When I left CalPERS in 1996 after ten years (having founded and run their corporate governance program for all ten years), I bought shares in ten companies that I felt listen to shareowners, had or were developing good corporate governance, and would be (hopefully!) a good economic investment. Of those ten companies, eight have done very well, with one doing so-so, and one not doing so good. Chevron, a Fortune Ten Company, was one of those ten companies. I have held Chevron stock for 16 years now, and it has done quite well.
Spring is proxy season and my mailbox, both postal and electronic, has filled with proxy materials and annual reports. I try to read/look over all these materials and to carefully vote my proxies. Recently, I turned to my Chevron proxy and noted item No. 4, entitled: “Shareholder Proposal Regarding Exclusive Forum Provisions.” This proposal states: “RESOLVED: The shareholders of Chevron Corporation (the “Company”) hereby ask the board of directors to repeal the Company’s “exclusive forum” bylaw which was unilaterally adopted by the board of directors and which generally requires shareholders to bring certain types of legal actions only in Delaware, the state where the Company is incorporated.”
I have fought for good corporate governance for over 26 years, first as a CalPERS “shareowner activist,” and then as a counselor to corporate boards for the last 15+ years, and as a corporate board member of various public companies for the last 13 years.
As a long time advocate of shareholder rights, I have always held the view that boards should be as deferential as possible to shareholders on questions of their rights. In particular, questions such as the scheduling of director elections (annual or staggered terms), the voting threshold for ballot items (super majority, majority or plurality), and the right of shareholders to sell their shares without board approval (limitation of poison pills) – all are questions that belong directly to the shareholders, in my view.
There have always been items, however, on which shareholders have had less direct control, but which could still be defined as shareholder “rights” – including, for example, the number of days before a meeting required for submission of a shareholder proposal, the date of mailing of a proxy statement, the time and location of an annual shareholder meeting, and the list goes on. Although there have been shareholder proposals on some of these items over time, they are generally the sort of issues on which shareholders have deferred to their board in the absence of an unreasonable governance structure. On economic questions, moreover, shareholders have given even stronger deference, as boards attempt to fulfill their fiduciary duties to shareholders by acting to protect the corporation and shareholders’ economic interests.
This is a sensible practice on the part of shareholders. In circumstances where a company is well-governed, there are many questions on which shareholders should give deference to their board.
Today’s debate over forum selection provisions is one which I believe deserves careful attention. Based on my experience, the litigation system in the United States has changed dramatically over the past few years. Lawsuits are now routinely filed almost simultaneously against companies in multiple jurisdictions on the exact same issues. Because of the way the litigation process has changed and because of the intense competition among plaintiff’s lawyers for fees associated with filing such lawsuits, companies today are regularly forced to defend the virtually identical lawsuits in multiple courts at the same time. While shareholders should be able to sue a company or its board for failure to protect the interests of investors, it does not follow that they should accept a meaningful waste of shareholder resources in the process – which for large companies can run into the many millions of dollars – by defending the exact same allegations in multiple forums at the same time.
Some boards have acted to curb this wasteful practice through forum selection provisions. Although shareholders should be wary of any unreasonable limitation of their rights by board action, I think that shareholders should defer to boards on this and similar issues where there are meaningful shareholder funds at stake AND where the board has a demonstrated track record of protecting shareholder interests. A diverse board with annually elected directors, by a majority vote threshold, with strong independent leadership in the boardroom (including either a separate chair or strong lead independent director), offers the perfect candidate for deference on an issue like the forum selection concept. Boards of well-governed companies, when faced with clear economic consequences in the many millions of dollars (of shareholders’ money!), should be given deference on such matters.
There are, sadly, still many boards today where shareholders should not defer on a matter such as this and should want to have the right to vote on any such change because they have no faith that the board will use such a provision in a way that protects shareholders. Nevertheless, there are boards that should be given the deference and leeway to make careful judgments in this regard, recognizing that shareholders are ultimately in the driver’s seat when it comes to director elections if the board abuses these or other provisions that affect shareholders’ rights. Without some reasonable carve out for the good boards, those that have a track record of looking out for shareholders, we risk elevating form over substance in the shareholder rights debate and missing the important issues in the process.
Boards with a proven track record of working in the interests of shareholders should be empowered to make reasonable decisions, as well as held accountable if they do not use that power properly. But second-guessing individual board decisions on matters of clear economic import by voting against the board on such matters seems counter-productive, especially in circumstances where a board has shown restraint, good judgment and a focus on shareholders’ economic interests. Shareholders should use equally good judgment and restraint when they decide to support or oppose the decisions of effective and well-governed boards on economic matters directly affecting the shareholders’ wallet – including forum selection bylaws adopted as a means to deal with the proliferation of multiple lawsuits in multiple forums, on the same issues and facts.
Chevron is a perfect example of a company with an exceptionally strong record of good governance and shareholder rights with a forum selection provision that is narrowly drawn to address the meaningful economic impact to shareholders from defending multiple identical lawsuits. Chevron has an annually elected board (by majority vote) with a strong lead independent director, no antitakeover provisions and a robust history of working constructively with the shareholder community. Indeed Chevron had modified its forum selection provision in response to suggestions from shareholders and has used restraint in applying its provision, not seeking consolidation where there is a good reason for shareholders to file suit outside of Delaware. As a long-time shareowner myself in Chevron, I am comfortable deferring to the board on an economic question such as this because I believe this is a board that has shown good judgment and can be held accountable to shareholders if it fails to do so in the future.