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Setting the benchmark in corporate integrity

Boards under threat as shareholders demand more power

Activist shareholders demand right to action by written consent, but risk undermining board authority

It is not news that shareholders are constantly fighting for more power within companies, but Cognizant Technology Solutions (CTS) have taken it a step further. A group of shareholders in the Nasdaq-listed business and technology services provider have been demanding greater involvement in how the company is run day-to-day, by making their voices heard through written consent documents.

Shareholders are suggesting they should be given more power to affect change at CTS without having to wait until shareholder meetings to get involved. The group are demanding that this right through action be enshrined through written consent; they even argue that it could save the company time and money by not having to hold physical meetings.

Shareholders, led by John Chevedden, say the proposal, if accepted, will raise standards of governance in the company. It is not unconceivable that shareholders will be able to depose a board member, or dissolve an entire board through written action alone if the proposal is enforced. Board members have voiced their concerns that the proposal will give undue power to a minority of shareholder, and that the so-called written consent actions might limit the board’s decision making abilities in serious issues.

“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,” reads the proposal, which will be voted on in the upcoming annual meeting next June. “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.”

Not many companies worldwide have adopted similar measures, but Chevedden cites examples like Wet Seal, a clothing and accessories company, whose shareholders successfully replaced underperforming directors through action by written consent in October of 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 says.

The CTS board is strongly and vocally opposed to Chevedden’s proposal. “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,” reads a statement from the 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.”

 

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