LIU, NYC PENSION FUNDS CALL FOR PROXY ACCESS AT CHESAPEAKE ENERGY
One of 13 Shareowner Proposals Seeking Greater Board of Director Accountability and Independence at Portfolio Companies
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New York City Comptroller John C. Liu and the New York City Pension Funds ("the Funds") announced their latest shareowner efforts to make corporate boards of directors more independent and accountable. In four separate shareowner proposals filed at 13 companies the $113 billion Pension Funds are seeking access to the corporate proxy to nominate directors, independent board chairs, declassified boards and majority voting in director elections.
The Comptroller's Office withdrew three of the proposals-board declassification at Juniper Networks (NYSE: JNPR) and majority voting at HollyFrontier (NYSE: HFC) and Hersha Hospitality (NYSE: HT)--after the companies agreed to adopt the requested reforms. The remaining proposals are expected to be subject to shareowner votes at companies' annual meetings this spring.
"Entrenched directors who are not accountable breed lax oversight -- and often damage their companies in the process," said Comptroller Liu. "Long-term shareowners need the ability to remove or replace directors who destroy shareowner value or are unresponsive to investor concerns."
Proxy Access Proposal
The Funds have called on Chesapeake Energy, Co. (NYSE: CHK) and Nabors Industries (NYSE: NBR) to allow substantial, long-term shareowners to include their director nominees in the companies' proxy statement. The requested bylaw amendments would enable shareowners to avoid the enormous cost of sending out their own proxy cards when they are dissatisfied with a board and want to run their own candidates for election as directors.
The proposal at Chesapeake was filed in response to concerns with the board's independence from management and its record of ignoring shareowners' concerns. The natural gas producer's board has approved excessive pay packages and other financial perks for its CEO, who is also the board chair.
Additionally, after a majority of shareowners voted to declassify Chesapeake's board -- and require its members to seek reelection annually -- the company successfully lobbied for a change in Oklahoma law that actually required classified boards at large, publicly-traded firms incorporated in the state.
Nabors also has a history of egregious executive pay and unresponsiveness to shareowner concerns. The proposal was co-filed by a group of public pension funds, as previously disclosed.
The specific terms in the proposals mirror those in a Securities and Exchange Commission rule approved in 2010 that the U.S. Chamber of Commerce and Business Roundtable successfully challenged in federal court: shareowners holding at least 3 percent of the stock for three years could nominate up to 25 percent of the board and place the names on the ballot.
Repeal of Classified Boards Proposal
Comptroller Liu and the Funds filed proposals calling on Juniper Networks (NYSE: JNPR), Airgas, Inc. (NYSE: ARG), Energen Corporation (NYSE: EGN), Lorillard, Inc. (NYSE: LO), and CF Industries Holdings, Inc. (NYSE: CF) to repeal their classified board structures and require all directors to run in annual elections. The Funds recently withdrew the proposal at Juniper, where it received a 98% vote in 2011, after the company agreed to adopt the request.
Firms that have classified boards stagger the terms served by directors, ensuring that a majority of them never face reelection at any one time. This structure insulates individual directors from accountability on an annual basis and serves as a potent takeover defense, since it can take two years for a hostile bidder to wrest control of the board. Classified boards are negatively correlated with company performance.
Independent Board Chair Proposal
To enhance the board of directors' role as an independent overseer of management, Comptroller Liu and the Funds submitted proposals at Philip Morris International (NYSE: PM) and Mylan, Inc. (NASDAQ: MYL) that would bar current or former employees from being board chairs.
Boards are meant to provide independent oversight of the CEO. A board's independence can be compromised when the board itself is led by the current or former CEO, as is the case at Philip Morris and Mylan, respectively. Insufficiently independent boards are responsible for the problematic pay practices and poor risk oversight that contributed to the financial crisis.
Majority Voting in Director Elections
Under state law, the default standard is for public company directors to be elected by a plurality of votes cast, rather than by a majority of votes cast. In an uncontested election, this means a nominee for the board can be elected with as little as a single affirmative vote, even if a substantial majority of the votes cast are "withheld" from the nominee.
By now nearly 80 percent of large companies have adopted some form of majority voting standard for director elections, but only 34 percent of S&P MidCap companies and 15 percent of SmallCap companies had adopted majority voting. Absent majority voting, it is impossible to defeat director nominees who run unopposed.
Comptroller Liu and the Funds filed this proposal at Southern Union Co. (NYSE: SUG), HollyFrontier (NYSE: HFC; formerly Frontier Oil Corp.), GEO Group (NYSE: GEO) and Hersha Hospitality Trust (NYSE: HT). The Pension Funds subsequently withdrew the proposal at HollyFrontier and Hersha Hospitality after those companies adopted majority voting policies.
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New York City Comptroller John C. Liu serves as the investment advisor to, custodian and trustee of the New York City Pension Funds. The New York City Pension Funds are composed of the New York City Employees' Retirement System, Teachers' Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund and the Board of Education Retirement System. The New York City Pension Funds hold a combined 15,242,414 total shares in Chesapeake Energy, Co. (NYSE: CHK), Nabors Industries, Ltd. (NYSE: NBR), Juniper Networks (NYSE: JNPR), Airgas, Inc. (NYSE: ARG), Energen Corporation (NYSE: EGN), Lorillard, Inc. (NYSE: LO), CF Industries Holdings, Inc. (NYSE: CF), Philip Morris International (NYSE: PM), Mylan, Inc. (NASDAQ: MYL), Southern Union Co. (NYSE: SUG), HollyFrontier (NYSE: HFC; formerly Frontier Oil Corp.), GEO Group (NYSE: GEO) and Hersha Hospitality Trust (NYSE: HT) valued at $686,550,903.81 as of 3/12/2012.
In addition to Comptroller Liu, the New York City Pension Funds trustees are:
New York City Employees' Retirement System: Ranji Nagaswami, Mayor's Representative (Chair); New York City Public Advocate Bill de Blasio; Borough Presidents: Scott Stringer (Manhattan), Helen Marshall (Queens), Marty Markowitz (Brooklyn), James Molinaro (Staten Island), and Ruben Diaz, Jr. (Bronx); Lillian Roberts, Executive Director, District Council 37, AFSCME; John Samuelsen, President Transport Workers Union Local 100; Gregory Floyd, President, International Brotherhood of Teamsters, Local 237.
Teachers' Retirement System: Ranji Nagaswami, Mayor's Representative; Deputy Chancellor Kathleen Grimm, New York City Department of Education; Mayoral appointee Freida Foster and Sandra March, Melvyn Aaronson (Chair) and Mona Romain, all of the United Federation of Teachers.
New York City Police Pension Fund: Mayor Michael Bloomberg; New York City Finance Commissioner David Frankel; New York City Police Commissioner Raymond Kelly (Chair); Patrick Lynch, Patrolmen's Benevolent Association; Michael Palladino, Detectives Endowment Association; Edward D. Mullins, Sergeants Benevolent Association; Thomas Sullivan, Lieutenants Benevolent Association; and, Roy T. Richter, Captain's Endowment Association.
New York City Fire Department Pension Fund: Mayor Michael Bloomberg; New York City Fire Commissioner Salvatore Cassano (Chair); New York City Finance Commissioner David Frankel; Stephen Cassidy, President, James Slevin, Vice President, Robert Straub, Treasurer, and John Kelly, Brooklyn Representative and Chair, Uniformed Firefighters Association of Greater New York; John Dunne, Captains' Rep.; James Lemonda, Chiefs' Rep., and James J. McGowan, Lieutenants' Rep., Uniformed Fire Officers Association; and, Sean O'Connor, Marine Engineers Association.
Board of Education Retirement System: Schools Chancellor Dennis Walcott; Mayoral: Eduardo Marti, Gitte Peng, Jeff Kay; Tino Hernandez, Judy Bergtraum, Freida Foster, and Linda Laursell Bryant; Patrick Sullivan (Manhattan BP), Gbubemi Okotieuro (Brooklyn BP), Dmytro Fedkowskyj (Queens BP), Wilfredo Pagan (Bronx BP) and Diane Peruggia (Staten Island BP); and employee members Joseph D'Amico of the IUOE Local 891 and Milagros Rodriguez of District Council 37, Local 372.