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E-MailCydney S. Posner is Special Counsel at Cooley LLP. This post is based on a Cooley publication. Related research from the Program on Corporate Governance includes The “New Insiders”: Rethinking Independent Directors’ Tenure by Yaron Nili (discussed on the Forum here).
The topic of director tenure has increasingly become the focus of both academics and investors. Some argue that long-term directors contribute deep knowledge of the company and provide experience, historical memory and continuity to the board—along with the gravitas sometimes necessary to challenge management. Others contend that directors with long tenure are “stale” and rarely contribute fresh perspectives. Moreover, they suggest, the independence of directors with long tenure may even be compromised—not in the technical sense of the NYSE or Nasdaq definitions of course, but rather more in the sense of “social independence,” meaning that the development over time of shared social connections might bias them or taint their objectivity. According to the WSJ, the head of a corporate governance center at the Conference Board has observed that “’[t]he tenure issue is one that is bubbling below the surface.’“ (See this PubCo post and this PubCo post.)
While there have been some shareholder proposals in the past regarding board term limits, they have been sporadic and have not necessarily fared well at the ballot box. A couple of institutional shareholders, including CalPERS, have indicated that director tenure could shape their votes in the future; however, the inflexibility of fixed term limits and predetermined retirement ages have not been widely favored, nor have the key proxy advisory firms typically supported shareholder proposals for mandatory retirement age or term limits. Now, some of the most prolific corporate gadflies are challenging one company on this issue, but with a twist: this proposal is specifically tailored to focus only on the company’s lead independent director. Will that make a difference?
In this no-action request and response to The Allstate Corporation, William Steiner, with John Chevedden as his agent, submitted a shareholder proposal requesting “that our Board adopt a rule that whenever possible our Lead Director have less than 12-years tenure. A director with more than 12-years tenure is arguably not independent.” The company’s Lead Director “had long tenure of 17 years, which may compromise her ability to act as an effective and independent counterbalance to the CEO/chair.” In addition, the supporting statement noted that the Lead Director had served on the board of a company that had previously filed for bankruptcy. The supporting statement also indicated that GovernanceMetrics International (GMI), a provider of corporate governance research and ratings, “said long-tenured directors can often form relationships that may compromise their independence and therefore hinder their ability to provide effective oversight.” Finally, the supporting statement contended that independence for the lead director was “especially important” because the company had combined the role of CEO and board chair.
The company sought to exclude the proposal under Rule 14a-8(i)(8)(iii), contending that the proposal and supporting statement questioned the competence, business judgment and character of the Lead Director, who was standing for reelection. In support of its argument, the company cited other letters in which the staff had granted no-action relief in connection with exclusion of a proposal to reduce board size, where the supporting statement identified one of the directors as having been forced out of his job and “questioned how that director ‘enjoy[ed] the support of [the company’s] shareholders.’ In granting relief to exclude the proposal, the Staff specifically noted that the proposal appear[ed] to question the business judgment of a board member whom [the company] expect[ed] to nominate for reelection at the upcoming annual meeting of shareholders.’” With that and other examples in mind, the company then argued that the shareholder proposal and supporting statement questioned the Lead Director’s competence, business judgment and character because they raised the issue of her service on a board that had declared bankruptcy and questioned “her ability to act as an effective and independent counterbalance to the CEO/chair” and her “ability to provide effective oversight.” The company asserted that these statements “are intended to cause the Corporation’s stockholders voting on the Proposal to reconsider their support” for the Lead Director, who was expected to run for reelection at the annual meeting. These types of statements, the company contended, “in effect oppose a company’s solicitation for the reelection of a director and directly implicate the policy underlying Rule 14a-8(i)(8)—to prevent election contests that do not afford shareholders the protection of the additional disclosures required by the Commission’s rules governing such contests.”
The proponent countered that the proposal did not advocate removal of a director and subsequently pointed to the title of the proposal “Lead Director Qualifications.” But, the company pointed out, Rule 14a-8(i)(8) provides five separate bases upon which a proposal may be excluded, only one of which relates to removal, and that was not basis on which the company was relying. However, the proponent maintained, the “company did not claim that the proposal says that the Lead Director is unqualified for any of the 90% of the board seats which are not held by the Lead Director,” in effect asserting that the proposal related only to the director’s status as Lead Director and nothing more.
In the end, the staff did not concur that the company could exclude the proposal under Rule 14a-8(i)(8). Assuming that the proposal is submitted for a shareholder vote, the outcome may help determine whether we see these types of proposal proliferate in the future.
