The Securities and Exchange Commission got it just about right with its new proxy-access rules for investors.
One indication that the new rules strike an appropriate balance is that the stock market greeted them with equanimity, neither surging nor plunging.
The new rules give significant long-term investors a meaningful say in company oversight at the board level without exposing companies to capture by special interest groups, unions and, too often, their public pension fund allies.
Investors now have the right to have their nominees for boards of directors included on the standard corporate ballots distributed to shareholders before annual shareholder meetings, if they own at least 3% of a company's stock, and have held the shares for at least three years.
In addition, dissident shareholders can nominate no more than 25% of the board, and cannot use the new power to seek a change in control at a company.
Until now, those wishing to challenge board members had to bear the cost of mailing separate ballots and waging campaigns for shareholder support. The significant costs of these activities deterred most groups from challenging entrenched and underperforming boards.
Now, in effect, all shareholders will bear the costs of such activities, as they do the election activities of the company-nominated directors.
Until now, most corporate boards have been insulated from shareholder input on their performance, except when a group such as the Council of Institutional Investors made itself heard. But such groups could target only a few underperforming companies a year.
In fact, corporate democracy has until now resembled nothing so much as the democracy of the politburo of the former Soviet Union, where an old-boy network selected Communist Party members for membership, and most stayed on it until retirement or death.
Likewise, most directors have been nominated by corporate chief executives and top management, often on the basis of friendship, and once elected remain on the boards until retirement or death.
Shareholders, because of the costs of a proxy battle, had little hope of forcing the replacement of even one director, even when boards had failed miserably to take action against poorly performing corporate managements.
Those opposing changes in the proxy rules have argued that changes in the long-standing rules would open corporate managements to pressure from groups pushing the interests of a few at the expense of the many shareholders.
They argued that union pension funds might put union representatives on the boards to pressure management to accept unionization of a company, though it might not be in the interests of most shareholders.
At the very least, competing interest on the boards could be significant distractions to corporate management, hurting corporate performance rather than helping it.
Those campaigning for greater shareholder democracy have argued that some managements and boards have run companies in their own interests, not in the interests of all shareholders, and point to excessive top management compensation as evidence. They also argue that large stockholders, such as public employee pension funds, have significant parts of their assets in stock index funds and thus cannot sell their shares.
Besides, they have argued, the shareholders own the company and should have more say in its management.
The SEC has provided that. With the 25% limitation, and the three-year, 3% holding requirement, the agency has given shareholders an avenue to ride herd on boards of directors and top corporate management, without giving special interests too much power.
Those opposed to the new rules can undertake a legal challenge, sparked by comments by SEC Commissioner Kathleen Casey, who declared them “fundamentally and fatally flawed,” so their implementation might be delayed.
But when the changes take effect, they are likely to inspire directors to pay more attention, and to oppose top management more often when they are uncomfortable with the company's direction. n
