January 30, 2007
What’s Wrong with Shareholder Nominations Anyway?
Posted by Lisa Fairfax

As a follow-up to my post on shareholder efforts to participate in the nomination process, I decided to look at the reasons HP offered in opposition to the shareholder proposal on this issue. HP shareholders maintain that their proposal to allow certain shareholders to gain access to the corporation’s proxy in order to nominate up to two directors is necessary to ensuring greater accountability. And of course the proposal seems to be a part of a larger campaign to ensure that shareholders have a greater voice in corporate decision-making.

Based on my reading of its statement of opposition, the HP board’s primary arguments against the proposal centered around four concerns. First, the proposal would require HP to amend its by-laws in order to include the proxy access provision. If successful, the amendment would be automatic, which mean it could pass without any input or discussion from the board. Second, allowing shareholders to have access to the corporation’s proxy for purpose of nominating directors could create expensive and divisive elections, potentially turning every director election into a proxy contest. Third, the proposal could result in the election of “special interest” directors who would not serve the interests of all shareholders. Finally, HP already allows shareholders to participate in the director election process because the company allows shareholders to make recommendations to the board’s nominating committee. The shareholders supporting statement did address this final point directly, noting that when shareholder recommendations are rejected, there is no meaningful recourse other than to engage in an expensive and relatively rare proxy fight.

Interestingly, HP allows cumulative voting and has instituted a majority vote requirement for its director elections. HP highlighted these features to demonstrate that its process already allowed for considerable shareholder voice. But those features also combine to create a system that increases the likelihood that if the shareholder proposal is enacted, a shareholder nominated director could actually be elected.

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