Earlier today, the Federal Register published new rules governing proxy access that will take effect November 15th. The proxy access rule, approved by the SEC on August 25th, enables shareholders to nominate candidates for director boards. Opponents of proxy access (Rule 14a-11 and amendments to Rule 14a-8) are sharpening their swords against an onslaught of what they perceive as misplaced and undeserved power. We summarize a few of the arguments against proxy access, as well as counterarguments in favor.
Last week, the merchant banking firm Discovery Equity Partners fired the shareholders’ opening salvo by announcing its intent to nominate two board candidates at Tier Technologies, a mid-cap firm based in Virginia in which Discovery and affiliates hold a 13.5 percent stake.
The “Bad Numbers” Response. Most critical reactions to date concentrate on numbers: the 3 percent ownership threshold; the 3-year holding period; the 3-year phase-in period for small public companies; the 25 percent membership cap, per firm, on shareholder-nominated directors. CorpGov.net’s James McRitchie says these numbers will likely change. “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,” he wrote the day before the SEC decision. “Time to gear up; may a thousand access proposals bloom.”
The “Barbarians at the Gate” Response. McRitchie’s statement strikes fear in the heart of entrenched interests. “Alinsky Wins at the SEC,” shrilled a Wall Street Journal editorial, referring to the legendary Saul Alinsky whose book, Rules for Radicals, influenced the modern community organizing movement. The WSJ premise: overly narrow and politicized shareholder interests will destabilize corporate America by “forcing preferred candidates” onto corporate boards, a stance echoed by the US Chamber of Commerce.
Harvard Law School’s Forum on Corporate Governance and Financial Regulation recently summarized 16 “novel ideas” (we consider them Strangelovean) from George Mason University Law School’s J.W. Verret to thwart proxy access. His examples include tightening qualifications for directors; “whitemail,” or buying contested candidates off to remove them from the proxy card (which is white); and state anti-takeover statutes to defend against proxy contests.
The “See You in Court” Response. Many believe that companies will move the proxy access fight from the ballot box to the courtroom, despite the best efforts of the SEC to prevent this. Opponents have had 60 days from the August 25th approval date to file a legal challenge, probably “on the grounds that the SEC failed to fully analyze the impact on efficiency, competition, and capital formation”, according to labor fund lawyer Cornish Hitchcock. “Lawsuits are virtually certain,” said Joseph Grundfest, a Stanford Law School professor and former SEC commissioner.
The “Engage and Appease” Response. Today, Harvard’s CorpGov Forum posted a series of suggested board actions from Adam Emmerich of Wachtell Lipton Rosen & Katz. Although nuanced, the assumption remains that activists have agendas that automatically differ from those who want to build shareholder value. To wit: “engaging constructively and pro-actively with shareholders may enable companies to anticipate and address investor concerns that could otherwise lead to nominations. While it will not be possible to head off all nominations, particularly from unions, activists and others with special non-shareholder agendas, a company’s ability to resist a special interest access slate will be greatly enhanced if it has fostered good relations with its major shareholders.”
At least he supports an “active monitoring and engagement” approach, a positive step forward.
In the end, each of these arguments is speculative—and some are downright stupid. Proxy access helps restore American corporate governance to a participatory and representative system that spreads accountability across a diverse spectrum of players—a far cry from the system that got us into this mess in the first place.