New York City Comptroller Scott Stringer's push for more shareholder input in the makeup of corporate boards has breathed fresh air into a lingering debate, but many banks especially smaller ones are expected to blow back against it.
The fight centers on whether investors should have more power to nominate candidates for board seats. Corporate reformers have previously tried and failed to strengthen shareholders' say in the proxy process, and the negative reaction from some bankers to the latest effort was swift.
"I am completely opposed to it," said Ronald Paul, the chairman and chief executive of the $3.9 billion-asset EagleBank in Bethesda, Md. "Shareholders, if they don't like the way [a bank] is being run, they can sell their stock."
Stringer, who took office in January, announced last week that he had filed proxy-access resolutions at 75 companies in the city's pension fund portfolio, including at New York Community Bancorp.
New York Community is the only bank to have received a resolution so far. But Stringer's office plans to expand the initiative across its investment portfolio, a move that could put more banks in the comptroller's crosshairs.
The resolutions would give investors that have had a 3% stake in a company for at least three years the right to nominate a director. Many public companies carefully handpick directors and make it hard for rival choices to be added to proxy statements.
"We are seeking to change the market by having more meaningful director elections through proxy access, which will make boards more responsive to shareholders," Stringer said in a press release announcing the initiative.
The comptroller, who oversees the $160 billion-asset New York City Pension Funds, says he's targeting "zombie directors" or directors who remain on boards despite not winning the majority of shareholder support in uncontested elections.
Out of the 41 directors across the country who have failed to receive majority votes this year, all but one still hold on to their board seats, according to Stringer's office.
"The goal is really to shift the level of accountability across the market," said Michael Garland, director of corporate governance for the New York City Pension Funds.
Some companies have been targeted for not having women on their boards. Others have been targeted for excessive executive pay.
At the $45 billion-asset New York Community, for instance, shareholders in June voted to reject the company's executive compensation plan. The vote was part of a nonbinding, "say-on-pay" vote.
The bank did not respond to requests for comment.
The primary goal of the project is to increase the responsiveness of boards to shareholder concerns, Garland said. He also pointed to a study from the CFA Institute an association for financial analysts showing that proxy access increases market performance.
"We're not looking to subsidize low-cost takeovers," Garland said.
Community bankers disagree.
"It would facilitate dissident directors who would be able to get on boards with specific agendas," said Chris Cole, senior regulatory counsel for the Independent Community Bankers of America.
Only one resolution has been filed at a publicly traded bank. But big banks are a likely target for the initiative, and it could "trickle down" to smaller banks, Cole said.
The ICBA has opposed proxy access for years. The Washington trade group has new concerns about the added burden it would place on board recruitment.
"Community banks are having more difficulty finding good, competent directors," Cole said. "With the increase in responsibility and liability, people are really averse to serving on boards."
And, he added, the initiative could inhibit small banks from going or staying public.
EagleBank's Paul echoed the ICBA's concerns. "Having outside directors that aren't familiar with the community is a huge, huge mistake," he said.
Big banks, though, have all but shrugged at Stringer's ideas.
Several trade groups representing large financial institutions, including the American Bankers Association and the Clearing House, did not comment. The Business Roundtable which represents large corporations, including some of the biggest banks and the Securities Industry and Financial Markets Association said they are reviewing the initiative.
Stringer may face a challenge in convincing executives that his proposed reforms are anything more than an attempt to attract voter attention, said Marcel Kahan, a corporate law professor at New York University.
"Stringer's proposals will be designed to play to both audiences, to the shareholder audience, and partly to the audience of his voters," he said. "Stringer probably wants to run for higher office someday."
Kahan describes the comptroller as a "symbolic activist." Many of the resolution's potential benefits touted by Stringer such as board diversity and curbs on executive pay would have little effect on a company's financial performance, Kahan said, but rather are designed to send a broader social message.
"Most of the things Stringer is proposing in terms of impact and inconvenience to the boards is trivial," he said.
Stringer took office at the beginning of the year, after winning a closely watched Democratic primary over Eliot Spitzer, the state's ex-governor who resigned amid scandal in 2008.
The typically low-profile city race attracted a national spotlight, giving Stringer, the former Manhattan borough president, a political boost.
Stringer's office insists that the boardroom initiative is simply a necessary response to regulatory failure at the federal level.
"Following the financial crisis, we've had all kinds of reforms, but even after all of these reforms, shareholders still don't have the ability to elect or unelect directors," said Garland, the comptroller's governance director.
The Securities and Exchange Commission has wrestled with the issue for years. The agency most recently adopted a proxy access rule in 2010, under then-Chairman Mary Schapiro. Similar to the comptroller's initiative, the rule gave shareholders with a 3% stake for at least three years the right to nominate a director.
"I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director," Schapiro said in an Aug. 2010 press release announcing the rule.
It was also a central part of the Dodd-Frank financial overhaul, which gave the SEC formal authority to mandate proxy access.
The SEC rule ignited a backlash among the nation's biggest business groups. The Business Roundtable filed a federal lawsuit, along with the U.S. Chamber of Commerce.
"The proposed rules could lead to the election of 'special interest directors,'" the Roundtable said in an August 2010 letter to the Obama administration.
In July 2011, the D.C. Circuit Court of Appeals vacated the SEC rule, saying that the regulator did not perform an appropriate cost-benefit analysis of its effect on the market.
The SEC has since said it has no immediate plans to revisit the issue.
Stringer's office says that the moment is ripe to revisit proxy access but this time at the market level. A number of big companies, including Verizon and Hewlett-Packard, have recently adopted resolutions, Garland said.
Both of those resolutions used the 3% ownership standard for boardroom nominations, according to the CFA Institute report.
"We want the SEC to reissue its rule, but we can't wait any longer," Garland said. "We will do it company-by-company if necessary."
It's an ambitious goal. But it is unclear whether proxy access resolutions, if they are adopted, would prove as an effective method for voicing shareholder concerns.
"It's still highly controversial," said David Larcker, director at the Corporate Governance Research Initiative at Stanford University.
The financial industry has "taken some shots" in recent years, and it's natural for shareholders to take a closer look at director-level decision-making processes, Larcker said. But changing how board members are selected may have unintended consequences.
"Are you going to end up in a better place than you are now? I think it's just not that obvious to me, but I think it's an excellent question," he said.