Bank of America (BAC) Faces Proxy Access on May 8th

John Harrington, of Harrington Investments, will present his proposal on proxy access at the upcoming Bank of America (BAC) meeting on May 8th in Charlotte, North Carolina. It will be the first time language modified to provide a floor for retail nominators of at least 1/2% will be voted on.

That modification was made in an attempt to win over proxy advisors who were concerned the previous version could theoretically allow retail shareowners with as little as $100,000 in equity to nominate directors.  Under the revised proposal, the minimum threshold for a nominating group under provision 1(a) at BAC is approximately $1.3B and under provision 1(b) is approximately $666M. Under either option, that is a substantial investment.

A million dollar investment in a company may mean very little to a huge fund group like Fidelity, with $3.9 trillion under management. Additionally, most large funds are based on indexes, modified indexes or algorithms. They exist in a competitive environment driven by reducing costs. The more money a fund spends on monitoring corporations and trying to change corporate governance, the more they are likely to lose to their competitors.

Let’s say, for example, that Fidelity own 2% of a company, while Vanguard and BlackRock also own 2% each. If Fidelity introduces a proxy access proposal at a company and subsequently nominates a couple of board members who add so much value that share price rises by 5%, Fidelity would see its profits in that company rise by 5%, less any cost they incurred for their effort.  The profits of Vanguard and BlackRock, Fidelity’s competitors, would also rise by 5% but they wouldn’t have to subtract any costs, since they didn’t incur any additional effort. The more such efforts Fidelity makes, the more they will be at a disadvantage to their competitors.

Individual retail investors aren’t under the same constraints, especially when using low cost social media sites like Sharegate.com to organize.

Some reasons why BAC is a target for proxy access:

Over the last five years, the value of Well Fargo stock has risen 20%. JPMorgan is even.  BAC has lost almost 70% of its value.

In recent years, the company has completed a number of controversial acquisitions, paid out billions in executive bonuses, accepted $35B in emergency funding from the U.S. government, and allowed its former CEO to walk away with $83M in severance pay. The company has been accused of misleading investors and has repeatedly ignored shareowner proposals requesting that it take measures to improve its governance policies. 

CEO remuneration practices at BAC do not appear to be well aligned with sustainable shareowner interests. For the most recently reported period the CEO’s base salary was $950,000. Perquisites and other miscellaneous compensation totaled $420,524. Total compensation was $1,370,524, but total summary compensation was $8,087,181. The board has not executed a formal CEO employment agreement.

On January 7, 2013 it was announced that BAC entered an $11.6 billion settlement to end Fannie Mae’s claims that the bank improperly sold it mortgages and to resolve problems with foreclosures.

On December 14, 2012, HSH Nordbank AG sued BAC in New York State Supreme Court over more than $218M in residential mortgage-backed securities. They accuse BAC and its Countrywide unit of making “misrepresentations and omissions” about the underwriting standards for mortgage loans pooled together into the securities.

On November 9, 2012, it was reported that a long-running class-action lawsuit accusing trading firms on the NYSE, including BAC, of improperly executing trades for their dealer accounts ahead of their clients reached an $18.5 million settlement.

The list could go on and on but hopefully shareowners can see the need for a change in direction at BAC. Below is the “resolved” language of the proposal, followed by a brief explanation of those provisions.

RESOLVED, Shareowners ask our board, to the fullest extent permitted by law, to amend our governing documents to allow shareowners to make board nominations as follows:

1. The Company proxy statement, form of proxy, and voting instruction forms shall include, listed with the board’s nominees, alphabetically by last name, nominees of:

a. Any party of one or more shareowners that has collectively held, continuously for two years, at least one percent but less than five percent of the Company’s securities eligible to vote for the election of directors, and/or

b.  Any party of shareowners of whom 50 or more have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000 and collectively at least one half of one percent but less than five percent of the Company’s securities eligible to vote for the election of directors.

2. For any board election, no shareowner may be a member of more than one such nominating party. Board members and officers of the Company may not be members of any such party.

3. Parties nominating under 1(a) may collectively, and parties nominating under 1(b) may collectively, make nominations numbering up to 24% of the company’s board of directors. If either group should exceed its 24% limit, opportunities to nominate shall be distributed among parties in that group as evenly as possible.

4. If necessary, preference among 1(a) nominators will be shown to those holding the greatest number of the Company’s shares for at least two years, and preference among 1(b) nominators will be shown to those with the greatest number who have each held continuously for one year a number of shares of the Company’s stock that, at some point within the preceding 60 days, was worth at least $2,000.

5. Nominees may include in the proxy statement a 500 word supporting statement.

6. Each proxy statement or special meeting notice to elect board members shall include instructions for nominating under these provisions, fully explaining all legal requirements for nominators and nominees under federal law, state law and the company’s governing documents.

Explanation of Provisions
  • Direct access to the company proxy has long been considered the most direct and cost effective method of allowing shareowners a meaningful role in the nomination and election process. As Les Greenberg and I argued in our petition to the SEC for proxy access in 2002, “entrenched managers and directors will only improve corporate governance when they can be held accountable, e.g., voted out of office and replaced with directors chosen by shareholders.”
  • We set the bar for nominating directors under “option a” higher than that used by Norges Bank this year (see Staples proposal) by requiring shares be held continuously for two years, rather than just one. Norges received substantial support for their proposals last year but the higher holding period may ease concerns about use of the proposal by hedge funds or special interest groups.
  • For “option b” we chose the same threshold level as for submitting proposals under SEC Rule 14a-8, since this time-honored standard is surrounded by court decisions, SEC guidance, and no-action letters. However, “option b” also requires 50 shareowners and with this revision the group must now collectively hold at least one half of one percent but less than five percent of the Company’s securities eligible to vote for the election of directors, a substantial amount. Where shareowners hold 5% or more, we expect them to go through the normal solicitation process. ISS said the previous proposal “poses a risk that a shareholder group’s nominee may not bring the type of experience and qualifications that a company of this size and complexity may require.” One might compare “option a” filers to the “experts” who write the Encyclopedia Britannica and “option b” filers to “amateurs” who write Wikipedia, which has turned out to be much more robust than Britannica in many respects.  There is room for both. Keep in mind, placing a nominee on the proxy is not the same as electing a nominee. Nominees still need to be approved a majority of share votes.  For why it is necessary to not depend on large institutional investors to file proxy access proposals, see arguments made by Ronald J. Gilson and Jeffrey N. Gordon, as well as those of Robert AG Monks
  • Provision two is designed to ensure no single entity or group of shareowners can nominate anything close to what might be a controlling number of directors by restricting them to 24%. The provision also ensures the company does not short-circuit the access process through side agreements with nominees or nominators.
  • The aim of provision three is to allow a substantial change in board composition without triggering a change-in-control, since the total number of shareowner nominees is limited to 48%. Previous versions of the USPX model restricted any one party to a single nominee to encourage board diversity. This revision allows two directors to be nominated by a single party, which might increase the chances of a party undertaking the work involved to make such nominations and elect their chosen nominees. The chances of winning a change-in-control fight through proxy access would be minimal, since other shareowners usually expect to be paid a change-in-control premium by a controlling acquirer. Obtaining approval from ISS, Glass-Lewis and other proxy advisors is considerably harder for a change-in-control slate than for a short slate. Change-in-control could also trigger provisions in debt instruments, employee agreements, severance agreements and other contracts resulting in costly disruptions.
  • Limiting shareowners to 24% of nominees per option will better ensure an influx of new ideas and perspectives, as well as greater independence. Boards will more likely be presented with not only a “plan B,” but also a “plan C,” in exceptional circumstances. It also addresses concerns that “special interests” will take over boards under proxy access. These concerns have been overblown, since directors have a fiduciary duty to the whole company and must win by a majority of all shares voted. However, it is a way of reassuring groups like the US Chamber of Commerce and Business Roundtable that no shareowner gains what these special interest groups would consider “undue” influence through the proxy access process.
  • The language of provision four provides some minimal guidance to boards on how to fairly prioritize competing submissions. For “option a” groups, priority is given to groups with the greatest number of shares, since that option emphasizes substantive long-term owners.  For “option b” groups, those with the largest number of qualifying shareowners are given preference, since that option is designed to encourage the value of participation and input by all owners.
  • Provision five is to ensure a somewhat more level playing field with regard to disclosures in the proxy and their accessibility by shareowners.
  • Provision six ensures everyone knows the rules. Since the company would be listing shareowner nominees in their proxy, they will need to ensure they meet all legal requirements such as SEC Rule 14a-4(d)(4), which prohibits a nominee from being listed unless they have consented to being named in the proxy statement and to serve if elected. Otherwise they may face liabilities and shareowners would be voting for ineligible candidates. Legal standards are generally minimal, like not having declared personal bankruptcy or not having been found legally insane, so the cost of such an exercise should be minimal. Yes, we can expect some boards to game the system with unfair standards. Hopefully, ISS, Glass-Lewis and others will call them on it and recommend voting against directors that play such games.

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