What’s the best way to win an election? Make sure nobody runs against you!
Unfortunately for shareholders, Nabors Industries Ltd. (NYSE:NBR) wants to ensure it continues to have this advantage even though a majority of shares voted against the practice last year.
But shareholders are fighting back and putting up a renewed effort to gain the right to proxy access (i.e., the right to list their own director nominees on the proxy). The same proxy access proposal that passed in 2012 appears on Nabors’ 2013 proxy, despite the company’s effort to gain permission from the SEC to omit it. We’ll know the preliminary shareholder voting results on June 4.
Governance woes
In contrast, Chesapeake Energy Corporation (NYSE:CHK) responded to majority support for proxy access in 2013 by sponsoring its own proxy access proposal in its 2013 proxy, while Hewlett-Packard Company (NYSE:HPQ) sponsored its own proxy access proposal in its 2013 proxy in response to shareholder demands, and The Western Union Company (NYSE:WU) responded to shareholder pressure by granting some shareholders the right to post director nominees on the ballot.
I also believe shareholders have a reason to blame Nabors Industries Ltd. (NYSE:NBR)’s leadership for creating executive compensation plans that failed to gain majority shareholder support in 2011 and 2012. In fact, the company’s 2012 plan was so controversial that it managed to gain only 25% support from shareholders. The perks offered to executives and board directors were shady enough to attract the SEC’s attention in 2011.
Benefits of proxy access
Given these governance disasters, it shouldn’t be a surprise that shareholders want more of a say over who will represent them on the board of directors.
Without proxy access, shareholders’ ability to oust underperforming directors is limited because Nabors Industries Ltd. (NYSE:NBR) has to list only directors nominated by company insiders on its ballot. The only way shareholders can nominate alternative directors can is by pouring money into an expensive proxy contest.
With no alternative candidates, there’s no guarantee that directors will leave even if they fail to receive majority support. Consider the case of Cablevision Systems Corporation (NYSE:CVC). In 2010 and 2012, directors Thomas V. Reifenheiser, John R. Ryan, and Vincent S. Tese remained on the board even though they all failed to receive majority support in the company’s 2010 and 2012 elections. Worse, Cablevision Systems Corporation (NYSE:CVC) renominated the shunned directors yet again in 2013.
Even if a company does get rid of directors who fail to receive majority support in uncontested elections, shareholders have to trust the board to select new board members that will better represent their interests.
In short, without proxy access, shareholders have a limited ability to hold directors accountable for underperformance.
The Foolish takeaway
The procedural concerns associated with shareholders’ limited ability to nominate director candidates becomes especially significant at companies where leadership compromises our trust, as I believe Nabors Industries Ltd. (NYSE:NBR)’s leadership has repeatedly done. If the proposal passes again, and Nabors actually implements it, then I think we may see some positive changes. As it is, I think investors should be reluctant to own the stock until the company’s management and board begin to make decisions that better reflect shareholders’ interests.
The article Shareholders Still Dealing With Troublesome Nabors originally appeared on Fool.com and is written by M. Joy Hayes, Ph.D.
Fool contributor M. Joy Hayes, Ph.D., is the Principal at ethics consulting firm Courageous Ethics. She has no position in any stocks mentioned. Follow @JoyofEthics on Twitter. The Motley Fool recommends The Western Union Company (NYSE:WU) and has options on Chesapeake Energy Corporation (NYSE:CHK).
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