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CalPERS and other activist investors to gain a seat in the boardroom

Shareholder activism | CalPERS and other activist investors to gain a seat in the boardroom Ian Fraser

If you believe that increased shareholder engagement is the key to a corporate nirvana in which responsible investors can force companies to change their behaviour - for example by thinking longer-term and eschewing corporate excess - there's been a most welcome development.

New rules permitting large shareholders to nominate directors for the boards of US companies were approved by the SEC on August 24. The rules entitle shareholders who have owned 3% of a company’s common equity for more than three years (which pretty much excludes hedge funds) to nominate their own director for election to investee companies' boards.

SEC Chairman Mary Schapiro said:

“I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfil the responsibilities of serving as a director."

The move was welcomed by activist investors and corporate governance experts who believe it will assist the push towards socially responsible investing (SRI) and environmental and social governance (ESG). According to Responsible Investor Rob Feckner, president of the California Public Employees’ Retirement System (CalPERS), described the move as “an important advancement of the principles of investor protection” and said that it will be considered “a win-win for business and investors”.

Along with a group of other institutional investors, the $200bn California public sector pension fund has been campaigning for proxy access for some time.

Joseph Dear, its chief investment officer, said the move was a "win-win" situation that gives long-term investors the chance to propose people who are “knowledgeable [and can] bring fresh ideas and new perspective to a company’s operations”.

There's a view that the rule change will bring an end to culture where boards could be dominated by corporate clones obsessed above all with their own pay packets, enabling people with slightly broader vision to take some control of US corporations. There should also be greater scope for more women and people from minority ethnic groups to help guide America's top businesses.

Given the corporate myopia that has blighted US corporate life for generations, which is seen as one of the key causes of the global financial crisis, this has got to be a good thing.

Quick off the mark, CalPERS has already started recruiting suitable executives to act as director nominees, and has been putting them on standby, according to the Wall Street Journal.

Fellow Californian pension fund CalSTRS, which looks after teachers' pension assets, said the move would permit like-minded institutional investors to team up. However CalSTRS CEO Jack Ehnes said that proxy access should only be used “sparingly” and only after “other means of dialog and negotiations have been exhausted”.

The Council of Institutional Investors has welcomed the proposal saying it should “invigorate board elections and make boards more responsive to shareowners”.

However opponents of proxy access fear it gives too much power to groups that already have significant sway over corporate America. They also believe directors who are cherry-picked from the CalPERS database might be more beholden to the $200bn fund than to shareholders as a whole, according to the WSJ.

The proposal, which was passed by the SEC by a majority of 3 to 2, was voted against by two SEC commissioners, Kathleen Casey and Troy Paredes. Casey said the proxy rule will join climate change disclosure in the “pantheon of the SEC’s poor decisions”. The US Chamber of Commerce is also against the changed rule, saying: “Rather than focusing on good corporate governance, the SEC has given special interests the ability to hold the board hostage on narrow issues at the expense of other shareholders.”

The SEC’s Schapiro predicts there will be “dozens of instances of give and take” as the new rules take effect, and, as the WSJ pointed out, the final details of the new rules remain in flux.

Further reading on shareholder activism and improving corporate governance:

Tags: activist investors , corporate governance , environmental and social governance , SEC , Securities and Exchange Commission , socially responsible investing , US
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