In the wake of the SEC’s approval of management proxy access for three percent shareholders, it’s quite surprising to note the vehemence of the remaining opposition to such action. For example, the Wall Street Journal in its lead editorial on August 30, 2010 entitled Alinsky Wins at the SEC, which in itself makes clear the extent of its opposition, states that the new rule will only “help activists and unions, not shareholders.” Similarly, an unnamed official of the U.S. Chamber of Commerce speaking on Yahoo Finance on August 25, 2010 states that it will fight this action “using every method available” because it is “a giant step backwards for average investors” and David Hirschmann, the Chamber’s President/CEO of its Center for Capital Markets Competitiveness, in the same place, characterized the new rules as ones that allow “the proxy process to be [used] to give labor-union pension funds and others greater leverage to try to ram through their agenda” which “makes no sense.”
Institutional investors and other proponents of improved governance should be prepared to respond in the media and elsewhere to such arguments.
Perhaps the most simple and compelling response is that the new rules permit nothing which was not already permitted – i.e. a change in board composition through shareholder vote. That is, any investor has been and remains able to wage a proxy fight for board representation to seek to “ram through” (or pursue) their agenda. While the new rules are intended to and will obviously lead to more minority representation by reducing the cost of its pursuit, it was already contemplated by all pertinent law. Investors have also had and retain the right under 1934 Act Rule 14a-8 to include on proxy cards many proposals for action not involving director elections.
Indeed, allowing proxy access to investors hardly guarantees them a board seat. They still must convince the holders of the requisite number of shares in the pertinent jurisdiction – none of which is being changed – to vote for their candidates. If simply allowing proxy access to minority holders of itself will greatly expedite their candidacies, what does this say about the level of shareholder satisfaction with management and its slates?
Even if a board seat is obtained by an investor, it is just that; a seat, and not a majority capable of imposing its own agenda. Given that proxy access for large firms with market caps exceeding $33 billion will require ownership of more than $1 billion of stock for more than three years, one wonders why there is so much concern. We are not talking about miniscule, “gadfly” shareholders with no real economic interest, only pursuing a social agenda. What is more a part of capitalism than allowing a meaningful voice to large investors in a company?
Apart from these somewhat mechanically-oriented, but still significant, arguments, lurks the ultimate consideration, namely the need for better governance, which can only be accomplished with real accountability for boards. When Jim McRitchie brought all of this to the fore 8-10 years ago through his writings and suggestions to the SEC, reasonable, knowledgeable people could argue about whether there was a general governance problem. In light of the numerous debacles over the last decade starting with Enron, few would want to take the negative side of this argument today. Many, including the author of this post, would argue about how to improve governance, but the “whether” part of the debate is a different story.
The status quo has not worked. In far too many cases, directors have been asleep at the proverbial switch while managements brought down companies and imposed huge costs on societies. One way or the other, there needs to be additional accountability for boards, and this initiative is quite modest, in that it does not change in any way the substantive standards to which directors are held. That is, the only accountability for even catastrophic decisions is removal from office – not financial liability. Commentators have lamented the modesty of this effort.
When called upon to defend the new rules, all concerned should keep in mind and remind the public, what they do and don’t do relative to the status quo, as well as why this action has been taken now.