Drawing Swords: The Battle Over Proxy Access

The TakeAway: As the Federal Register publishes proxy access rules, we survey arguments against shareholder rights.

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.

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7 Responses to Drawing Swords: The Battle Over Proxy Access

  1. Pingback: CorpGov.net » Murninghan Post on Proxy Access

  2. Broc Romanek says:

    The formula for when the proxy access rules apply is different than what you wrote – it doesn’t apply to proxies mailed on or after March 15, 2011. Rather, it’s a lookback formula and it applies to companies who mailed on or after March 15, 2010 during this past proxy season. A lot of people are stating it wrong so you are not alone.

    • Bill Baue says:

      Thanks for pointing this out, Broc. We’re glad to have this correction. We deleted the inaccurate section of the article.

      Bill Baue
      Editor in Chief, The Murninghan Post

      • Bill Baue says:

        This just in from Beth Young, Lecturer at Harvard Law School and Senior Research Fellow with The Corporate Library:

        From the release (2010 proxy season transition rules):

        “Rule 14a-11 contains a window period for submission of shareholder nominees for inclusion in company proxy materials of no earlier than 150 calendar days, and no later than 120 calendar days, before the anniversary of the date that the company mailed its proxy materials for the prior year’s annual meeting.671 Shareholders seeking to use new Rule 14a-11 would be able to do so if the window period for submitting nominees for a particular company is open after the effective date of the rules. For some companies, the window period may open and close before the effective date of the new rules. In those cases, shareholders would not be permitted to submit nominees pursuant to Rule 14a-11 for inclusion in the company’s proxy materials for the 2011 proxy season. For other companies, the window period may open before the effective date of the rules, but close after the effective date. In those cases, shareholders would be able to submit a nominee between the effective date and the close of the window period.”

        Effective date: 60 days after publication in the federal register [which occurred on September 16th, so effective date is Nov. 15th]

        It seems to me that Broc is right. The window period will still be open on November 15th for those companies who mailed at least 120 days later (on or after March 15th) last year.

  3. John Wilson says:

    Actually, although I would not use the term “engage and appease,” Adam Emmerich has it partly right. The best result from proxy access would not be a lot of director candidates nominated by shareholders. Proxy access should lead to more discussions between boards and shareholders to allow companies to anticipate problems and prevent the need for a more adversarial approach. I do believe that Mr. Emmerich will be surprised, however, when such discussions result in companies being more, rather than less, attuned to long term shareholder value creation.

    • Marcy Murninghan says:

      Great point, John, and very much in line with our view. There’s no question there should be more meaningful engagement between boards and shareholders — something far more possible now with technology innovations — to facilitate better decisions. We were referring to the tendency to lump shareholders who speak up into one group, and dichotomize their interests as opposed to those of the board.

      At the same time, as in public life, it’s easy to balkanize discussion of shared interests; in this case, there’s an opportunity to avoid those traps, and as you say, look to the long term interests of all–including society and the environment, which is so affected by these decisions. In the end, all shareholder are citizens, too (as well as many other things–employees, customers, parents, and so forth) even if not all citizens are shareholders.

      Thanks so much for your comment!


  4. Pingback: CorpGov.net » SEC Access and Dodd-Frank Calendar

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