Guest Post: Shareholder Proposals and the Next Step in Overboarding Disclosures

I am please to be able to publish this post authored by our former BLPB editor/co-blogger Stefan Padfield.  We miss his voice here, but he is doing good work in his current role, as this post shows!  Thanks for contributing this, Stefan.

+++++

On November 14, 2023, the National Center for Public Policy Research (NCPPR) – where I work – submitted a shareholder proposal to Johnson & Johnson that sought disclosures related to overboarding. (For the uninitiated, overboarding refers to the issue of corporate directors sitting on too many boards but can also be extended, as it is here, to other commitments.) On March 1, 2024, the SEC staff informed J&J that no action would be recommended against the company by the staff if J&J excluded NCPPR’s proposal. This no-action relief arguably represents a change in the long-standing SEC practice of supporting proposals related to overboarding and is thus worthy of further examination. (The underlying documents can be accessed here; the SEC staff also granted no-action relief to Verizon and Lowe’s on the same proposal.)

By way of background, the SEC staff is on record as saying that an overboarding proposal “relates to director qualifications.” Accordingly, the SEC staff has stated in the past that it does “not believe that [a company] may omit [such a] proposal from its proxy materials in reliance on rule 14a-8(i)(7)” as improperly relating to the ordinary business of the company.

Admittedly, our proposal was unique in that it asked directors to “disclose their expected allocation of hours among all formal commitments set forth in the director’s official bio, with allocation being permissible “on a weekly, monthly, or annual basis.” And perhaps this is sufficient for some to categorize our proposal as excludable micromanagement, as the SEC staff did. However, there is a good argument to be made that “the SEC has incorrectly applied the micromanagement rule to exclude disclosure proposals.” More generally, the active shareholder proponent just quoted also noted in the same piece the SEC’s heavy and arguably excessive reliance on the micromanagement exclusion this season:

In reality, the most significant substantive development in the Rule 14a-8 process in the last two seasons has been largely ignored in the anti-shareholder furor. Far from representing a system unfairly tilted toward proponents, the SEC is more readily concurring with issuers’ increasingly aggressive use of the micromanagement exclusion…. According to preliminary calculations by the Shareholder Rights Group, in 2023, micromanagement arguments accounted for 8 out of 27, or 30%, of successful Rule 14a-8(i)(7) requests. In 2024 so far, micromanagement arguments have accounted for 25 of 56, or 44.6%, of winning requests based on the ordinary business/micromanagement rule.

Regardless, in addition to prior no-action decisions that deemed overboarding proposals nonexcludable, we later submitted a similar proposal to Verizon and added the following stakeholder perspectives to urge the SEC staff to reconsider its conclusion in Johnson & Johnson:

• Weil, Gotshal & Manges LLP: “The board should assess whether directors that may be overcommitted have sufficient time and ability to take on the significant tasks relating to public company directorship.” (Emphasis added.)
• Wachtell, Lipton, Rosen & Katz: “As board responsibilities grow, so has the focus on director bandwidth; directors should be realistic about their bandwidth when considering new opportunities for board service.”
• Vanguard: “The role of public company directors is complex and time-consuming, and the funds believe that directors should maintain sufficient capacity to effectively carry out their responsibilities to shareholders. For this reason, the funds look for directors to appropriately limit their board and other commitments to ensure that they are accessible and responsive to both routine and unexpected board matters …. The funds look for boards to have in place policies regarding director commitments and capacity and to disclose such policies (and any potential exceptions) to shareholders ….” (Emphasis added.)
• The Conference Board: “[W]hile adopting an overboarding policy can be useful, it is more important for boards to have candid conversations about their evolving time requirements and the ability of directors to devote the time necessary to the role.... In light of expanding workloads, boards should take a fresh look at the time commitments expected of directors …. Overboarding policies are now a predominant practice, embraced by three-quarters of the S&P 500 and over half the Russell 3000 and supported by the proxy advisory firms. But policies alone are insufficient. As part of the annual evaluation process, directors should assess their ability, both on an individual and collective level, to dedicate the necessary time to fulfill their responsibilities effectively and make informed decisions.” (Emphasis added.)
• State Street: “[I]n its Summary of Material Changes to State Street Global Advisors’ 2023 Proxy Voting and Engagement Guidelines, State Street[i] indicates that starting in 2024 for companies in the S&P 500, it will no longer use numerical limits to identify overcommitted directors and instead ‘require that companies themselves address this issue in their internal policy on director time commitments and that the policy be publicly disclosed.’” (Emphasis added.)

Furthermore, the need for the requested disclosure can be demonstrated by looking at the bio of a director at CVS, where our proposal was unopposed: J. Scott Kirby. Doing so reveals the following nine commitments.

1. Director, CVS
2. CEO, United Airlines
3. Director, United Airlines
4. Executive Committee, United Airlines Board
5. Finance Committee, United Airlines Board
6. Director, SONIFI Solutions
7. Chairman, Star Alliance Chief Executive Board
8. Member, Board of Governors of the International Air Transport Association
9. Director, U.S. Air Force Academy Foundation

Suffice it to say, many would presume that Mr. Kirby would more than have his hands full simply as CEO of United Airlines. Accordingly, it seems a small thing for CVS shareholders to ask for an estimate of how exactly there will be enough hours in the day for Mr. Kirby to juggle these nine commitments without depriving CVS of the critical attention he is being nominated to provide as director. And to the extent some might argue that listing committee assignments as discrete commitments improperly inflates the perceived workload, we say: (1) either the discrete commitment is material or the disclosure of that commitment in the official bio is misleading; (2) a company is free to attribute zero hours to any disclosed commitment, and is thereby free to clarify for shareholders that, for example, membership on the finance committee is a nominal position.

Given the ever-increasing responsibilities of corporate directors, as well as generally increasing demands on their time, limiting oversight of overboarding to counting board seats and CEO spots is unsustainable. Accordingly, we will likely be submitting a similar proposal next season and urging the SEC staff to reconsider its conclusion in Johnson & Johnson. Asking prospective directors how they intend to allocate their hours among their often numerous commitments should not be viewed as improper micromanagement but rather basic accountability fully within the ambit of shareholders to request.

_____

[i] Our overboarding proposal at CVS was apparently defeated by a vote of 97% against. In light of the comments here by State Street and the preceding comments by Vanguard, it would be interesting to see how those asset managers voted (assuming they hold shares in CVS).