NYC Comptroller's New Program to Let Shareholders Have More Say on Who Serves on Corporate Boards

How "independent" can directors be if the insiders not only determine who serves on the board and how long they serve, but also how much they get paid and what information they receive?
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On Election Day in America, voters get to choose between at least two candidates and majority vote determines who will serve to represent the constituents. But in Corporate America, elections don't work that way. Instead, board members are nominated by insiders, they run unopposed, and management counts the votes. Incredibly, management-selected directors keep their jobs even if a majority of the shareholders refuse to vote in favor of their election.

Reforms inspired by the Enron-era accounting disasters and the Wall Street failures that led to the financial meltdown put a lot of emphasis on "independent" directors. But how "independent" can directors be if the insiders not only determine who serves on the board and how long they serve, but also how much they get paid and what information they receive?

Furthermore, while Dodd-Frank included a provision for "proxy access," giving significant shareholders the right to submit nominees for the board and have their candidates included on the ballot circulated to all shareholders by the company, the implementing of that provision has been blocked by a group of corporate executives dead set against reform.

Shareholders--from institutional investors, like public pension funds, to individuals saving for retirement--recognize that cozy, insular boardrooms present a significant investment risk. That's what makes the Boardroom Accountability Project--an initiative of New York City Comptroller Scott M. Stringer and the City's pension funds--so important. The Project, which launched last week, includes 75 shareholder proposals calling on portfolio companies to give shareowners the right to nominate directors at U.S. companies using the corporate ballot.

Stringer's breakthrough here is making it clear that no matter what their concerns are as investors on behalf of New York City employees, it all comes back to who is on the board and is making sure that those board members understand that their duty is to shareholders, not CEOs.

Of the resolutions filed, with some overlap included, 33 were at carbon-intensive coal, oil and gas, and utility companies, 24 at companies with little to no diversity on their boards, and 25 at companies that received significant opposition by shareholders to excessive executive compensation put to an advisory shareholder vote in 2013.

Corporate directors operate under the broad protection of the "business judgment rule," which provides that, because they are "elected" by the shareholders, courts will defer to their judgment on business decisions, even if subsequent events show that they were wrong. However, if executives continue to allow directors to serve when a majority of the shareholders have refused to vote for them, or if they fight shareholders who want to make the process for nominating board candidates less insular, this will change.

This is a critical step forward, but it is also a measured, even modest one. In this most tilted of playing fields, executives can ignore even a 100 percent vote in favor of shareholder proposals like these. Even if the proposals are implemented, shareholders do not anticipate nominating candidates for more than a fraction of a percent of board seats. They would only exercise that option for the most ineffective boards, those with the most outrageous disparities between pay and performance, the worst sustainability failures, or the least transparent and reliable financial reports. And exercising the option would not guarantee that their candidates would be elected. They would still need to get the support of over half the shareholders, reducing any risk that a small shareholder could seize control of the board for short-term gain.

The real purpose of these proposals is to send a message to corporate insiders that shareholders want to see a more robust and transparent process for selecting director candidates. If the targeted companies are smart, their CEOs will meet with Stringer to discuss ways to achieve that goal. If they are not, they can expect to see a rise in opposition to the candidates they nominate, and even the possibility of a proxy contest. One way or another, shareholders will make sure that boards do a better job of protecting the companies they own.

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