Carl Icahn’s motive of late is to get companies to loosen up their corporate governance in an effort to make it easier for activists to get involved with newly spunoff companies.
But there’s a new trend that’s taking activist investing to another level.
This new trend is known as “proxy access.”
Companies that have embraced proxy access put all board nominees on their ballots, not just those backed by the company. Investors who have owned 3% of the company for at least three years can nominate board members. The move basically means that investors can nominate their own directors for the board.
There are already a number of companies changing their bylaws to embrace proxy access, including the likes of Progressive Corp (NYSE:PGR), General Electric (NYSE:GE) and Yum! Brands (NYSE:YUM).
But this trend isn’t to be mistaken for opening the door to activists, or letting activist investors have a free for all at the board.
Activist investors aren’t known for waiting three years to effect change. Rather, this is a positive for longer-term shareholders that are fed up with the current board and want to see a change.
The idea is that pension funds, mutual funds and other large, usually passive investors will now be allowed a greater say in how large companies are run.
This comes just as the world’s largest mutual fund operators in the U.S. are becoming more assertive. For example, there’s Vanguard, which is a passive investor that owns over 5% of nearly every large cap company out there.
It’s time that big mutual fund companies like Vanguard and BlackRock (NYSE: BLK) have a louder voice.
Just last month, Vanguard put out a letter to the CEOs of all the companies it has a stake in, noting that it will be more forceful going forward when it comes to corporate governance changes. Specifically, instead of simply abstaining when it comes to shareholder proposals, it will vote no if it disagrees.
BlackRock also sent a signal to public companies last month by updating its guidelines. It stated that it has no problems voting against one or more board members, whether it’s because the board isn’t diversified or has no succession plan, or if a board member is too long-tenured.
And State Street Corp. (NYSE: STT), another major mutual fund operator, recently adopted a policy of taking a closer look at board members that have been tenured for nine years or longer.
Good News for Big Banks?
My take on the proxy access trend is positive. I’ve talked a lot about big bank breakups over the last couple weeks. And big banks are ripe for a change. Two of the hardest hit banks since the financial crisis, Citi and Bank of America, are both leading the charge in terms of proxy access.
The Fed stress tests from this past week were a positive for many banks. Despite having a tough time getting through the stress tests last year, Citi passed with flying colors this year. It’s done a lot of de-risking over the years, too. Its Citi Holdings portfolio, which contains its problem assets, only makes up 5% of its total assets as of the end of 2014. At the end of 2013, it was 16%.
Now, Bank of America only got conditional approval for its capital plan. It has until the end of September to submit a new plan.
But it’s worth noting that the company’s overall capital ratios improved year-over-year, and it got approval for a $4 billion buyback. The bank also got no objection to its current 5 cents a share quarterly dividend – meaning its 1.3% dividend yield is safe.
In the end, the fact that Citi and Bank of America are making headway in terms of corporate governance, along with the fact that they are two of the cheapest banks around, makes them a bit more enticing from an investment perspective.
This article is brought to you courtesy of Marshall Hargrave from Wyatt Research.