General Electric Lets a Little Democracy into its Boardroom
by Scott Klinger, 3/11/2015
In a surprising move last month, General Electric (GE) announced that it would give large shareholders a role in nominating an alternative slate of directors for board elections. GE is not the first large company to adopt such measures, but it is the most prominent. Even more remarkable is the fact that the company put forth this measure voluntarily.
Big business CEOs have long opposed competitive elections for members of their boards.
A corporation’s directors play a vital role in setting the strategic direction of the company. They hire and oversee the company’s chief executive officer (CEO). They review the audit of the company’s financial records, and they set the pay of the CEO and other senior executives. Failing to perform these duties well and with accuracy can have significant impacts, not just for the company, but for the entire U.S. economy.
Shareholders, in theory, own and control a corporation, but this control has always been limited because American corporations have no real elections for their boards. Candidates for directors are put forth by the board itself, and shareholders are ritualistically presented with a slate of directors equal to the number of seats to be filled. They can vote “no” for any candidate, but given there are only as many candidates as there are seats on the board, even a candidate failing to win a majority of votes still is placed on the board.
Over the last decade, a growing number of institutional investors have pressed to change the way directors are elected. They asked the Securities and Exchange Commission (SEC) to adopt new measures of what was called “proxy access” – the right of shareholders with a large enough stake in the company to nominate directors directly to the proxy ballot.
In August 2010, the SEC adopted such a measure, allowing shareholders or groups of shareholders owning three percent of a company’s stock continuously for more than three years to nominate alternative directors for shareholders to consider when they vote.
The move angered the nation’s CEOs. The Business Roundtable, a powerful lobbying organization representing prominent CEOs, and the U.S. Chamber of Commerce, the nation’s largest business lobby, sued the SEC to block the measure. They won, and the measure was struck down in 2011.
Following a disheartening court ruling, persistent shareholders did not give up.
Undeterred, a group of concerned shareholders took proposals for the right to nominate directors directly to their fellow shareholders, company by company. And they’ve slowly been winning those fights. Proxy access has been adopted at several public corporations, including Hewlett Packard and Verizon.
GE entered the fray last fall, when one of its shareholders, Kevin Mahar, introduced a shareholder proposal asking the company to broaden the role of shareholders by adopting proxy access.
Under SEC rules, any shareholder who has owned $2,000 worth of stock for more than one year has the right to introduce a proposal asking the company to report on a specific business practice or to change some policy. The SEC considers these votes advisory, not binding, and as such, even when resolutions receive a majority of shareholder’s votes, companies are not legally obligated to follow shareholder direction on issues like disclosing their political contributions or reporting on the effects of climate change.
General Electric’s decision was a surprising change in direction, and Citigroup is likely to follow suit.
Once a company receives a shareholder proposal, the corporation has the right to challenge the proposal for a range of reasons. GE challenged the Mahar proposal. The SEC rejected GE’s assertions and ordered the company to allow a shareholder vote on it.
But rather than put the matter to a vote, GE simply adopted the rule. Mary Shapiro, former chair of the SEC when the agency rule allowing shareholders to nominate directors was issued in 2010, currently sits on GE’s board.
GE is a politically powerful company, and its CEO, Jeff Immelt, is a member of the Business Roundtable’s Executive Committee. That GE defied the early loud objections of the Business Roundtable to adopt this proposal signals a major change in corporate governance.
GE’s proxy access policy allows shareholders owning three percent of the company’s stock or a group of less than 20 shareholders who have owned GE stock for more than three years to nominate up to 20 percent of the board.
These requirements set a high bar. Only three shareholders – BlackRock, Vanguard Group and State Street – own more than three percent of the company’s stock; one of those investment firms could nominate new directors.
GE had more than 70 shareholders as of the end of last year who each owned more than 0.15 percent of the company’s stock. A combination of these firms could also meet the requisite hurdle.
In the week after GE’s announcement, Citigroup’s board urged its shareholders to vote in favor of a proxy access proposal – ensuring that following their annual meeting, Citigroup’s shareholders will also be able to nominate board candidates.
As attitudes change, it is time for the SEC to reconsider proxy rules.
Nearly 100 shareholder proposals on proxy access have been submitted to U.S. corporations in the last year. In 2014, the 17 proxy access resolutions that were voted on received, on average, 33.9 percent of the votes cast.
In the 2010 court ruling that killed the original SEC rule, the U.S. Chamber of Commerce and Business Roundtable argued that allowing shareholders to nominate directors would impede business competitiveness and capital formation. The D.C. Circuit Court of Appeals agreed. But when the court ruled, there were no companies that allowed shareholders a right to nominate. Today, with more than a dozen companies allowing shareholders a voice (and after this proxy season, perhaps dozens more), it is hard to make the case that such a rule will harm companies. Now GE, Citigroup, Verizon, Staples, and many others will testify that it won’t. We encourage the SEC to take another crack at creating uniform voting rights for the owners of corporations.