The other day I included mention of a project by J.W Verret (Truth on the Market) who promises 16 posts in a series of strategies on how to avoid complying with proxy access once it is enacted. His postings are defended by someone I normally consider at least somewhat rational, Stephen Bainbridge. One of Verret’s latest, suggests that if directors are elected through proxy access at a company, the majority board members could set up an executive subcommittee to do all the substantive work of the board, thus freezing out directors nominated and the elected by shareowners from any significant decisions.
To me, this smacks of a violation of the duty of good faith. After working on proxy access for so long (Les Greenberg and I submitted our original petition in the summer of 2002), Verret’s tactics seem especially venal to me, so I posted a bit of a rant (New Resources: Sustainability Quotes, Crisis Timeline, Cal Corp Law & Proxy Access Avoidance and here in response to Bainbridge.
Verret apparently plans 13 more posts on the subject, although he posted something of an answer to critics on July 29th (Corporate Blog Smack Down 2010 over my Proxy Access Defenses). Those critics were Nell Minow (see Another Misguided Piece from Professor Bainbridge) and J. Robert Brown (Access and a Desperate Response). Both are well worth reading.
It looks like Bainbridge may be entering with a series of his own recommendations. For example, see Using Board Qualifications to Defang Proxy Access, 7/29/10, where he proposes companies could limit directors to those holding $250,000 worth of stock. As one commentator wrote,
How would this work in practice when most companies simply grant new directors sufficient shares of stock to meet their minimum ownership requirements within the required period of time (e.g. five years)? A board would be hard pressed to do so for all its members except for those elected via access.
Of course, in most cases involving proxy access we can expect the company to be under some financial distress, since shareowners aren’t likely to invoke access at a company that is doing well. If Bainbridge is expecting all director’s to pony up their own funds to purchase substantial shares in the company, he may not only be limiting access candidates but others as well. For example, I was once asked onto a board where the company was entering bankruptcy. Both nominating committees and shareowners seeking access would likely be blocked by Bainbridge’s suggestion.
Part of me says we shouldn’t give the ideas of Bainbridge or Verret to circumvent proxy access laws any more publicity, since maybe there are company leaders crazy enough to take their advice. However, after reading Brown response, I’m almost thinking that any such challenge may just add strength to the movement for greater shareowner democracy because it would likely lead to further preemption of Delaware law, should the courts there go along with these “defenses.” Dodd-Frank gives the SEC broad authority regarding proxy access requirements. Circumvention could easily lead to a real push for further access and to more than 25% of the seats.
In yesterday’s post (Proxy Access Blog Wars, And Introducing PA Defense #4), Verret recommended that boards adopt instant runoff voting (IRV) for their elections, which he calls the “Chinese Menu Ballot.” (One might assume from the name that he would require choices from various columns, whereas in fact, he call for IRV type ranking, so I am somewhat confused by the name he uses.) He appears to argue in favor of IRV, since it “would in some circumstances eliminate candidates for which a majority of shareholders have a strong preference against.” I find myself in actual agreement with this recommendation. I too, want consensus candidates and think IRV has a great many advantages for corporate elections. (see my May 2003 comment letter to the SEC)
In fact, for many years I have been advocating that CalPERS use IRV in its own elections. Several local governments already use IRV. Once the Secretary of State certifies ballot counting equipment at the state level, I think it is highly likely that CalPERS will adopt it for their board elections. Once they do, they may become strong advocates for IRV in contested corporate board elections.
Verret promises to “save the best for last.”
The final two defenses I will offer stand to completely subvert any of the benefits of proxy access. The final two defenses I will propose will ensure that no investor will have any remaining incentive to nominate directors onto the corporate proxy under the SEC’s proxy access regime, and they will be certain to withstand challenge in both Delaware and the federal courts.
We’ll see. In the meantime I hope for more constructive suggestions, like post #4, for the posts in between.
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