Proxy Access Lite?

The revisions to SEC Rule 14a-8 are expected to come into effect this week. Many investor advocates were disappointed when the SEC decided against appealing a court decision that struck down the more potent Rule 14a-11, which would have forced proxy access on all companies.

So starts Erik Sherman’s Proxy access lite to go live in Inside Investor Relations, 9/14/2011. I’m quoted extensively speculating about corporate defenses. I’m not sure that is the message I meant to convey. I should have just referred Erik to J.W. Verret. See his paper Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank.

How can a board avoid a showdown? According to Peter Gleason, managing director of the National Association of Corporate Directors:

If you get the best board possible and you’re focused on the right issues like strategy and risk, and you communicate with your shareholders, you don’t need to worry about it.

I’m not sure if I agree with that. Yes, that’s how most CII members are likely to use the rule but as a retail shareowner activist I view implementing access as insurance, much like having majority vote requirements. Shareowners shouldn’t be waiting until companies are in trouble before putting in an access rule.

After all, it is likely to take a year or two after initiating a proposal before a rule is in place and than another year or two to nominate and elect directors. Even then, such nominees are liable to constitute a distinct minority of directors. A lot can happen in four years. Don’t wait until there is a fire to put in a smoke detector.

As for “proxy lite,” yes, it may be light on the legal mandates but the thresholds sought under Rule 14a-8 will be a lot lighter than those under Rule 14a-11. I’m not sure the Business Roundtable will be thrilled with the results.

I’m still welcoming input on what should be included in a model proxy access proposal. If interested in getting involved, e-mail James McRitchie. So far, I’ve got the following:

  • universal proxy will increase the likelihood that no special interest, such as unions or entrenched managers, will “control” the board, since many shareowners will choose directors ala carte, rather than along “party” lines.
  • Full access is needed to ensure changes in control can occur in a timely manner — before the value of the corporation erodes — and without the unnecessary expense of a solicited proxy contest.
  • Low barriers are also advisable. Narrow eligibility requirements, such as those contained in Rule 14a-11, which bar most individual and institutional investors, must go. Artificial barriers requiring a 3% holding for 3 years in order to place a nominee on the ballot can be seen as “arbitrary and capricious,” especially given the SEC’s longstanding requirement of $2,000 worth of shares held for one year to submit shareowner proposals under Rule 14a-8.
  • To address concerns of the Business Roundtable and Chamber of Commerce and reduce the likelihood of excess spending, all candidates, including the board’s own nominees, should be required to file full disclosure of costs, both pre- and post-election. There should be an accounting of all campaign expenditures, including in-kind contributions and those expended by corporations or other interested entities on behalf of candidates they support.

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2 Responses to Proxy Access Lite?

  1. James McRitchie 09/19/2011 at 6:35 am #

    I agree, expectations should be modest. The world isn’t changing tomorrow because of proxy access. On the other hand, I’m not looking for a fight with institutional investors. Investors aren’t all the same; that’s for sure. We all need advocacy groups that speak on our behalf. Both USPX and CII do a great job at representing the interests of their constituents. Just to add, here’s an article from Bloomberg that says Small Investors May Get More Sway on Corporate Boards ( wouldn’t that be nice?

  2. Glyn A. Holton 09/19/2011 at 4:29 am #

    We should keep our expectations for Rule 14a-8 proxy access proposals modest. Look at what just happened with say-on-pay. In its first proxy season as a legal mandate, 98.6% of pay packages were approved.

    Entrenched executives will fight proxy access proposals every step of the way …. submission, voting, implementation and interpretation.

    A fight may emerge between institutional and individual investors over the language of proposals. The big institutions loved proposed Rule 14a-11, which pretty much said they could have proxy access and no one else (see Retail shareowners organizing through the United States Proxy Exchange are likely to submit proposals specifying the same modest eligibility requirement to nominate as already exists under Rule 14a-8 to submit a proposal (hold $2,000 of a corporation’s stock for a year.)

    If the differences between institutional and individual investors become stark, that might be a good thing. THEY don’t speak for US, but they have long presumed to do so. Let’s tell the world that they don’t.

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