1 Way Big Finance Stifles Shareholders

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It's pretty easy to win an election if nobody's running against you.

Unfortunately for investors, this strategy dominates corporate board elections, in which insiders have almost complete control over who serves on their boards.

Who gets to choose?
At most public companies, shareholders have very little say over who serves on the board of directors. Prospective directors are almost all nominated by company insiders and compete in uncontested elections. Within this structure, shareholders have to dump money into an expensive proxy contest if they wish to put up competing candidates. Alternatively, they can express disapproval for the existing candidates by withholding votes and hoping the shunned directors will be replaced by better candidates.

But in uncontested elections, directors may not leave even when the majority of shareholders refuse to vote for them. For example, Cablevision refused to get rid of directors Thomas V. Reifenheiser, John R. Ryan, and Vincent S. Tese when they failed to receive majority support in the company's 2010 and 2012 elections. Worse, Cablevision renominated the shunned directors yet again in 2013.

Denying you the choice
In hopes of gaining more power over director elections, shareholders at Bank of America (NYSE: BAC  ) , Charles Schwab, Goldman Sachs (NYSE: GS  ) , Wells Fargo (NYSE: WFC  ) , and Western Union (NYSE: WU  ) submitted proposals last year pushing the companies to grant some shareholders the right to list alternative director nominations.

But all of these companies attempted to deprive shareholders of the chance to vote on these proxy access proposals.

Bank of America and Goldman Sachs successfully blocked these proposals after writing no-action letters asking the SEC staff to confirm that they would not recommend enforcement action for omitting these proposals from their 2012 proxies.

Charles Schwab, Wells Fargo, and Western Union  also submitted no-action letters to block proxy access proposals from their 2012 proxies, but the SEC indicated that these companies failed to provide adequate grounds for omitting them. While these proposals didn't pass when they came to a shareholder vote, a significant minority -- 31%-33% -- supported the proposals at all three companies.

Who is listening?
Encouraged by the significant shareholder support in 2012, Western Union shareholder Norges Bank renewed pressure to increase shareholder access this year. It proposed that Western Union list director nominees from shareholders who have beneficially owned at least 1% of the company's stock for at least one year.

Instead of attempting to simply block the issue, this year, Western Union agreed to compromise by granting some shareholders the right to list their director nominees on future proxies, but making holding requirements more stringent than those initially proposed by Norges Bank. Western Union now allows access to shareholders who have beneficially owned at least 3% of the company's stock for at least three years.

Outside the finance industry, other companies have also responded to shareholder pressure to offer better proxy access. For example, Hewlett-Packard responded to shareholder pressure in 2012 by promising to include a proxy access proposal in its 2013 proxy materials. When it did, the company's board even recommended that shareholders vote for the proposal.

Why investors want a voice on the board
Many investors worry (rightly, I think) that the current system for selecting corporate directors undermines accountability. As the Cablevision case shows, uncontested director elections can make it virtually impossible to oust even the most unpopular directors.

Also, as I've argued previously, I believe investors should worry about a system in which all of the directors are selected by insiders -- especially given that the interests of company insiders aren't always aligned with shareholder interests.

For these reasons, I believe we should look more favorably on companies that list shareholder nominees for the board of directors than those that don't. And I suspect investors will more favorably value the shares of companies that do.

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Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 01, 2013, at 10:13 AM, corpgov wrote:

    Want more power in electing directors at BAC? Vote in favor of John Harrington's proxy access proposal at the May 8th meeting.

    This is an innovative proposal that potentially gives retail owners a chance to nominate directors. Groups of 50 or more investors, each holding at least $2,000 or more, could nominate but their aggregated holdings would have to top $666 million.

    I've already been told some are voting against because they don't believe "amateurs" should be involved in nominating directors? I ask, why are "professionals" handling other peoples money more qualified than actual shareowners? Nonsense!

    Remember, the "low" figure of 1/2% of BAC or $666M is just to nominate. To get elected, those candidates must win a majority of the vote.

    For more on Harrington's proxy access proposal at BAC, see or

  • Report this Comment On May 02, 2013, at 7:34 PM, donbcms wrote:

    An even better way was shown at the shareholders meeting of Hudson City Bancorp regarding proposed merger with M&T Bank. The moderator came out with a "Gag Order" that severely limited the qestions you were allowed to ask? Like WHY NO BIDDING? Despite Mr. Hermance's start with M&T, his LOYALTY should have been to HCBK Stockholders. M&T had NO branches in N.J.

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