SEC Commissioner Troy A. Paredes
What are the the proper limits of shareholder proxy access?
Proposed Exchange Act Rule 14a-11 creates a direct right of access for shareholders to the company’s proxy to nominate board members. For large public companies, a nominating shareholder or group that beneficially owned at least one percent of the company’s shares for at at least one year would have the right to nominate director candidates in the company’s proxy materials. The SEC’s proposal prohibits shareholders from adopting a bylaw to opts out of the Rule 14a-11. Shareholder proxy access is therefore mandatory.
On June 23, 2009, Securities and Exchange Commission (SEC) Commissioner Troy A. Paredes explained why he voted against proposed Rule 14a-11.
Commissioner Paredes’ main concern revolves around the mandatory nature of the rule:
“Mandatory corporate law forces a universal governance scheme on all firms without allowing a firm the flexibility needed to adapt based on its distinct circumstances. Recognizing that one-size-fits-all mandates are inappropriate for many businesses, the enabling approach defers to private ordering, spurred on by market discipline and competition, to determine how each firm should be organized to advance its particular needs and interests most effectively. The internal affairs of each corporation can be tailored to its own attributes and qualities, including its personnel, culture, maturity as a business, and governance practices. Simply put, the same corporate governance regime is not necessarily optimal for a struggling Midwest industrial manufacturer, a small-cap biotechnology company in Silicon Valley, and a dominant financial services firm in New York.”
The Commissioner has two further concerns. First, Mr. Paredes argues that some shareholders will worry that “special interest” directors (e.g., environmentalists, corporate governance activists?) may not have the goal of maximizing firm value. Such directors would not work in the best interests of shareholders. Second, Mr. Paredes believes that the election of certain shareholder nominees — presumably the “special interest” directors — will create too much conflict in the board, thereby undercutting board effectiveness.
Analysis Of Commissioner Paredes’ Arguments
The proposed rule is not as problematic as Commissioner Paredes paints it to be. First, the objection to a uniform corporate governance regime conveniently ignores that uniformity already exists. The SEC’s proxy rules already mandate that information, such as certain shareholder proposals, be included on on the corporate ballot and proxy materials. Further, variation is possible under the proposal, as it would allow companies to adopt arrangements providing shareholders with greater access to the company’s proxy than what the rule requires. Of course, that is not the type of variation that opponents want. For them, the most meaningful variation would be an opt-in system or leaving it up to state corporate law.
Second, the ownership requirements for proxy access increase to 5% for small cap companies. Shareholders who want proxy access at a small-cap cleantech company in Silicon Valley would need a larger block of shareholders than the dominant financial services in New York. This sliding scale further undermines the uniformity argument since ownership requirements for proxy access will vary by company size.
Third, the concern over special interest directors is exaggerated. Special interest directors will have difficulty getting on the ballot because they are unlikely to be nominated by shareholders with sufficient shares in the company. They have difficulty getting elected now even when they are on the ballot. To get elected, special interest directors have to make the case that they represent the best interests of shareholders. That will not change with the proposed rule. Mr. Paredes presents no reason why shareholders would elect directors who would work against shareholders’ interests.
Finally, why are special interest directors likely to tip a board into conflict? Mr. Paredes points out that independent director representation on boards and the separation of the CEO and board chairperson roles have increased. He apprears to believe that these trends have increased “dissension and disruption” on boards. I’d like to know what evidence supports that position. As argued above, shareholders will not elect special interest directors if they do not further the best interests of shareholders. Therefore, Mr. Paredes’ concern that boards can stand any more conflict that special interest directors would bring is misplaced.
http://www.youtube.com/watch?v=BIcNgjqtO8Y&feature=related