June 22, 2015

Despite the attention given to the impact of short-term investor activists on corporate America, a more profound change is unfolding. Long-term shareowners are slowly bringing a sea-change to the boardrooms of leading companies.

Investors have put forth more than one hundred shareowner proposals at major companies seeking "proxy access." This is shorthand for the ability of shareowners to put forward candidates for election to the board -- traditionally the prerogative of management. The rising tide of votes in favor of this important right shows we are entering a new era of board accountability.

Proxy access offers a constructive, orderly channel for bringing new balance to the boardroom: one that favors long-term owners over short-term traders or "raiders." We know that the quality of Boards is our first and best protection to ensure that companies generate long-term value and effectively manage both risks and opportunities. Companies will thrive under the stewardship of boards that are independent, competent and diverse. When boardroom tenure lengthens and fresh perspectives become scarce, long-term owners need to step up.

The CFA Institute, in its study of evidence of the impact of giving shareowners the right to nominate directors, concluded that proxy access would be good for corporate performance and thus provide a net benefit to the economy. This makes sense. The role of shareowners is to provide capital. The role of the board is to oversee management. Holding boards accountable means the ability to vote on their appointment, and also the ability to offer alternatives when needed.

The tally to date for this season's votes on proxy access demonstrate there is a winning formula. The proposals winning support share three features: shareowners proposing candidates to the board must jointly represent a minimum of 3% of the company’s equity, have held that stake throughout a three year period and can only propose up to 25% of the Board. These sensible requirements reflect an SEC rule which was vacated through a court challenge in 2011 by the Chamber of Commerce and Business Roundtable. The overturning of this rule left investors with the quaintly termed option of "private ordering" - going company by company to introduce proposals which bring in proxy access. An impressive band of long-term investors, representing several trillion dollars of capital, is now doing just that.

New York City has filed proposals at 75 companies, CalPERS is jointly carrying out more than 100 proxy solicitations and attending 50 annual general meetings to support proxy access this season. TIAA-CREF wrote to its 100 largest holdings to explain its support for proxy access. Norges, one of the world’s largest global funds, issued a paper arguing the economic and governance case for proxy access. BlackRock went on the record to indicate its support, too, and T Rowe Price joined pension funds in webinars hosted by groups such as the Council of Institutional directed to the proxy advisory firms. Investors have made their support public and made sure all parties understand the reasoning, the approach, and the votes that will follow. This represents critical mass on a core issue.

There are other investors who remain unconvinced. Some in the mutual fund community have disappointingly not supported this shareowner initiative. Some say they support the principle of proxy access, but only with higher thresholds or limitations which were rejected as too onerous during the SEC's consultation. Others consider that investors should not or do not need the ability to propose directors unless through informal channels.

Overall, this view is not prevailing. The overwhelming majority of the proposals which have gone to the vote, to date, have passed. Some business leaders are showing the way and recognizing their investors as owners.

Prudential Financial has introduced proxy access voluntarily, Apple has promised to come to shareowners with a workable plan, and Apache offered management's full support to a shareowner proposal on proxy access. Other companies have settled the matter and introduced proxy access before the matter came to a vote.

The stance on proxy access represents a seismic shift in U.S. corporate governance, and one with profound consequences. It brings new influence to investors, but most important, influence reserved for the long-term owners. Proxy access will have a civilizing effect on activism, because major investors like CalPERS are insisting this be a right for long-term, significant owners. Proxy access will bring owners to the gate, not the barbarians.

For additional information visit the CalPERS Global Governance website at http://www.calpers-governance.org.