Under the agreement, the Lake Forest, California-based company will allow stockholders owning at least 5% of its common shares for two years to propose two new directors every year and get their picks listed alongside the official slate in the proxy statement. The shift, effective next year, means that Apria’s nine directors may face opposition for their seats during the 2004 annual meeting, according to a Wall Street Journal report.
“The only way to influence board dynamics is by a robust selection process. This is a step toward it,” Ralph Whitworth, Apria’s outside board chairman, said in a Journal interview. According to Whitworth, current directors at the company debated extensively before they adopted the new policy last Thursday. “There were some directors reluctant to be first,” the company chairman recalled.
However, support was finally won after Whitworth convinced the board that a more open election process would improve the board’s independence and effectiveness. “We think we have a well-balanced and well-qualified board,” he said. But two-way races “will add another level of scrutiny each year.”
Tide of Change?
The move by Apria will intensify attention on the issue at the US Securities and Exchange Commission (SEC), which is grappling with the question of improving shareholder democracy. Earlier this spring, the agency launched a broad review to formulate possible changes in the proxy rules and regulations and their interpretations regarding procedures for the election of corporate directors. During this review, the agency will examine issues such as:
- shareholder proposals
- nomination processes
- elections of directors
- solicitation of proxies for director elections
- contests for corporate control
- disclosure and other requirements imposed on large shareholders and groups of shareholders.
Further, the SEC will consult with all interested parties, including representatives of pension funds, shareholder advocacy groups, and representatives from the business and legal communities and requested that recommendations be provided by July 15. The outcome of the review will not affect the current proxy voting season.
The recent round of actions arose after a proposal e arlier this year by the American Federation of State, County and Municipal Employees’ (AFSCME) pension plan calling for Citigroup to permit shareholders or groups of shareholders holding 3% or more of the company’s stock to nominate candidates for director in the company’s proxy material (SeePension Funds Urge SEC Action on Proxy-Access Issue). However, after review of a request from Citigroup, the SEC’s Division of Corporate Finance determined that existing Rule 14a-8 under the Securities Exchange Act of 1934 did not require Citigroup to include AFSCME’s proposal in its proxy materials.
Under the current rules, only candidates that are nominated by an incumbent board of directors are included on the ballots that companies distribute to their shareholders. If shareholders want to nominate a candidate, companies are not required to mention the candidate or to include that candidate’s name on the ballot. If a shareholders’ candidate wants support, they must bear the expense of printing, distributing and collecting their own ballots, as well as their own campaign material.
AFSCME had argued that such measures amount to spending large sums of money in what is essentially a proxy contest, action normally only required during hostile-takeover bids. However, Apria’s action marks the first time that a publicly held US company has made such a move to enhance shareholders’ direct involvement in board selection.
Unions and public pension funds strongly favor making it easier and cheaper for shareholders to add their own candidates to official board slates. Business groups are expected to oppose such a change as unwieldy, though few have filed comments so far.