The Business Roundtable and Chamber of Commerce made their case and the Court found the SEC rulemaking on proxy access arbitrary and capricious “for having failed once again… to adequately assess the economic effects of a new rule.”
The SEC rules certainly didn’t come out the way Les Greenberg and I envisioned when we petitioned back in the summer of 2002. Ours was a simple proposal, summed up in one sentence:
The intended effect of the suggested modifications is that the solicitation of proxies for all nominees for Director positions, who meet the other legal requirements, be required to be included in the Company’s proxy materials.
I didn’t realize Just how bad the actual language is that got adopted until I read an illuminating paper by Jill E. Fisch of the University of Pennsylvania, The Destructive Ambiguity of Federal Proxy Access. I urge everyone who cares about this critical issue to read Fisch’s paper.
Yes, I had noticed the SEC’s rule requires an awful lot of disclosures and the three percent/three year holding requirements certainly eliminate any involvement I might have had in any nomination process. But I didn’t notice all the other possible triggers re various required schedules and filings and I hadn’t read all the requirements of schedule 14N and other impediments Fisch explains so well.
I was actually pinning my hopes on the amendments to Rule 14a-8 and hadn’t noticed users of that rule must comply with the complete filing and disclosure requirements of Regulation 14A in a similar manner to shareowners who mount a proxy contest.
Fisch argues, like many who advocate “private ordering,” the SEC is poorly suited for regulating corporate governance and that existing state regulation offers a preferable, more flexible framework. Unlike some others, at least part of her rationale is that SEC rules impede, rather than facilitate, shareowner participation.
Interesting is Fisch’s analysis of the possible reasons why the SEC went ahead with a rulemaking that is largely unusable. I’ll list them here but urge you to read her full explorations:
- Rule 14a-11 may simply reflect caution. Draw the rule as tightly as possible to “test the waters” with very few cases.
- Not doing something may have been viewed as a “sign of weakness.”
- Making it more restrictive may have reduced the incentive for business interests to sue… they did anyway.
- It isn’t a tool to increase the direct effectiveness of shareowners but is more of a communication device for sounding displeasure, providing another platform whereby shareowners can speak to each other.
- Raise the level of director discomfort without presenting a real threat.
- Maybe the SEC simply lost perspective on what they were trying to do by responding to critics with additional requirements that yielded unintended consequences.
The SEC’s efforts to avoid all possible bad effects or “unintended consequences,” may have led it to choose instead a rule that has no consequences, intended or otherwise…
Any debate over proxy access that fails to evaluate its effect on the allocation of power between shareholders and managers is, over proxy access is, however, destructively ambiguous, because the best argument in favor of proxy access – increasing board accountability – requires that proxy access increase shareholder power.
As those of us committed to proxy access start over again, difficult but not impossible in the current political climate, we would do well to take Fisch’s advice on an alternative approach:
- The SEC should amend Regulation 14a to require the issuer to disclose, in its proxy statement, all properly-nominated director candidates, regardless of whether the nomination is made by a nominating committee, a shareholder or some other mechanism. Provide for comparable disclosures, regardless of the source of the nomination.
- Amend Rule 14a-4 to require the issuer’s proxy card to give shareholders the opportunity to vote for any of the candidates included in the proxy statement. The proxy card would thus constitute a universal ballot for all properly-nominated candidates.
- Encourage firm-specific experiments by retaining the recently adopted amendments to the election exclusion under Rule 14a-8 authorizing the inclusion of shareholder proposals concerning the process by which directors are selected.
There was no need for the SEC to try to determine the optimal level of shareholder nominating power. The area would have been free for state law and issuer-specific experimentation if the SEC had simply held, seventy years ago, that issuers were required to disclose the existence of all properly nominated director candidates on the issuer’s proxy statement and to provide shareholders with a chance to vote on the election of such candidates.
Given how long debate has raged on, it wouldn’t hurt to step back and get it right. In this case, simple is certainly better. The first step is to reexamine 14a-8, which was also stayed by the SEC because the amendment was “designed to complement” the proxy access rule and the SEC viewed its changes as “intertwined.” We must now unwind the two rules to see what is left in the 14a-8 amendments. I will probably be urging the SEC to lift the stay on 14a-8 amendments and will likely ask for additional amendments to provide for a robust form of private ordering, as discussed above. More to come. Please send me your thoughts and analysis.