After decades of consideration, the U.S. Securities and Exchange Commission voted 3-2 today to approve a final proxy access rule that will be in effect for most of the 2011 proxy season. The new rule, assuming it survives a potential corporate legal challenge, will require a 3 percent ownership threshold and a three-year holding period for investor groups that seek to nominate board candidates to appear on corporate proxy statements.  

“As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own," SEC Chairman 
Mary Schapiro said at today’s open meeting. "Nominating a director candidate is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. The critical point is that shareholders have the ability to make this choice."

Investor advocates hailed the long-awaited adoption of the new rule, even though it includes a much longer holding period and a higher ownership threshold for access at larger companies than the SEC proposed in a June 2009 draft rule.

“This is ground-breaking for U.S. shareowners,” Ann Yerger, executive director of the Council of Institutional Investors (CII), said in a press release. “Access to the proxy will invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies.”

Following a “vote no” campaign by labor pension funds, Dell investors withheld 25.1 percent support from Chairman and CEO Michael Dell at the information technology company’s Aug. 12 annual meeting.

The AFL-CIO and the American Federation of State, County, and Municipal Employees opposed Michael Dell, who founded the Texas-based company, in an attempt to prod the board to appoint an independent chair. The labor investors announced their campaign after the company announced a $100 million settlement in late July to resolve an SEC accounting probe; the accord includes a $4 million payment from Michael Dell.  According to an SEC lawsuit, the company failed to disclose exclusivity payments it received from Intel from 2003 through 2006. 

“Considering that his name is on the company, this is an important percentage of shareholders asking the board to institute independent leadership,” said Lisa Lindsley, director of capital strategies at AFSCME. 

Director Thomas Luce, who chaired the audit committee in 2007 and served on that panel earlier, received 23.7 percent opposition, according to a Dell filing this week. Three other board members, who served on the committee during the period covered by the SEC probe, received more than 17 percent dissent.  

The withhold vote against Michael Dell is notable, because he was elected with more than 96 percent support at the annual meetings in 2009, 2008, and 2007. This year’s opposition would have been even higher but for the 273.7 million shares held by the chief executive, his family, and other officers and directors. John Keenan, a strategic analyst with AFSCME, notes that the CEO would have received 30.7 percent dissent without the insider vote.

The insider voting bloc also dampened support levels for two shareholder proposals. Keenan estimates that the AFL-CIO’s “say on pay” resolution would have received 48.7 percent support, instead of a 39.7 percent vote. Likewise, AFSCME’s solicitation reimbursement proposal would have earned 43.9 percent support, instead of a 35.8 percent vote, Keenan said.  
 

The Delaware Supreme Court has upheld a Chancery Court judge’s dismissal of a Michigan pension fund’s lawsuit over a board’s refusal to accept the resignations of majority-opposed directors. While the ruling was a defeat for the pension fund, it appears that this decision may help other shareholders sue companies over majority-opposed directors.  

In an Aug. 11 decision, the Supreme Court affirmed the dismissal of a lawsuit by the City of Westland Police and Fire Retirement System, which sued Axcelis Technologies after its board declined to accept the resignations of three directors who failed to receive majority support at the 2008 annual meeting. The pension fund filed suit under Section 220 of the Delaware General Corporation Law, which permits investors to inspect a company’s “books and records” if they demonstrate a “proper purpose.” Westland also sought records concerning the board’s rejection of two takeover bids by Sumitomo Heavy Industries, which fueled the majority withhold votes. 

At the heart of the case is the director resignation policy that Beverly, Mass.-based Axcelis adopted in 2005 while maintaining plurality voting. Resignation policies have become more widespread since then; about 70 percent of S&P 500 firms now have majority voting provisions, according to ISS data. The question of whether investors have any legal recourse if a board refuses to accept a resignation has received more attention in recent years, particularly as the New York Stock Exchange’s ban on broker votes in uncontested board elections has made it more likely that a director may receive majority opposition. 

The U.S. Securities and Exchange Commission plans to consider a final proxy access rule when it holds an open meeting on Wednesday, Aug. 25, at 10 a.m.

The SEC's meeting notice included no details on the content of the final rule that will be presented for consideration. The final rule may require that investor groups hold a minimum 3 percent stake for at least two years to be eligible to nominate board candidates to appear on management proxy statements, according to SEC observers and news reports. 

A Massachusetts pension fund has filed a derivative lawsuit against Hewlett-Packard’s board members and former CEO that seeks an independent board chairman, three shareholder-nominated directors, and other novel governance changes. 

In an Aug. 10 lawsuit in California state court, the Brockton Contributory Retirement System alleges that HP’s board members breached their fiduciary duties, committed gross mismanagement, and wasted corporate assets by agreeing to pay as much as $40 million in severance benefits to outgoing CEO Mark Hurd. The pension fund further alleges that Hurd and interim CEO Catherine Lesjak engaged in insider trading in violation of California state law because they sold HP shares while in possession of non-public information. 

Hurd was forced out by HP’s board on Aug. 6 after a company contractor made sexual harassment allegations, and a board-commissioned probe found that he falsified expense reports.  The Palo Alto, California-based technology company’s shares lost almost $9 billion in value on Aug. 9, the first trading day after Hurd’s departure. 

“Regardless of whether this was a firing ‘for cause,’ or a resignation, Hurd was not entitled to severance benefits under his employment agreement with HP, and the Board’s authorization of these payments was an abuse of their discretion and a violation of their duty of loyalty to HP and its shareholders,” the complaint asserts. 

HP has declined to comment on this lawsuit, according to news reports. 

The Florida State Board of Administration (SBA), which oversees the state's $140 billion retirement system, is urging mid-cap and small-cap firms to adopt majority voting bylaws.

The SBA has begun a two-part campaign directed at companies that don't require directors to receive majority support in uncontested elections. Michael McCauley, the SBA's senior officer for investment programs and governance, said the retirement system has begun sending letters to the 508 firms in the Russell 1,000 index that still maintain plurality voting or have plurality voting plus a director resignation policy. Over the next month, the SBA plans to send letters to the 1,700 firms in the Russell 2,000 index that have no majority voting procedures.

"One of the fundamental rights shareowners have under state corporate law is the power to elect corporate directors," McCauley wrote in a letter to the companies. "SBA staff endorses majority voting for the meaningful accountability it affords your shareowners and believes it improves the performance of individual directors. Such accountability serves to enhance shareowner confidence in board actions. Under plurality voting in uncontested elections, the election of directors by less than a majority vote has led shareowners to question the legitimacy of the director selection process."

While 70 percent of S&P 500 index companies now have majority voting provisions, up from 52 percent in 2008, this practice is less common among smaller issuers. Among S&P 1,500 firms, only 35 percent have some form of majority voting procedures, according to ISS data.

Investors have expressed a renewed interest in pushing companies to adopt majority voting bylaws after lawmakers dropped a majority voting mandate from the Dodd-Frank legislation in June.

The issue of succession planning is getting more attention again after last week’s sudden ouster of Hewlett-Packard Chairman and CEO Mark Hurd, and activist investors plan to file more shareholder proposals on this topic in 2011.

HP announced Friday that Hurd resigned and was replaced by Catherine A. Lesjak, the company’s executive vice president and chief financial officer, who will serve as interim CEO. A new chairman has not been named. According to news reports, the board voted to seek Hurd’s resignation after an investigation into a sexual harassment complaint by a marketing contractor; the probe concluded that Hurd falsified about $20,000 in expense reports to conceal that relationship. 

According to news reports, HP’s board had no formal succession plan in place before Hurd’s resignation. Industry observers expect the company will bring an outside executive to take over, a process that will take some time and likely require costly recruitment incentives. The company’s shares fell 8.3 percent in after-hours trading on Friday. 

Three months after fending off a shareholder revolt, Massey Energy is taking more steps to improve its governance practices. 

In a filing yesterday, the coal-mining company said it would hold an Oct. 6 special meeting to seek shareholder approval to amend its certificate of incorporation to declassify the board; investors overwhelmingly supported a shareholder proposal on this topic in May. The company will also ask investors to endorse the removal of supermajority provisions to approve shareholder-proposed bylaws and certain business combinations. In addition, Massey will seek to amend its certificate to eliminate cumulative voting and to drop a prohibition on the right of investors to call special meetings. To take effect, the declassification, cumulative voting, and supermajority proposals must receive support from 80 percent of the company’s outstanding shares.   

The board has also adopted several other governance changes. Those include a new policy to prohibit outside CEOs from serving on more than two other boards and to bar other Massey directors from accepting more than five other directorships. The company also plans to eliminate tax gross-ups on change-in-control payments. The board also divided its current Safety, Environmental, and Public Policy Committee into two committees: the Safety and Environmental Committee to consist exclusively of independent directors and the Public Policy Committee to consist of a majority of independent directors. Shareholder activists criticized the oversight provided by the current safety committee after 29 miners died at Massey's Upper Big Branch mine in April. 

 “The measures approved by the Board build upon our existing strong corporate governance foundation and reflect Massey’s commitment to excellence in this area. I am particularly pleased that the Board’s actions reflect a concerted effort to solicit constructive feedback from our stockholders,” retired Admiral Bobby Inman, Massey’s lead director, said in the filing. 

The Virginia-based company previously agreed to adopt majority voting in response to a majority-supported shareholder proposal. However, Massey has not heeded the requests of some investors to appoint an independent board chair, and instead plans to clarify the duties of the lead director.

The three board members on Massey's ballot in May had more than 42 percent opposition amid a well-publicized "vote no" campaign by the Change to Win labor federation, the California Public Employees' Retirement System (CalPERS), and other public pension funds.

“In the wake of the tragedy, shareholders have been keenly focused on the board’s accountability to its owners, so moves to introduce annual voting for directors and strengthen the board’s oversight of management are vitally important,” said Anne Simpson, CalPERS' senior portfolio manager for corporate governance.  “We will be calling for shareholders to approve the reforms at the special meeting in October, and continuing to engage with the board.”

However, the CtW Investment Group, the investment arm of the Change to Win labor federation, was critical of the board's refusal to appoint an independent board chair.  "By failing to name an independent chairman, the Massey board has once again demonstrated its unresponsiveness to shareholders and unwillingness to challenge Chairman and CEO Don Blankenship," said Michael Garland, CtW's director of capital strategies. "Without fundamental changes to the board’s leadership and composition, shareholders will continue to bear the cost of Mr. Blankenship’s confrontational and counterproductive approach to shareholders and regulators alike." 

"Over the past two months, Massey has sued the Mine Safety and Health Administration; hired the former MSHA chief in the Bush administration to attack the agency’s probe of the Upper Big Branch explosion; and been criticized for 'grandstanding' by a federal judge who said the company’s efforts 'to interfere with the ongoing investigation' were a 'waste time and resources,'” Garland said.   

The U.S. Securities and Exchange Commission plans to consider a final proxy access rule at an open meeting on Aug. 25, according to news reports and SEC observers. The final rule will likely require that investor groups hold a minimum 3 percent stake for at least two years to be eligible to nominate board candidates to appear on management proxy statements. 

While the SEC has not yet announced when access will be considered, commission officials have said they hope to have a rule in place before the 2011 proxy season. An SEC spokesman declined to comment on The Wall Street Journal’s report that access would be considered Aug. 25. 

It appears likely that the commission will vote 3-2 to approve the final rule, with SEC’s two Republican commissioners dissenting, according to the Journal. The two Republicans--Commissioners Troy Paredes and Kathleen Casey--voted against a draft access rule in May 2009. That proposal called for three separate ownership thresholds (1, 3, and 5 percent) based on an issuer's market capitalization as well as a one-year holding period for investors who wish to propose nominees.

The SEC has received more than 500 comments on the draft rule and reopened the comment period in December to get more input on the costs and benefits of access and whether companies should be allowed to seek shareholder approval to opt out of federal standards. Activist investors have been generally supportive of the draft rule, while labor investors called for a two-year holding period. Corporate advocates have opposed the draft rule and have argued for higher ownership thresholds and for an opt-out provision.  

It is unclear whether small issuers (i.e., non-accelerated filers, which have less than $75 million in market capitalization) or investment companies will be exempted from the rule. The Dodd-Frank Act, which affirmed the authority of the SEC to issue a proxy access rule, authorized the SEC to exempt small companies. Governance observers expect that the final rule won’t include opt-out language.

The California State Teachers’ Retirement System (CalSTRS) and Relational Investors are threatening to wage a proxy fight at Occidental Petroleum over the oil company’s compensation practices and the board’s failure to abide by its retirement policy or announce a succession plan for its long-serving chief executive and chairman.  

In a joint July 30 letter, the investors said they plan to nominate at least four board candidates to Occidental’s 13-member board at the 2011 annual meeting. Ralph Whitworth, a principal at Relational, plans to seek a board seat, but the other potential dissident candidates haven’t been selected, according to The Wall Street Journal.  

The AFL-CIO and the American Federation of State, County, and Municipal Employees (AFSCME) are urging Dell investors to vote against Chairman and CEO Michael Dell at the computer company’s Aug. 12 annual meeting. The labor funds say they hope that a high withhold vote against Michael Dell will prompt the board to appoint a new chairman. 

The union pension funds announced their “vote no” campaign after the Texas-based company reached a $100 million settlement with the Securities and Exchange Commission on July 22 over the company’s accounting and disclosure practices from 2001 to 2006. As part of that accord, Michael Dell has agreed to pay a $4 million fine. The SEC accused the company of failing to disclose exclusivity payments it received from Intel to not use central processing units manufactured by a rival. Without these payments, Dell would have missed its earnings targets between 2002 and 2006, according to the SEC.

The labor investors also contend that Michael Dell “received excessive levels of compensation” during the period that the alleged disclosure and accounting problems occurred. The funds point to a recent Wall Street Journal article, which said that Michael Dell was the 12th highest-paid U.S. CEO over the past decade. According to the funds, he received $453.8 million in total compensation, including exercised options, between 2000 and 2009, while shareholders lost 66 percent of their share value.

“Based on the allegations in the SEC’s complaint against our Company and Michael Dell, we believe that shareholders would be better served by the removal of Michael Dell as the Chairman of our Company’s Board of Directors,” the labor funds said in a letter to Dell investors. 

Dell’s board has publicly maintained its support for the CEO since the announcement of the SEC settlement. “Dell’s Board reaffirms its unanimous support for Michael Dell’s continued leadership, and the management team in its ongoing commitment to transparent accounting, integrity in financial reporting and strong corporate governance," Sam Nunn, the board’s presiding director, said in a press release. 

The labor funds also are urging investors to support an AFSCME proposal to provide for the reimbursement of proxy solicitation expenses, and an AFL-CIO resolution to establish an annual advisory vote on executive compensation.