If the third time is a charm, investors might luck into proxy access.
On June 10, the Securities and Exchange Commission released a proposed rule for public comment titled Facilitating Shareholder Director Nominations. The goal of the proposed rule is to give shareholders limited access to the proxy statement of the company to nominate candidates to boards.
Proxy access is a corporate governance regime that would allow shareholders of public companies to include in a company's proxy materials — the proxy statement and proxy voting card — candidates for director nominated by the shareholder in opposition to the company's slate of candidates for election to the board.
But wait, isn't this déjà vu? Indeed, it is more than that — this is the third time around with respect to a rule for proxy access. A little history might help to sort things out.
Rule 14a-8 adopted by the SEC under the Securities Exchange Act of 1934 provides that a public company must include a shareholder's proposal on its proxy card if certain procedural requirements are met. But the same rule also allows a public company to exclude certain shareholder proposals.
For many years, the SEC staff held that public companies had the right to exclude from the proxy statement shareholder proposals that relate to the election of directors. This so-called “director election” exclusion has allowed public companies to ignore shareholder proposals for access to the proxy statement for nominating director candidates.
However, this issue came into question in October 2003 when the SEC — under then-Chairman William H. Donaldson — issued a proposed proxy access rule. That rule proposed that holders of 5% or more of the company's common stock could nominate directors at the next year's annual shareholders' meeting if, at the current shareholders' meeting, there were one of two circumstances where the company was not responsive to its equity owners.
First, if at the current shareholders' meeting, a director nominated by the company received more than 35% of withhold votes (essentially a vote of no confidence for that director), then shareholders could gain access to the company's proxy statement the following year.
Second, if the shareholders submitted a proxy access proposal to the company, and the access proposal received more than 50% of the vote of shareholders, but the company did not adopt the proxy access bylaw.
This proposed rule received significant criticism and resistance from the business community, and subsequently withered on the vine because of a lack of consensus from the then SEC commissioners.
The second chance for access came in 2005 when the American Federation of State, County and Municipal Employees pension fund submitted a rule 14a-8 proxy access proposal to American International Group. The SEC staff permitted AIG to exclude the proposal from its proxy materials under the director election exclusion. However, AFSCME challenged the ruling and a U.S. Court of Appeals in New York overruled the SEC and denied AIG the ability to exclude AFSCME's proxy access proposal from the company's proxy materials.
So the SEC once again reviewed proxy access and in July 2007, under Chairman Christopher Cox, issued two different and, in fact, contradicting proposals. The first, called the “exclusion proposal,” reiterated and justified the SEC's long-standing view that proxy access proposals could be excluded under the director election exclusion.
The second proposal, called the “access proposal,” permitted 5% of the shareholders to submit a proxy access proposal to the bylaws of the company — very similar to the initial proxy access rule that William Donaldson had proposed in 2003.
Predictably, corporate governance advocates such as the Council of Institutional Investors, California Public Employees' Retirement System, California State Teachers' Retirement System, AFSCME and other pension funds supported the access proposal. Just as predictably, the Business Roundtable, the U.S. Chamber of Commerce, public companies, and other business groups supported the exclusion proposal.
In November 2007, after the departure of one commissioner, the SEC commissioners voted 3 to 1 to adopt the exclusion proposal, although then-Chairman Cox promised that the SEC would revisit the issue sometime in the future. Mr. Cox never did review the rule again.
Now shareholders have a third chance to catch the bouquet. In April 2009, SEC Chairman Mary L. Schapiro publicly stated that she supported shareholder proxy access. The SEC staff released an outline of a proposed rule in May and the full text of the rule in June.
The SEC has proposed a new rule — 14a-11 — that explicitly allows proxy access under certain conditions. Second, the SEC proposed to amend rule 14a-8 indubitably to reverse the SEC's vote in 2007 to adopt the exclusion proposal.
Will three times be the charm? It is hard to say, but the battle lines already are being drawn.
With respect to the new proposed rules from the SEC, the U.S. Chamber of Commerce has commented that it is “opposed to a federal shareholder access right” because “there is no compelling reason for a federal access right.” The Business Roundtable has also criticized the SEC for “an unprecedented pre-emption of state corporate law — the bedrock of corporate governance — that will turn the boards of 15,000 publicly traded companies into political bodies and threaten their ability to function.”
What the Business Roundtable and the U.S. Chamber of Commerce may have overlooked is that the bedrock of corporate governance is not state corporate law, it is capitalism. Indeed, capitalism is the foundation of our economic society.
Under a capitalistic regime, shareholders provide risk capital to a company to allow it to grow and generate revenues and profits. However, the provision of risk capital comes with a price. First, capitalists expect a return on their investment in the form of dividends and capital appreciation. Second, shareholders expect to have some say in the business affairs of the company.
Generally, capitalism follows the golden rule: Those who own the gold make the rules. More generally, this means that those who provide the risk capital to a company should have some right to express their views about how the company should be run.
Under our capitalist society, this input is contributed on behalf of shareholders through the board of directors. The directors represent the shareholders, not the company. Therefore, in a capitalist economy it is reasonable to allow shareholders to have some say in the nomination as well as the election of directors to the board.
Undoubtedly, pressure will be brought to bear on SEC commissioners to delay or defeat the proposed proxy access rules. It is a fact of life in our lobbyist-driven political structure.
However, you cannot hold back capitalism — just look at the former Soviet bloc nations if you need a current reminder. This time, I hope that the SEC says, “I do.”
Mark Anson is president and executive director of investment services, Nuveen Investments Inc., Chicago. The views expressed in the commentary are his own and not necessarily those of the firm.
