At the end of last week, as discussed here, proxy advisory firm Glass Lewis told the WSJ that, in some circumstances, it may recommend against company nominees for director when the company excludes a shareholder proposal for proxy access on the basis of a conflicting management proposal. That announcement followed statements from the SEC advising that Corp Fin would not express its views on the application of Rule 14a-8(i)(9) – which permits exclusion of shareholder proposals on the basis of conflicting management proposals — during the current proxy season. (For a more extensive discussion of that turn of events, see this post.)
In a blogpost today, Glass Lewis expanded on the positions taken in the WSJ interview, advising that it “will continue to review each proxy access proposal, along with the company’s response, on a case-by-case basis.” In assessing management and board responsiveness to shareholders, Glass Lewis will take into account the company’s response to shareholder proposals on proxy access, including submission to shareholders of a conflicting alternative management proposal, whether in lieu of or in addition to the shareholder proposal, “based on the specific facts and circumstances of the company and its actions.” In that regard, Glass Lewis will consider “the reasonableness and proportionality” of the company’s response to the proposal, particularly in light of the fact that Corp Fin is staying on the sidelines this season.
In the post, Glass Lewis effectively endorses the concept of proxy access for significant, long-term shareholders, but believes that “the exercise of the proxy access right [should] be subject to certain minimum ownership thresholds and holding periods as well as limitations as to the number of directors nominated through proxy access.” However, there is no precise number or percentage of directors that should be subject to proxy access, in the view of Glass Lewis; rather, the appropriate level will depend on many factors, striking a balance between adequate shareholder representation and a disproportionate number of directors that amounts to a change in control of the board.
Notably, Glass Lewis confirms its WSJ announcement that it “may recommend against certain directors if the management proposal varies materially from the shareholder proposal without sufficient rationale,” although it does retrench somewhat by indicating that it expects to pursue that course of action in only “limited cases.” In assessing material variance in the management alternative proposal, Glass Lewis will examine in particular the “minimum ownership threshold, minimum holding period and maximum number of nominees to determine whether the company’s response is reasonable or would thwart the intent of the shareholder proposal (e.g. establishing a minimum ownership threshold/period significantly higher/longer than that submitted by the shareholder, thereby rendering the provision all but unusable).” Several aspects of the Glass Lewis post reflect an implicit reaction to the original Whole Foods proxy access management alternative proposal (discussed here), in which shareholder groups were not allowed to aggregate their holdings to reach the shareholder ownership threshold, and the threshold was set at a level that would have precluded any single shareholder from making use of Whole Foods’ proposed process. For example, Glass Lewis indicates that it will consider “the number/type/nature of the shareholders above the proposed threshold” in management alternative proposals and will “closely review” whether the provisions “present overly burdensome hurdles such as excessive restrictions on shareholders working as a group that would by themselves or coupled with restrictive rules regarding ownership size, length and number/percentage of directors fundamentally vitiate the proxy access right.”
Glass Lewis will also look at the company’s performance and overall governance profile, including whether there are other “opportunities for shareholders to effect change, e.g. call a special meeting, other differences in the terms of the competing proposals as well as the nature of the proponent. Glass Lewis will review the rationale provided by the company regarding its reaction to the shareholder proposal, including explanation for the difference in the terms of the management proposal compared to the shareholder proposal’s terms.”
In addition, Glass Lewis will also examine the terms of shareholder proposals for proxy access, including whether they are “overly prescriptive,…introduce minimum ownership calculation methods open to abuse or… impose undue or unnecessary burdens on the company or the board.”