Nasdaq-listed Cognizant Technology Solutions (CTS) is facing a strange predicament. Some of its shareholders want more powers in the day-to-day running of the company by allowing for right to action through written consent.
This proposal would empower shareholders by giving them the ability to effect change at the company without being forced to wait until a shareholder's meeting to do so.
Shareholders could conceivably replace a board member or an entire board using action by written consent, among other actions. Some also point out that shareholder action by written consent would save the company the cost of holding a physical meeting.
Supporters of the proposal argue this will improve the governance standards of the company. However, the board of directors and the management fear such a right could be misused by a handful of shareholders and that it could also tie the hands of the board from taking actions on serious issues.
The proposal moved by California-based shareholder John Chevedden wants the shareholders to be allowed to bring any action on the company through written consent any time during the year. The proposal would come up for voting in the company's annual meeting in June, the firm said in a filing recently.
At present, shareholders have to wait for the annual general meetings before bringing any proposal.
"Board of Directors undertake such steps, as may be necessary, to permit written consent by shareholders entitled to cast the minimum number of votes that would be necessary to authorise the action at a meeting at which all shareholders entitled to vote thereon were present and voting. This written consent includes all issues that shareholders may propose. This written consent is to be consistent with applicable law and consistent with giving shareholders the fullest power to act by written consent consistent with applicable law," said Chevedden's proposal.
Chevedden cited recent instances of companies, which have adopted such policies. "The shareholders of Wet Seal (WTSLA) successfully used written consent to replace certain underperforming directors in October 2012. This proposal topic also won majority shareholder support at 13 major companies in a single year. Hundreds of major companies enable shareholder action by written consent," Chevedden added.
According to Chevedden, the proposal assumes importance as Cognizant's board is vulnerable and can do with more independence. Citing reports by independent research firm GMI, he pointed out how three of the company's directors had a very long-tenure, which could hinder directors' ability to provide effective oversight. "A more independent perspective would be a priceless asset for our Board of Directors," Chevedden's proposal said.
"Three directors were age 70 to 75 - succession planning concern. Thomas Wendel, Robert Weissman, Robert Howe and John Klein each had 11 to 14 years long-tenure. Plus these long-tenured directors controlled 75 per cent of our executive pay committee, 67 per cent of our nomination committee and 50 per cent of our audit committee. Director independence erodes after 10-years," it noted.
The proposal also raised concerns over senior executive shareholding. "Lakshmi Narayanan did not own any stock after nine years on our Board. Shareholder confidence in our Board's commitment to increasing shareholder value may be compromised when our directors do not share the risk of investors."
When contacted, a Cognizant spokesperson referred to a statement of opposition filed by the board. "We refer you to Cognizant's response to this proposal, starting on page 32 of the preliminary proxy, which reflects the company's views on this matter. We cannot provide any additional comments."
In a strong 'statement of opposition' to Chevedden's proposals, the board said, "In light of the company's existing corporate governance practices and policies, the board of directors believes that adoption of this proposal would NOT be in the best interests of all stockholders and is unnecessary. Accordingly, the board of directors unanimously recommends a vote AGAINST this proposal"
According to the board, the company's existing corporate governance practices and policies already ensure stockholder democracy and the accountability of the board of directors.
"The board believes that the adoption of this proposal (action by written consent) is ill-advised, particularly in light of the corporate governance practices and shareholder protections the company currently has in place and is in the process of implementing. In contrast to our current shareholder protections, which we believe are for the benefit of all of our stockholders, allowing stockholder action by written consent would leave the company and its stockholders vulnerable to small groups of activist investors who do not owe fiduciary duties to the company."
Governance experts are not very positive about the proposal. J N Gupta, founder of Stakeholders Empowerment Services, feels the move would result in lesser transparency. "There could be a situation where 80 per cent of the shareholders are kept at dark and 20 per cent shareholders can push through some proposal in this manner. That is not good governance."
Shriram Subramanian, founder, Ingovern Research, said: "Cognizant and other companies in the US are fighting the need to empower shareholders wanting to place proposals through written consent without a need to call a shareholders' meeting. Proposals through the written consent process may come as a complete surprise to the boards of companies and may not give them enough time to react to shareholder actions. It is not clear that the written consent process have enhanced shareholder value as it could be disruptive to the company and other shareholders. In the Indian context, written consent process doesn't exist."