One of the most interesting developments in the world of corporate governance has been proxy access, something the Council of Institutional Investors calls “a crucial mechanism that gives shareowners a meaningful voice in corporate board elections.” Imagine, wanting a meaningful voice in an election! Over the last two years, the number of proxy access shareholder proposals grew from about 20 to about 100, and in 2015, 60 of those proposals passed; over half the proposals submitted in 2016 also passed. All of that activity simply got a lot of corporations to provide shareholders, provided they own sufficient shares, the ability to nominate a director for election without going to the expensive trouble of printing up their own proxy ballots and sending them to all the shareholders.
But nobody tried using the newly-won proxy access to actually nominate a director until very recently, when GAMCO Investors nominated a director at National Fuel Gas. On November 23, the company filed an 8-K report notifying stockholders that it had determined that GAMCO was not eligible to use proxy access because, in the company’s words, “These representations include that an Eligible Stockholder acquired the Proxy Access Request Required Shares in the ordinary course of business and not with the intent to change or influence control of the corporation, and {GAMCO} does not presently have such intent.” Thanks, by the way, to TheCorporateCounsel.net for alerting everyone to this, proving that people do actually read 8-Ks.
It’s not a secret that GAMCO is in fact pressuring National Fuel Gas to do something specific. But it is worth thinking about the principle at work here: you can nominate a director so long as the shareholder doing the nominating does not intend to change or influence control of the corporation. I’m not entirely sure how that phrase—“change or influence control of the corporation”—should be interpreted, but this is surely one of those devil-in-the-details definitions that might be used to bury a really surprising notion in legalese.
I see two ways to interpret it, one narrow and one broad. The narrow notion focuses more on control of the corporation. Unless the nominee owns a controlling share, how precisely would one director change or influence control? Unless, that is, there is already some division among board members and shareholders over the future course of the business and one director could tip a precarious balance. That probably isn’t the state of play at very many corporations.
The broad interpretation focuses more on change, and this is where my mental analyst starts flashing WARNING! WHOA! WHAT?!? You can only nominate a director if you have no intention to change the corporation? Shouldn’t every director have that brief? Directors are there to look after the interests of shareholders, and that sometimes does involve changing the corporation. Name one corporation whose business model, management and strategy should be preserved in amber, because it’s perfect. That’s what we call a null set: a group containing nothing.
There should be diversity on boards, because diverse groups do a better job of decision making than homogeneous ones. That means, in practice, that it’s good to have people on boards who think differently from each other and from management, and that difference can be a creative force in shaping future corporate strategies. Permitting proxy access only for rubber-stampers is pretty much NOT what the shareholders that have filed proxy access proposals had in mind, and the governance community should watch what happens with this one.