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Activists Reduce Board Diversity, Say Multiple Studies

Shareholder activists and their supporters often tout governance-related benefits that emerge at companies they target. Some of these benefits may be grossly overstated according to two separate studies from proxy advisory firm ISS and Bloomberg News.

The ISS report examined shareholder activist appointments and company appointments made in response to activism from 2011 to 2015. The study found that of 380 board seats at S&P 1500 companies, only 8.4% were female. This compares with 25% for all new appointees to S&P 1500 companies over the same period. Rates for ethnically diverse candidates were equally low at these activism-affected firms with diverse appointments at 5%, compared to a sector average of 13%.

Bloomberg examined 174 activist-related appointees at S&P 500 companies during the same timeframe and found only 7 (or 4%) were women.

In the companies included in the ISS study, the number of all-male boards grew from 13% to 17%, and the number of all-white boards rose from 52% to 56%.

This lack of diversity among activist nominees comes in stark contrast to a growing push for increased gender and ethnic diversity at US public companies. Major institutional investors, including BlackRock, State Street and Vanguard, are demanding that boards include more women and people of color, often citing research that shows diverse groups make better decisions and lead to greater profitability. These, and other major shareholders, have publicly committed to voting against the re-election of board members at companies that fail to adequately address gender and ethnic imbalances.

End of Shareholder Proposal Process as We Know It?

Part of the Financial CHOICE Act 2.0 would change the shareholder submission process significantly.

In February, Jeb Hensarling, Chair of the House Financial Services Committee, submitted a memo to the Committee’s Leadership Team outlining proposed changes from the original Financial CHOICE Act. One of the provisions sought to dramatically change the shareholder proposal and resubmission process. Few details were provided at the time. We now have clarity.

CHOICE 2.0 would require the SEC to revise the eligibility requirements for shareholder proposals to eliminate the dollar threshold and provide eligibility only when a shareholder holds at least 1% of a company’s voting shares (or a higher threshold at the SEC’s determination). The draft also seeks to increase the required eligibility holding period for shares from one year to three years.

The revised Act would also require the SEC to raise the resubmission thresholds:

  • if proposed once in the last five years, the proposal could be excluded if the vote in favor was less than 6%;
  • if proposed twice and the vote in favor on the last submission was less than 15%; and
  • if proposed three times or more and the vote in favor on the last submission was less than 30%.

In a third major provision, which would appear to target frequent submitters such as John Chevedden, the Act would prohibit an issuer from including in its proxy materials a proposal submitted by an individual acting on behalf of another shareholder(s).

Here is where we have to factor in the law of unintended consequences.

Be careful what you wish for!

This draft would dramatically reduce the number of shareholder proposals, as the higher thresholds would block the majority of proponents – corporate gadflies, faith-based investors, SRI investors, many public pension funds – since, in many cases, even 1 percent of stock could equate to billions of dollars. This would mean that only the likes of BlackRock, Vanguard, SSgA, etc. would meet the criteria. Although these larger funds traditionally have not shown a tremendous appetite for submitting (or even supporting) a vast number of these proposals, we have seen attitudes change over the past few years. Recently, we have seen public statements from investors regarding emerging trends such as CSR, diversity, cybersecurity, board evaluations and director elections. As a result, there has been a need for greater engagement, action and disclosure on these issues from companies, especially those at risk of losing support on the ballot. Would these dramatic legislative changes finally motivate larger investors to start submitting proposals and forcing the issues?  The pressure has been steadily mounting for years, so it is conceivable that this revision could be the catalyst to provoke one of these funds to take direct action, and one may prompt the whole group.

Be careful what you wish for. Dealing with the gadflies and smaller investors is a manageable process for most companies. Dealing with a larger investor, especially a top-10 holder, is an entirely different proposition.

Stay tuned as this develops over the coming months, as there are sure to be plenty of heated conversations on this topic.

Prism Webinar Recording Now Available

In December, 2016, we were joined by Keir Gumbs, Partner, Covington and Burling, and Marty Dunn, Partner, Morrison & Foerster, to discuss the latest developments at the SEC and a securities law update.

General topics included:

  • Proxy Access – evolving provisions and proponent tactics
  • 14a-8 interpretation and application
  • Impact of the election and the future of Dodd-Frank and the SEC
  • Universal ballot, executive compensation policies and other impending rule-making initiatives
  • 14a-8 interpretation and application
  • SEC disclosure effectiveness initiative

You can listen to the full presentation HERE

NFG Rejects GAMCO Proxy Access Nomination

As previously reported, on November 10, 2016 GAMCO filed the required 14N with the SEC to make proxy access nominations. National Fuel Gas Company (NFG) received notification from GAMCO that it intended to nominate one director pursuant to the company’s proxy access bylaws.  (November 16 CGIC Blog entry: GAMCO Files 14N – Proxy Access Nomination)

On November 23, NFG filed a Form 8-K detailing the rejection of GAMCO’s nominee.  In the filing the company detailed the rejection was due to the following by-law provision: “A stockholder that seeks to use the Company’s proxy access By-Law provision must make certain representations and warranties to the Company. If these representations are not correct, the stockholder is not eligible to use proxy access. These representations include that an Eligible Stockholder:

(i)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 does not presently have such intent”

NFG cited a number of filings and communications from GAMCO, dating back to 2014, that led to the determination that GAMCO failed to meet this provision of the company’s by-laws and, therefore, the company would not include the proposal in the proxy materials: “Based on GAMCO’s past conduct and current actions, the Board has determined that (1) GAMCO possessed an intent to change or influence control of the Company when acquiring some if not all of the Proxy Access Request Required Shares; and (2) GAMCO continues to have the intent to change or influence control of the Company.”

On November 28th, GAMCO filed an amended 13D stating: “Lance Bakrow informed GAMCO this morning that he has decided to withdraw his name as a candidate for Director of National Fuel Gas Company. GAMCO will not pursue Proxy Access.”

For now it appears this issue is over, leaving us still awaiting the first use of proxy access.

GAMCO Files 14N – Proxy Access Nomination

On November 10, 2016 GAMCO filed the required 14N with the SEC to make proxy access nominations. National Fuel Gas Company (NFG) received notification from GAMCO that it intends to nominate one director pursuant to the company’s proxy access bylaws.

GAMCO, owning 7.81% of outstanding shares of NFG, has nominated Lance A. Bakrow to the Board of Directors. GAMCO stated that it believes its nominee’s skill sets and relevant experience “will be extremely valuable to the issuer and GAMCO is confident its nominee will have an immediate impact on the board.”

NFG adopted its proxy access bylaw in March of 2016, without previously having a shareholder proposal on the ballot. The bylaw has typical 3-3-20 provisions: the ability for one or more shareholders owning 3% or more of the company’s shares for at least three years to nominate up to 20% of the board. However, one somewhat unusual aspect is that the deadline for making proxy access nominations aligns with the deadline to make nominations under the advance notice provisions in the bylaws; for most companies the proxy access nominations deadline is earlier.

GAMCO has a history of attempting to push NFG to make strategic changes, having filed nine 13D’s since 2010. In 2015, it submitted a shareholder proposal requesting the company hire an investment bank to explore a spin-off of its utility business. NFG’s opposition statement to the proposal stated that “while we believe the GAMCO proposal was made with the sincere belief that it would benefit stockholders, after careful consideration, we firmly believe that our current strategy best positions us to deliver long-term value to investors.” The proposal received only 18% support, with GAMCO owning 9% of outstanding shares at that time. Prior to this in 2007, NFG was the subject of a proxy contest with New Mountain Ventures. The company settled the contest by giving them a board seat and splitting the CEO and chairman positions.

GAMCO has a fairly active history with 42 campaigns for board representation in the past six years. Although many felt proxy access would not be used by an activist hedge fund, due to the three-year holding requirement and limitations of solicitation in the bylaws, it appears this was appealing to GAMCO as an inexpensive way to engage for a board seat, given the history of this specific situation.

We will continue to monitor the situation and provide further updates as the matter develops.