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Activist Fund Wants to Ban Non-Binding Proposals Submitted by: L. Reed Walton, Publications

The Free Enterprise Action Fund (FEAOX) is asking two companies to adopt a bylaw to ban non-binding--or ?precatory?--proposals.

Bethesda, Md.-based FEAOX, led by activist investor Steven Milloy, has submitted a binding proposal at ExxonMobil and Charles Schwab that takes aim at labor funds and social investment groups that Milloy says clutter up company proxy ballots with ?nuisance? proposals.

?We see the whole proposal thing as having gotten out of hand,? Milloy told R&GW. ?The process allows for back-room deals between corporations and investors that don?t need to be disclosed to other shareholders, and we see that as harmful.?

Activist investors will often submit proposals seeking governance or social reforms, and then withdraw the resolutions after receiving a promise from companies to implement the reforms or examine the issue further. According to RiskMetrics data, investors have already withdrawn more than 100 proposals filed for the 2008 proxy season, often because of successful negotiations with companies.

The Council of Institutional Investors (CII)--which represents 128 public funds, labor investors, and social groups--disagrees with Milloy?s characterization of investor negotiations with companies. ?In many cases, the most productive proposals are the ones that are ultimately withdrawn,? Justin Levis, a senior analyst for CII, told R&GW. ?If they are [withdrawn], then productive dialogue was achieved and corporations believe that the proposal was in the best interest of ? shareholders as a group.?

In recent years, non-binding proposals have prodded hundreds of U.S. companies to adopt governance changes such as majority voting in director elections and board declassification, Levis said.

Milloy, a managing partner at FEAOX--which manages about $11-$12 million in investments--told R&GW that if ExxonMobil and Charles Schwab are willing to support his proposal, it would ?pass in a heartbeat,? but that without management backing, the resolution would have a hard time winning majority support. Both companies told Dow Jones news service that they received the FEAOX proposal, but both declined to comment before the release of official proxy materials later this year. ExxonMobil received 25 shareholder resolutions this year, including the FEAOX binding proposal, while Charles Schwab has received only two, according to RiskMetrics data.

During the Securities and Exchange Commission?s proxy rule-making process last year, several corporate officials and law professors urged the SEC to impose new limits on non-binding proposals or allow companies to adopt their own rules on those resolutions. Labor and social investors responded by filing thousands of comments in support of precatory proposals. (For more information on this topic, please see the Oct. 12, 2007, issue of Risk & Governance Weekly.) So far, the commission has taken no action to further limit shareholder proposals.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on March 13, 2008 (boomark / email).