Tag Archives | BRT

Investor Letter to BRT (Business Roundtable)

Publisher’s Note: The following guest post from Timothy Smith reproduces a recent investor letter to the BRT (Business Roundtable) concerning the importance of shareholder resolutions. I added title, graphics, changed some of the formatting and added a note about the BRT for background. See also previous posts: Financial CHOICE Act: From too big to fail, to too big to listen and Financial CHOICE Act: Take Action. Download the original letter via pdf.

Walden Asset Management





July 6, 2017
Mr. Joshua Bolton
President and CEO
The Business Roundtable
300 New Jersey Avenue, Suite 800
Washington, DC 20001

Dear Mr. Bolton:

We are writing to express the deep concerns of numerous investors regarding the Business Roundtable’s active campaign to effectively end the ability of most investors to file shareholder resolutions for a vote at corporate annual general meetings. Continue Reading →

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Proxy Access: What Now, With Ban to be Lifted?

The SEC will not challenge the decision of the U.S. Court of Appeals for the District of Columbia Circuit, No. 10-1305, which struck down the agency’s rule to make it easier for shareowners to nominate directors to corporate boards. (see SEC Fails to Appeal on Proxy Access, 9/6/2011 and Statement by SEC Chairman Mary L. Schapiro on Proxy Access Litigation) That leaves Rule 14a-8(i)(8), which wasn’t challenged. I have a few recommendations for the path forward. According to the statement by Schapiro:

The Commission’s stay order provides that the stay of the effective date of the amendments to Rule 14a-8 and related rules will expire without further Commission action when the court’s decision is finalized, which is expected to be September 13. Accordingly, absent further Commission action, Rule 14a-8 will go into effect and a notice of the effective date of the amendments will be published.

In Proxy Access: Next Steps for Shareowners I noted that Rule 14a-8(i)(8) amendments adopted by the SEC were stayed by the Commission because they were Continue Reading →

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Law Professors Submit Amicus Brief in Proxy Access

A group of 36 law professors — including Harvard Law School Professors Victor Brudney and John Coates — joined an amicus brief responding to the arguments advanced by plaintiffs in the case (Business Roundtable and Chamber Of Commerce v. SEC). As the brief notes, the law professors do not hold the same views on the merits of or underlying policies behind Rule 14a-11, and differ on many issues concerning corporate governance and corporate law and policy. But the law professors are in agreement that Rule 14a-11 does not violate the First Amendment.

Among other things, the law professors’ brief points out that all of the First Amendment arguments advanced by plaintiffs would argue against the constitutionality of the SEC’s long-standing Rule 14a-8, which the Business Roundtable and Chamber of Commerce specifically chose not to challenge. More substantively, the brief emphasizes, shareholders are not “outsiders” or “third parties” to a corporation, but play a crucial role in a corporation’s “internal governance.” Shareholders would have undisputed rights to speak at a shareholder meeting — which the proxy rules attempt to reproduce for companies with widely dispersed shareholders. Perhaps most importantly, the Congress and the SEC have for over 70 years regulated securities by requiring disclosure. To subject the federal securities laws to strict First Amendment scrutiny would eviscerate the capital markets and impede capital formation at a moment when the nation’s economy most needs new investment.

via Law Professors Submit Amicus Brief in Proxy Access Case — The Harvard Law School Forum on Corporate Governance and Financial Regulation.

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CII Files Brief Supporting SEC Proxy Access Rule

The Council of Institutional Investors filed a brief strongly supporting the Securities and Exchange Commission’s (SEC) “proxy access” rule, rebutting claims of business groups seeking to overturn the rule.

The Council’s CII TIAA-CREF et al amicus brief 01-27-11, filed with TIAA-CREF and 14 other pension funds, was submitted January 27 in the U.S. Court of Appeals for the D.C. Circuit, in Business Roundtable and Chamber of Commerce of the United States of America v. Securities and Exchange Commission.

“Proxy access will make companies more responsive to their shareowners and more vigilant in their oversight of management,” said Ann Yerger, executive director of the Council of Institutional Investors, an association of public, union and corporate pension funds with combined assets in excess of $3 trillion. “This basic shareowner right is widely accepted in many countries. U.S. investors deserve this same, fundamental protection.”

Proxy access gives shareowners a meaningful voice in corporate board elections by letting them place their nominees for director on the company’s proxy card when they are dissatisfied with the board and want to run their own candidates. This allows investors to avoid the often-prohibitive cost of distributing their own proxy materials to other shareowners. The SEC last August approved a rule granting certain long-term investors proxy access at U.S. public companies. But the rule was not put into effect because of the Business Roundtable-Chamber lawsuit.

The Council’s brief argues that the benefits of proxy access far outweigh the costs, citing enhanced communication between investors and management in countries where proxy access is permitted. The increased dialogue “keeps directors in touch with market sentiment which strengthens board independence, reduces risk surprises and improves corporate governance,” the Council and pension funds contend. The brief also dismisses business claims that the proxy access rule will saddle corporate boards with special-interest nominees

See also, CalPERSattachment-CIIpublicationEqualAccess (an attachment to a CalPERS Board meeting agenda from years ago).

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Proxy Access Update

As previously reported, after being sued by the Business Roundtable and the Chamber of Commerce, the SEC stayed new Rule 14a-11 and amendments to Rule 14a-8 regarding “proxy access.” According to an October 15 client alert from Reed Smith:

On October 8, 2010, the petitioners and the Commission jointly filed a Motion for Expedited Consideration with the court. The motion seeks court approval of a briefing schedule negotiated by the parties that calls for the petitioners’ opening brief to be filed by November 30, 2010, and contemplates that briefing will be completed by February 25, 2011. The motion also requested that oral argument be scheduled in the case on the earliest available date following the completion of briefing. In the Motion, the parties jointly stated that the stay granted by the Commission pending review by the court, even with the review being on an expedited basis, necessarily means that the Commission’s rule changes will not be available for use by shareholders during the 2010-2011 proxy season, but that expedited review would help ensure that outstanding uncertainty about the rules’ validity will be resolved before the 2011-2012 proxy season.

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BRT & Chamber Sue Over Proxy Access

As expected, the U.S. Chamber of Commerce and Business Roundtable filed a legal challenge to the SEC’s proxy access rules requiring a corporation to include in its proxy materials director nominees put forward by a shareholder (or group of shareholders) who have owned three percent or more of company stock for at least three years. Eugene Scalia and Amy Goodman of Gibson, Dunn, and Crutcher LLP will be counsel to the Chamber and Business Roundtable on this litigation.

In a petition for review filed in the U.S. Court of Appeals for the District of Columbia Circuit, the Chamber and Business Roundtable charge that the rule is arbitrary and capricious, violates the Administrative Procedure Act, and that the SEC failed to properly assess the rule’s effects on “efficiency, competition and capital formation” as required by law. In adopting the rule, the SEC:

  • Erred in appraising the costs that proxy access would impose on American corporations, shareholders, and workers at a time our economy can least afford it. For example, the Commission essentially disregarded numerous commenters who explained that the rule will be misused by special interest investors such as labor union pension funds and state pension funds;
  • Ignored evidence and studies highlighting the adverse consequences of proxy access, including that activist shareholders would use the rule as leverage to further their special interest agendas;
  • Claimed to be empowering shareholders, but actually restricted shareholders’ ability to prevent special interest shareholders from triggering costly election contests; and
  • Claimed to be effectuating state law rights, but gave short shrift to existing state laws regarding access to the proxy and related principles, including the law in Delaware and the Model Business Corporation Act, and created significant ambiguities regarding the application of federal and state law to the nomination and election process.
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How Politics Shaped the Political Economy of Global Finance

The Political Economy of Global Finance Capital by Richard Deeg and Mary O’Sullivan review 6 influential books on the topic in light of the recent financial crisis.

The most important developments highlighted:

  • the move from a predominant focus on state-centered patterns of regulation to a more comprehensive understanding of the role of states and private actors in building a transnational governance regime that mixes public and private regulation;
  • the intensified effort to understand the causal forces that shape the political economy of global finance based on more complex models that allow for an interaction among interests, institutions and ideas; and
  • increased attention to new sources of systemic risk in the global financial system, as well as a greater consideration of the consequences for domestic politics of interactions with the global financial system.

They argue that we must do more to understand the behavior of actors who enact the rules of global finance, not just those who generate the rules. More must be done to assess the costs and benefits of financialization at the global and national levels.

Some interesting points highlighted:

  • The financial crisis emanated not from the periphery but from the very core of the system.
  • Facilitated flows from poor countries to rich countries, rather than the historically opposite direction.
  • Coordinated market economies that rely on welfare production regimes for promoting and protecting the investment by firms in skill sets and specific assets may have a competitive advantage with financial globalization, the opposite of conventional thinking.
  • These protections inhibit convergence in corporate governance.
  • Financialization, where maximization of short-term shareowner value through dashboard metrics, has compromised the interests of other stakeholders and corrodes the coordinated system of capitalism.
  • Extraordinary incentives contributed to willingness to pursue aggressive strategies without due attention to risks.

How is it that false illusions were conferred sufficient legitimacy to deafen alternative views and stymie reform? In our thinking, a lot may come down to the power held by CEOs and their organizations like the Business Roundtable and the Chamber of Commerce. They can spend shareowner money like there is no tomorrow in defending a system that still gives CEOs virtually dictatorial power. On the other side, institutional investors are held to fiduciary duties that limit such lobbying efforts, even by the few that don’t have direct conflicts of interests, such as in trying to attract those 401(k) accounts from CEOs.

Happy Holidays: More, More, More: Gifts For the CEO Who Has Everything (clip from Nightly Business Report via The Corporate Library Blog, 12/24/09)

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Proxy Access and Hybrid Boards

The Chamber of Commerce opposes the SEC’s proposals on proxy access, claiming that such decisions reside within individual states. “No compelling reason exists to overturn the long-standing state law role in controlling the substantive rules regarding director election,” wrote the Chamber’s Richard Murray in a letter to Schapiro. “Pursuit of a federal right to access will lead to a one size fits all rule.” (Chamber Challenges SEC Over Proxy Access, Directorship, 5/1/09) “The Chamber believes that greater proxy access would not advance the financial interests of individual investors. Instead, it would allow labor unions and other special interest groups to advance their agendas at the expense of these investors.” (U.S. Chamber Calls Greater Proxy Access Good for Special Interests, Bad for Individual Investors, press release, 7/25/07)

“The potentially harmful consequences of proxy access must be considered. As
CEOs of leading U.S. companies, we are concerned about these renewed attempts to allow special and disparate interests to sidetrack corporate boards, as well as the inevitable effect these attempts will have on the ability of management and boards to focus on the long term value creation for shareholders and employees,” said John J. Castellani, President of Business Roundtable, an association of chief executive officers of leading U.S. companies with more than $5 trillion in annual revenues and nearly 10 million employees. (Business Roundtable Statement on SEC Proxy Access Proposal, press release, 5/20/09)

Rarely, however, do opponents of proxy access cite studies to support their agruments, which are more likely to be grounded in their own selfish interest to remain entrenched than in any true concern for shareowners or the US ecomony. Unions can’t hijack corporate elections if it takes a majority vote to elect directors, as it now does at most of the companies with CEOs in the BRT.

A recent study, Effectiveness of Hybrid Boards by Chris Cernich, Scott Fenn, Michael Anderson and Shirley Westcott, prepared by Proxy Governance under contract with the Investor Responsibility Research Center, looked at the effectiveness of 120 “hybrid” boards formed when shareowner activists were able to get a short slate elected and found total returns at such companies were over 19 percent — 16.6 percentage points better than peers. Total share price performance through the three-year anniversary of the hybrid boards averaged 21.5 percent — almost 18% percentage points more than their peers.

More than half of the excess return occurs within three months after an activist announces their intention to battle for board seats. Investors bid up its shares in hopes that a hybrid board will result in positive changes. Not suprisingly, performance was better where dissidents held a greater proportion of shares. They have both a better chance to get elected and more incentive to monitor. However, boards that seated a sole dissident moderately outperformed, whereas companies with three new directors significantly underperformed. Perphaps more positions being contested led to more resources being drained from the company and a greater distraction of management.

Companies whose hybrid boards were created through contest settlements averaged a sale premium of 29.6%, more than double the 13.5% average premium for companies whose hybrid boards were created by a proxy contest which went to a shareholder vote. Full blown proxy contests, like wars, can be expensive for both sides. Proxy access appears likely to bring positive changes at less cost, like the gradual transitions of democratic elections in government.

Expect to see more activist investors once proxy access becomes a reality. Like classic value investors, these firms rely on fundamental analysis showing that a company’s inherent value is greater than its trading price. Unlike most, however, they don’t wait for the market to recognize the value. They work for changes to close the gap. When they do get elected, they frequently bring much greater resources and experience to boards than most directors. Expect to see more funds like Steel Partners, Ichan Partners, Ramius Capital Group, Barington Capital Group, Breeden Capital Management, Relational Investors, Riley Investment Management, Third Point, Costa Brava Partnership, MMI Investments, Oliver Press Partners, and Lawndale Capital Management. I’ve updated our links page for such groups. If you know of others, please let me know.

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