The Advisors' Blog

– Chris Cernich, ISS Contested Meeting Research

In November 2013, ISS reported on an escalating phenomenon of boards adopting a one-size-fits-all bylaw prohibiting any dissident nominees who had received third party compensation for standing as a candidate in a proxy contest–whether or not this compensation would have continued once the nominee was elected to the board–from being seated as a director.

It now appears that many of the boards which adopted this “one-size-fits-all” bylaw have taken these shareholder votes on directors as a referendum on boards’ unilateral adoption of the bylaw, and begun to respond.

Just prior to issuing the proxy statement for its 2014 annual meeting, the board of Schnitzel Steel rescinded the bylaw entirely. The Rockwell Automation board rescinded its bylaw two days after a third of shareholders withheld votes from directors at the 2014 annual meeting. Sixteen other issuers have now followed suit. In aggregate, more than half the companies which adopted this bylaw have rescinded it in the four months since the Provident meeting, while only one additional issuer–CST Brands–has adopted it.

The ability of so many boards to adopt and then quickly rescind the bylaw raises the question whether those boards were, in fact, so firmly committed to the idea in the first place. Interestingly, appeal of the bylaw does not appear to lie in the direct experience of having faced an activist campaign: only nine of the 34 adopters (37 percent) had even faced a public activist campaign over the past six years. Just one–International Game Technology–had gone through a proxy contest, and yet the bylaw, had it been in place, would not have barred any of the three dissident nominees in that contest from service on the IGT board.

[Broc’s note: Earlier this week, CII send this letter to the SEC regarding more disclosure when it comes to 3rd-parties paying directors. Also see my 2-minute video on this topic.]