their nominees on the company's proxy has been a controversial topic in recent years, and the Securities and Exchange Commission has said that it's unlikely to revisit the issue of proxy access this year. CA asked the regulator for permission to exclude AFSCME's proposal, but the SEC deferred to the Delaware court earlier this month via a new expedited process. A ruling is expected by next week at the latest, according to sources familiar with the case. If the court rules in the union's favor, it could open the floodgates for similar shareholder proposals. If it doesn't act in time for CA to publish its proxy proposals later this month, then the union would be allowed to keep its proposal on the ballot. CA's shareholder meeting is scheduled for Sept. 9.

“It's going to be quite precedential,” said Rich Ferlauto, director of corporate governance and pension investment at AFSCME. The union has been a leading voice for increasing shareholder access to the director-nominating process and rejected the SEC's attempts last year to settle the issue. Now AFSCME plans to fight on by pushing for proxy access and getting the Delaware court to allow its proposal at CA.

“This is the next best thing, but we think we can have both things,” Mr. Ferlauto said in a telephone interview after the Delaware Supreme Court hearing last week. AFSCME has had similar proxy-reimbursement proposals at other companies, including one at Dell slated for a vote this Friday. While the proposal has not been a winner—it has gotten only about 15% of the votes the few times it has come to a vote—it is a test case to see if such a proposal would survive under Delaware law, Mr. Ferlauto said.

Of course, proxy reimbursement is not popular with most corporations, which would prefer the nominating process be left to management. But because it includes a natural barrier against frivolous nominations—you have to pay if you don't get enough votes—it may catch on, Mr. Elson said. “It's a conservative step that goes beyond shareholder access but is limited in that the marketplace will judge your ability to convince others of the correctness of your position,” he said. “You gotta win, remember?”

Peter Wallison, a fellow at the American Enterprise Institute, has supported reimbursement as a peace offering on proxy access. He told Financial Week that it is a good way to support shareholder democracy, while also ensuring disclosure is adequate. “Unions and others wanted to be included in the company statements because of the cost,” he said. “This takes the sting out of the issue.”

Still, reimbursement is likely to see some opposition. “It is an end-run attempt to accomplish proxy access through the state courts in Delaware,” said Tom Lehner, director of public policy at the Business Roundtable, noting that many dissident slates come from hedge funds, whose intentions don't always coincide with the company's. “It seems that if they have a strong belief in their case, they should be willing to put their money where their mouth is instead of having the corporation come in and subsidize them.”

Another area where business interests seem split is on which government body should decide whether to allow proxy reimbursement. To Mr. Lehner, the issue should be left to states, but Mr. Wallison said the SEC will need to weigh in because its rules are also at stake. Other states could fall in line if Delaware rules for the union in this case, Mr. Elson said, noting that North Dakota already allows for proxy reimbursement.

The SEC may be rooting for the Delaware court to rule for the union so it—or Congress—doesn't have to revisit proxy access, said Stephen Davis, principal at Davis Global Advisors and director of the Millstein Center for Corporate Governance and Performance at Yale University. As it stands, he said, it is unlikely the SEC will have time to revisit proxy access before the next season starts this fall, despite promises earlier in the year by chairman Christopher Cox to do so once the SEC was back to full strength.

An SEC spokesman said Mr. Cox has told reporters numerous times in the last month that he wants to revisit proxy access before the fall.

Democratic commissioner Elisse Walter was sworn in last week. Fellow Democrat Luis Aguilar and Republican commissioner Troy Paredes are expected to take office by early August.