Why Did Apple Give Big Investors the Right to Nominate Board Members?

Apple's decision to open board appointments to big investors is currently the subject of a public relations battle. The usual reaction to surrendering power in business is that the entity doing the giving is demonstrating fear and weakness. Apple's contention, not surprisingly, is that this was actually as show of strength.

The reality is that Apple's action was hardly bold or strong but may have been a clever attempt to forestall the repeated attempts by latter day greenmailers - now called 'activist investors' - to continue bullying the company in hopes to generating plunder for themselves.

The terms of Apple's amendment of corporate by-laws mean that given Apple's @$600 billion market value, only shareholders with @$18 billion in company shares can avail themselves of the offer. Most activist funds try to invest the smallest amount possible in target companies and then use their reputation with the media and other investors to get management to make concessions. So $18 bill is a daunting figure for anyone other than generally supportive pension funds.

Some other large corporations like Microsoft, Phillip Morris and Coca-Cola have also made similar concessions. All, it should be pointed out, face daunting market challenges and are trying to buy themselves  time in order to create workable strategies for survival. Apple's issue is that investors' growth demands mean that building on its iPhone success is going to become increasingly difficult. Whether this will work for or against any of the companies in question remains to be seen - but is probably not a good bet. JL

Tim Foley reports in the Financial Times:

It remains unclear how often proxy access will be used and by whom. Some large institutional shareholders regard it as an emergency option, to be used only if a board is failing to hold an underperforming management to account. Others see a more active role for shareholders.
Apple’s decision to give long-term shareholders a greater say in boardroom appointments is the most significant victory in an almost decade-long push to improve corporate accountability in the US, campaigners have said.

On Tuesday, the country’s largest company amended its bylaws to allow its investors to nominate directors, and shareholder rights groups claimed the move would make it harder for other companies to resist pressure to follow suit.Apple’s decision in favour of so-called proxy access — named after the ballot paper, or proxy, that is sent to shareholders ahead of annual meetings — takes to 129 the number of US companies to have adopted the practice. In recent weeks, Pfizer, AT&T and Wells Fargo have introduced similar measures.

Scott Stringer, New York City comptroller, who has led a group of public pension funds pushing for proxy access, called the Apple decision a “tipping point”.
He said: “Corporate resistance to proxy access is crumbling as more and more boards are coming to the table and working with investors to provide greater accountability that will drive long-term value.”
Patrick McGurn, special counsel at ISS, which advises investors on corporate governance issues, said his organisation had advised clients to support proxy access, as a means of tackling “chronic problems related to performance or governance” when they arise at companies. “Companies like Apple tend to be bellwethers and other boards are likely to look to such respected companies and are likely to examine this issue now,” Mr McGurn said.
But while many hailed the move, opponents warned that proxy access could be used by special interest groups to push political, social or environmental agendas unsupported by a majority of shareholders.
Steve Balet of FTI Consulting, which defends companies against activists, said the powers could be hijacked by shareholder groups.
“There is already a way for shareholders to nominate directors, but it does require them to spend money, which in turn requires them to believe that they will add value by doing so,” he said. “Proxy access is a free pass for activism by special interest groups.”

Corporate resistance to proxy access is crumbling as more and more boards are coming to the table and working with investors to provide greater accountability that will drive long-term value - Scott Stringer, New York City comptroller

Apple’s decision comes as the deadline approaches for shareholders to submit proposals to next spring’s annual meetings, where campaigners are likely to unleash another round of votes on the issue.

In 2015, Mr Stringer’s pension fund group targeted 75 companies with governance records that it regarded as poor, winning majority support for proxy access at more than half. It is yet to announce its targets for 2016, but they are likely to focus on energy companies.

The Securities and Exchange Commission repeatedly debated making proxy access compulsory a decade ago, but the rule it eventually proposed in 2009 was struck down two years later after a legal challenge by the US Chamber of Commerce.
The proxy access rules being adopted voluntarily by companies typically grant the right to nominate a quarter of the board to shareholders who have, collectively, held at least 3 per cent of the company for at least three years.

It remains unclear how often proxy access will be used and by whom. Some large institutional shareholders regard it as an emergency option, to be used only if a board is failing to hold an underperforming management to account. Others, however, see a more active role for long-term shareholders.

At present, shareholders who want to nominate their own directors must launch an expensive proxy contest, complete with their own separate ballot papers. Costs for administering such contests can run to more than $10m, so they are typically only undertaken by specialist activist hedge funds — such as Daniel Loeb’s Third Point or Bill Ackman’s Pershing Square — rather than longer-term shareholders.