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May 13, 2019

Kellogg shareholders vote for annual director elections

Measure needs to pass additional vote to be implemented

Kellogg Company shareholders have backed a move to introduce annual elections for directors but will have to vote for additional measures if the change is to be implemented – a hurdle they have not overcome at a previous attempt.

The vote took place at the Kellogg AGM held late last month in Battle Creek, Michigan. Specifically, the proposal called on the company’s board to reorganize itself into one class with each director subject to election every year.

Materials supporting the proposal quote former SEC chair Arthur Levitt as saying, ‘In my view it’s best for the investor if the entire board is elected once a year. Without annual election of each director, shareholders have far less control over who represents them.’ The materials state that more than 89 percent of S&P 500 companies have annual elections of directors, up from more than 70 percent in 2010.

The proponents - James McRitchie and Myra Young - also cite Equilar as arguing that a classified board ‘creates concern among shareholders because poorly performing directors may benefit from an electoral reprieve. Moreover, a fraternal atmosphere may form from a staggered board that favors the interests of management above those of shareholders. Since directors in a declassified board are elected and evaluated each year, declassification promotes responsiveness to shareholder demands and pressures directors to perform to retain their seat.’

The supporting materials state: ‘This proposal should also be evaluated in the context of our company’s overall corporate governance as of the date of this submission: Kellogg retains super-majority voting provisions. Shareholders cannot call special meetings. Shareholders have no right to act by written consent. The combined effect is to lock the board into an outdated corporate governance structure and reduce board accountability to shareholders.’

Kellogg’s board declined to make a voting recommendation either in support of or against the proposal. Writing in response, it states that the board is committed to maintaining strong governance practices and recognizes the belief of many shareowners and institutional investors in annual director elections.

‘The board believes there are a variety of valid perspectives with respect to classified boards, and these perspectives continue to evolve. The board has determined to use this proposal to provide the opportunity for shareowners to express their views on this topic, and the board will respond accordingly,’ it states.

It notes, however, that a non-binding shareowner declassification proposal in 2013 received majority shareowner support, after which the board proposed at the 2014 AGM an amendment to the certificate of incorporation providing for the elimination of the classified structure – but that this proposal did not receive the sufficient two-thirds support.

As such, the board notes that shareowner approval of this year’s proposal would not by itself declassify the board. As in 2014, the board must authorize the appropriate amendments to the certificate of incorporation and shareholders then need to approve each amendment by no less than two thirds.

The company did not have an immediate comment beyond the proxy statement.

Norway’s $1.1 tn sovereign wealth fund had said ahead of the vote that it would support the proposal. The fund does not usually give advance notice of its voting intentions, but Norges Bank Investment Management (NBIM), which manages the fund, said that it would do so for certain companies to ‘highlight issues that are of fundamental importance to the fund.'

‘For board accountability to be effective, shareholders must be able to participate in frequent election of all members of the board, with our preference being annual elections,’ NBIM chief corporate governance officer Carine Smith Ihenacho said in a statement before the vote. ‘Clear positions on good governance ensure predictability and consistency in our voting. As an owner we can influence companies by deciding who sits on the board.’

Ben Maiden

Ben Maiden is the editor-at-large of Corporate Secretary , an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter , covering regulatory and compliance...
Editor-at-large, Corporate Secretary