The chief executives of America’s corporations answer to one group perhaps more than any other: their boards of directors. But the members of those boards are often handpicked by the companies’ executives themselves. That can perpetuate a system where the boards remain overwhelmingly white and male, approve excessive pay packages for the executives, and fail to push the companies to focus on the long term over short-term priorities.
Some powerful investors have decided to try to disrupt that circular process. A campaign led by New York City Comptroller Scott Stringer, who controls the city’s massive pension system, is seeking something called “proxy access.” If companies agree to the change, investors like the New York pension fund who have owned at least a 3 percent stake of the company’s stock for at least three years would be able to nominate new board members directly to the ballot that goes before shareholders once a year, giving them a stronger voice in deciding who gets to be on boards.
The change is “about giving shareholders an easier way to nominate and vote on other candidates for the board,” explained Ann Yerger, executive director of the Council of Institutional Investors. That gives shareholders an “actual choice” when picking new members.
It may sound like a small change. But it’s the first major push of its kind. Some investors had tried to gain proxy access at a company here or there as a piecemeal effort. But in November, Stringer decided to submit a flurry of proposals at 75 companies. “This was the first year someone decided to make a big effort in the space. It’s quite new,” Yerger said.
“We wanted to start a movement to improve the responsiveness of corporate boards,” Stringer told ThinkProgress. “Weak [board] directors have failed to catch accounting fraud at places like Enron and WorldCom, directors have failed to reign in the excessive risk taking that led to the financial collapse.”
So far the effort has had huge returns. Twenty-eight companies have formally approved proxy access proposals, including major brands like McDonald’s, ConocoPhillips, Citigroup, Domino’s, eBay, and Kohl’s. Another five have voted in favor but haven’t filed official reports on the votes. Many of the proposals passed with flying colors: seven were approved with more than 70 percent of shareholders in favor. “We are sweeping the nation,” Stringer boasted.
The path from proxy access to corporate change is not immediate or necessarily direct. “It’s a tool that allows for choice and that can be a very powerful thing, but still for it to be really effective, ultimately I think [shareholders have to put forward] candidates and issues supported by a majority of the shareholders,” Yerger cautioned. It doesn’t guarantee that shareholders’ nominees will get chosen, just that they will get a vote. But even the ability to threaten a nomination that might be different from what the company would have picked for itself could hold sway. If shareholders say they will put someone on the ballot, “it may lead to enhanced dialogue between the company the shareholders,” she said.
Stringer predicts it will have a real impact. “So much of how you change things in the world is through democracy,” he noted. “I think even the specter of the possibility that share owners could run a director [in an election] will definitely change the mindset and culture of many of these boards around the country.”
And that could put issues that long-term shareholders like his pension fund care about on the radar. Union funds, for example, may be upset with companies that are handing most of their money to shareholders rather than investing it in raises for workers. “My first job is to make sure companies we invest in have good long-term value prospects,” Stringer said. Those investments are “companies that pay their workers a living wage, companies that understand that workers’ rights actually strengthen companies.”
He wants to see other changes as well. “We want to open up corporate America to the notion that it can’t just be a male, pale, stale boardroom of the Mad Men era,” he said. Women hold less than 20 percent of all board positions among the S&P; 500 and 18 companies have no women on their boards at all. Women of color hold just 3.1 percent of board seats among Fortune 500 companies. Yet there is a huge body of research in Stringer’s favor showing that greater board diversity brings better results.
But if long-term shareholders continue by and large to have little voice in picking nominees and therefore changing the priorities of corporate boards, he thinks little will change. “We’re going to continue to have less transparent boards, more male, pale, and stale boards, more CEOs basically getting advice from the same people exactly like the CEO,” he said.