Stanford Rock Center Proxy Access Forum

Proxy Access Panel

The Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University has quickly emerged as a focal point for conferences and seminars, research, and the development of new educational and course materials. The May 6th Proxy Access Forum was the latest iteration of the fine work being done at the Center.

My disclaimer: I don’t take notes quickly enough to get quotes. What follows are a few highlights of what I thought were some of the important messages conveyed by each of the panel participants and the moderator. I left them in note taking fashion, so there can be no confusion these are my impressions (and because it is quicker for me), rather than the fully articulated sentences of the speakers. Although there was a great deal of back and forth dialogue, it was easier for me to just place thoughts under the persons name, rather than trying to capture the interactive dynamics. Within a couple of weeks, you’ll be able to watch the event on the Center’s internet site under May 2010. I highly recommend it.

Both Paredes and Friedman provided their own standard disclaimers. They were expressing their own opinions, not those of the Securities and Exchange Commission or the SEC Investor Advisory Committee.

Troy A. Paredes, SEC Commissioner.  Voted against proposal. Objected to a-11

Troy Paredes

(mandatory) not opt-in a-8 (private ordering). Seeks balance between federal and state roles. Disclosure requirements of SEC are complementary to though control through state. Long-standing enabling approach of states vs prescriptive (mandatory one-size-fits-all) under federal. Different governance regimes optimal. Embraces private ordering provisions implemented by DE… Proxy access and expense reimbursement. His other concerns are for workability.  Opportunity costs for staff. Proxy access will divert scarce SEC resources. Has some doubt proposal will increase shareowner value.  Having input us helpful and gives us a lot to think about. Long history around this issue.

Francis (Frank) S. Currie, Davis Polk & Wardwell LLP – Regrets overly hard

Frank Currie

positions taken by the business community against opt-in proposals introduced previously at the SEC under the previous administration. Objects to one-size-fits all approach. While companies are allowed to innovate under a-8, they can’t make access harder.  We’ll see if the final regulations are softened. Rumor is the Commission will take a hard line. Concerned with SEC as referee.  Explaining how it works at our company will take a lot of time. DE approach much more workable. Use experience of companies to come up with a best process. However, with all the scandals and public anger, the SEC is unlikely to soften.

Advice for companies. Study proposal in great detail. How mechanics effect what company already has in place…. like advance notice provisions.  Do they clash?  Your own rules on what candidates should look like. How many boards serve on?  Rules might only apply to company nominees. Companies will need new timelines, taking into account possible shareowner nominees. Companies should be working on knowing their shareholders. Are they happy, unhappy? Why? Engage in a dialogue. Most are only going to be looking to proxy access as a nuclear weapon. Talk to them about new disclosures in place this year about why candidates selected by nominating are the best qualified. The whole way of running against a short slate makes difference; much more like a contest. Shareowners already have a lot of new weapons… broker votes gone, easier to withhold nomination with majority vote. We’ve already achieved overall balance, since these other corporate governance reforms alredy enable dialogue.  High degree of uncertainty is reason for shareowner value going down when proxy access is considered. (reference to “The Regulation of Corporate Governance.”

Abe M. Friedman, BlackRock, Inc. Has 17 staff responsible for voting. Written guidelines. Vote in best economic interest of shareowners. Re proxy access,

Abe Friedman

supportive. The right is critical… no question in my mind. Best place to nominate is in the nominating committee.  When you buy, you give up the right to hear decisions made in public. Board sessions are in a competitive market, so are private. Checks and balances slow in government… to make sure rights are protected and deliberative. Our companies, we want them to turn on a dime. In a well functioning company, we want directors nominated in the nominating committee because directors have the information and know what goes on in board meetings.

However, we also know that some boards fail. Not that they tried something that didn’t work, but they’re doing things in the interest of CEO, board member, etc. not in the interest of shareowners.  In those cases, shareowners need a new voice. Proxy contests are very expensive and cumbersome. Favors a-11. But think right should be used only when there is some triggering event. That doesn’t seem to be the direction we’re going though. Now we’re pushing for a high enough threshold, 2 years holding to not make proxy access too easy.

RiskMetrics’ power is exaggerated. Most investors take research from multiple firms.  Shareowners can’t make a decent proposal within the 500 words limitations, so opt-in procedures for proxy access can only be written by companies. Frank wanst companies to design; Joe wants shareowners to design… but shareowners can’t.  The idea that the combination of a-11 and a-8 is only going one way is a red herring because what shareowners are going to vote for reducing their rights? We need to ensure a good basic rule.  The cost of private ordering would be enormous… cost of putting it together at each company and litigating.

In response to comment from audience: It isn’t hard to find directors. Lots of people willing to serve.  There is no doubt shareowners have made progress. There are fewer interested party transactions. What we need are a few basic rights: majority voting, end to or right to vote on poison pills, inject voice in boardroom. Few things. He doesn’t think say on pay is one of the critical few.

Anne Sheehan, CalSTRS.  Briefly described CalSTRS… teachers. Holdings aren’t

Anne Sheehan

as large as BlackRock but votes 7,000 issuers a year. Ability to nominate is ultimately what this is all about. Average holding is 14 years. Would use it rarely, after massive failure. Now option is to withhold vote from director.  Many companies going to majority vote standard. But if a company fails to do anything, we need that access right. We talk to companies. They would have heard from us for years before we are nominating directors. 21 resolutions filed, all but 5 resolved. Ultimate tool in tool chest. We entrust directors to run the business.  S&P 500 majority vote, not smaller companies. Last year shareowners voted against directors but boards didn’t accept resignation or allowed them to continue. Companies can already enact proxy access, but few have. CalSTRS is asked by nominating committees for recommendations and, along with CalPERS, they are building a database of potential directors based on a broad diversity of skill sets.

Joe Grundfest, Stanford. In the proxy access debate, I’m a strong agnostic for what type of access should be allowed at each company. Socially optimal result

Joe Grundfest

should allow each group of shareowners to design the best proposal for their company. He almost hopes SEC does adopt a-11 so that he can file a brief questioning rational basis for their decision. If shareowners are smart enough to elect, why not smart enough to set the rules? First thing he will read the final rule for is the basis for the standards a-11.  He looks forward to litigating. Six cases challenged at the SEC for setting arbitrary standards, six cases lost.

In response to Sheehen, there are corporations where companies kept directors after losing majority votes but they made changes, like getting rid of a staggered board. Shareowners may have actually wanted to end staggered boards more than they wanted to remove specific directors, so they accomplished something. Life expectancy of CEO at company much reduced when shareowners are ignored. The closer the SEC gets to proxy access, the more stock goes down, so most shareowners don’t view it as a plus.  The SEC’s own questions in the rulemaking pointed to the error of their ways. Questions were more concerned with the ease of getting a nominee on the proxy, rather than the need for change at companies. The most obvious thing to do to create more defensible benchmarks in regulations is ask shareowners what they want. The SEC could have then weighed responses based on the size of a respondent’s holdings. A scientifically designed sample would have provided a better starting point and a much more defensible rule.

During the Q&A, I briefly raised some objections to the methodology and conclusions of the event study, “The Regulation of Corporate Governance” by Prof. David Larcker.  Although the change in Delaware code to facilitate proxy access, through opt-in, may have been a preemptive strike aimed at weakening the need for the SEC’s rule, I didn’t think it should be seen as an event that would reduce the likelihood of a-11. (Sidebar: I take a very skeptical view of event studies, based on price fluctuations around introducing a bill or initiating a rulemaking because so many of these initiatives fail… maybe I should take a more careful look at the study but even if proxy access is associated with lower stock values in the short-term, that wouldn’t convince me that access wouldn’t be positive in the long run. As a rule is introduced, shareowners are concerned with uncertainty and additional expenses of more contests. Once a rule is in place, it is unlikely to be used with much frequency but the tool yields dividends to shareowners because it has a deterrent effect.)

The real point I tried to raise was the idea that since the business community was so concerned with being forced into expensive proxy contests if proxy access goes through, they should advocate amending the rule limit or eliminate active proxy solicitation. Limits on campaign spending would also be good for shareowners, since expenditures largely come out of corporate treasuries, reducing the money available for dividends or expanding the business. There didn’t seem to be a any takers. Both Currie and Parades seemed to favor reimbursing challengers for their solicitation expenses when they achieve some minimum threshold of the vote.

I also expressed my objection to one of the ideas offered up in the background paper prepared with the Forum. (see Stanford Rock Center Proxy Access Reform Paper)

Corporations, corporate law firms, and publicly traded companies have generally maintained that each nominating shareholder or shareholder group should only have one nominee, as opposed to the SEC’s proposal to permit a qualifying shareholder to have multiple director nominees. Accordingly, the final Rule 14a-11 could have a single nominee per shareholder requirement.

I said that even though I thought I had been following the discussions on proxy access, I hadn’t heard much discussion of this possibility and thought it didn’t make sense, since one investor or group would be more capable to recommending nominees that fit, both with the remaining board and with each other, with regard to skills and experience. Currie clarified that the idea wasn’t necessarily one that would be taken up in Commission amendments but they included it simply because it was contained in a large number of comments.

Another great event, attended mostly by Stanford students who didn’t add much to the dialogue. Maybe Stanford students will take these forums less for granted in the future and will come better prepared with questions based on a more thorough reading of the related materials. I can’t help thinking the event would have packed the house at Harvard, with students coming from all over the Boston area.

When I studied at Boston College, we sometimes had more students at Harvard sponsored events than Harvard did. I suppose our interloping was helped along by something like a precursor to the Boston Consortium. The fact that we could take classes at any member university probably helped.  Students from all over the Bay Area should be taking advantage of future events at the Arthur and Toni Rembe Rock Center for Corporate Governance. And other than the panelists, where were the Bay Area investors, directors and CEOs? At least at last night’s event there were a smattering (from Intel and ICGN; both contributed to the dialogue). Hopefully, more will attend over time.

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