Proxy Access & Shareholder Citizenship: The Quest for Inclusion

The TakeAway: New SEC rule allows shareholders to nominate board candidates, a major victory for corporate democracy.

Yesterday was historic: the SEC granted shareholders the power to nominate candidates for board director elections.  The 3-2 vote along party lines ended years of debating this franchise, empowering shareholders holding at least 3 percent of a company’s stock for 3 years continuously.  “Nominating a director candidate is not the same as electing a candidate to the board,” said Mary Schapiro, SEC Chairman.  “I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director.  To me, the critical point is that shareholders have the ability to make this choice.”

The move did not come as a surprise – the SEC has signaled for more than a year its intention to change federal proxy rules, and the recently-signed Dodd-Frank Wall Street Reform and Consumer Protection Act provided for it.  The rule change has roots in an August 2002 Rulemaking Request submitted by James McRitchie of and Les Greenberg of the Committee of Concerned Shareholders, which led to an October 2003 Rule Proposal by the SEC that languished on the vine.

Activists welcomed yesterday’s actions as an affirmation of the right of shareholders to engage in self-governance through access to the corporate ballot.  Groups such as the Council of Institutional Investors and the Social Investment Forum championed proxy access, citing empirical evidence.  The Business Roundtable and the US Chamber of Commerce, among others vehemently opposed it, believing it would politicize the nomination process in favor of ”special interests.”

The new Rule 14a-11, running 451-pages, takes effect within 60 days of publication in the Federal Register. In theory that’s in time for 2011 proxy season—though not in practice for most firms, given the 120-day lead time required before a proxy is filed.

The significance of the new rules belies their modest impact.  Shareholders may not use these enhanced powers to change control of or expand the number of seats on corporate boards.  They face restrictions on how many candidates they can vet (at least one nominee and no more than 25 percent of the full board, whichever is the greatest number).  They cannot borrow stock to achieve these thresholds.   Smaller companies are exempted, for at least the next 3 years.  And the nomination process will be subject to certain procedural guidelines (many remain to be written), including disclosure.

Perhaps the biggest barrier is the price of entry.  Shareholders of large companies face daunting hurdles regarding the new eligibility requirements.  Lucian Bebchuk and Scott Hirst of the Harvard Law School Forum on Corporate Governance and Financial Regulation point out that “the 10 largest public pension funds together hold less than 2.5 percent at Bank of America, Microsoft, IBM and ExxonMobil.”

Governance guru Robert A.G. Monks told us that reaching the 3-percent ownership threshold will require a level of cooperation and collaboration among institutional and individual investors that is very difficult to achieve.  The use of social media and interactive technology will help enormously, he acknowledged.  But “as soon as the SEC decision comes out, it will be called to the D.C. Circuit [Court],” he said.  “The business community has been clear about its opposition to [proxy access].  They are fundamentally threatened by the notion that shareholders would nominate board candidates.”

The big picture: The ruling means that shareowners have a new way – even in the face of huge resistance – to push for greater corporate accountability and sustainability.  Yesterday’s SEC actions made our imperfect democracy a bit better, our representative system of governance more effective.  What surprises us is not that this happened, but that it was denied for so long to so many.

We hope shareholders, both institutional and individual, approach their new responsibilities with enthusiasm, virtue, and intelligence.

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5 Responses to Proxy Access & Shareholder Citizenship: The Quest for Inclusion

  1. Don’t forget the changes to Rule 14a-8. What the SEC has done is establish “private ordering” with a very high floor. Within a few years, we can expect to see 100s of proposals calling for more reasonable thresholds and holding periods, as well as allowing a greater proportion of shareowner nominees. Corporate governance activists have been given a new focus. Just as we have been struggling to obtain majority vote standards, we will now be fighting for more reasonable nomination requirements. To the John Cheveddens and Ken Steiners of the world I say, Time to gear up; may a thousand access proposals bloom. Start with small companies where the SEC has delayed implementation of Rule 14a-11 and where, on average, corporate governance reforms are furthest behind. Have an access proposal ready for next year? Please share it.

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