Risk & Compliance

Pension Funds Angle for ”Proxy Access”

Four of the country's largest funds announced a joint proposal that would give shareholders the right to nominate directors to the board of The Wal...
Stephen TaubOctober 13, 2004

Yesterday, four of the country’s largest pension funds threatened to shake up the proxy process.

The California Public Employees’ Retirement System (Calpers), the New York State Common Retirement Fund, the AFSCME Employees Pension Plan, and the Illinois State Board of Investment announced a joint proposal that would give shareholders the right to nominate directors to the board of The Walt Disney Co.

If the proposal receives a majority of votes at Disney’s 2005 annual meeting, a group of shareholders would be able to nominate up to two directors to Disney’s 11-member board at the company’s 2006 meeting.

“The first step in restoring investor confidence was for Michael Eisner to step down, the second step was to search for a successor as the CEO, but the third step — getting independent directors to serve next year and in the years ahead — is the most important step of them all,” said Calpers president Sean Harrigan, in a statement. “Our action is one step towards increasing the accountability of the Disney board to its shareholders,” added Ed Smith, chairman of the Illinois State Board of Investment.

The shareholder proposal is not unprecedented. During the most recent proxy season, AFSCME prepared a similar proposal for the annual meeting of Marsh McLennan, but withdrew it after the financial-services company nominated former federal prosecutor Zachary Carter to its board.

Of course, the Disney situation could have been avoided altogether if the Securities and Exchange Commission didn’t back off from its own proposal to open up the nominating process. A year ago, the commission trotted out its own plan that would have allowed shareholders to nominate directors under certain circumstances — a plan that generated a record number of comments and spawned a rare roundtable discussion.

The SEC’s original proposal would have applied only to a shareholder who owned more than 5 percent of a company’s shares for two years, and only after one of two triggers was tripped.

One trigger requires that a shareholder (or group of shareholders) owning at least 1 percent of voting shares outstanding for at least a year to submit a proposal that receives more than 50 percent of the votes at an annual meeting. The other trigger would be tripped if one of the company’s own nominees for the board received “withhold” votes on more than 35 percent of the proxies cast at the meeting.

Together, the four pension funds own more than 18 million shares of Disney’s total 2.05 billion shares outstanding — but because that’s not quite 1 percent, the funds wouldn’t be able to rely on the SEC proposal to include their candidates on the ballot.

In any event, only three of the five SEC commissioners, including chairman William H. Donaldson, support what has come to be called proxy access. The SEC has repeatedly stated its strong preference that four of the five approve the proposal before the commission puts forth its final rules.

The Securities and Exchange Commission’s proposal is facing strong opposition from a number of organizations, including the Business Roundtable, which fears that special-interest groups will “hijack” the proxy process. But if the SEC doesn’t get its act together, the nominating process threatens to turn into a free-for-all.