Corporate Governance

Shareholder Access Redux (Part 5)

By J. Robert Brown

We are examining the decision by the Commission to deny shareholders access to the company's proxy statement for their nominees. As part of the process, we are examining the history of access. Much of what is written can be examined in greater detail in my paper, The SEC, Corporate Governance, and Shareholder Access to the Board Room.

The first official surfacing of concern over access since the efforts in 1942 occurred when the Commission decided to hold public hearings on the proxy rules in the aftermath of the corporate bribery scandals arising out of the Watergate investigations. The hearings planned to address, among other things, whether "shareholders [should] have access to management's proxy soliciting materials for the purpose of nominating persons of their choice to serve on the board of directors," a topic that included restrictions on the authority. The Commission acknowledged that nominations taking place at the meeting were “of little practical value, since at that point proxies have already been received by management for the nominees it has chosen, and the number of shareholders attending an annual meeting typically is insignificant.”

At the hearings, predictably, “most corporate commentators were opposed” to allowing shareholders the right to include their nominees in the company’s proxy statement. The objections were familiar, with some contending that shareholders really did not want the authority (shareholders “were apathetic” and not in a position “to evaluate the qualifications of nominees”), others that it would have a disruptive impact on the board (shareholder nominations would “politicize the board, thereby diluting its effectiveness and reducing the accountability of board members”) and still finally others contending that it would discourage good candidates from serving (“good candidates for the board would be discouraged if they had to ‘run’ for office.”).     

Although not fully agreeing with the objections, the Commission opted not to allow access but instead opted for a milder, less controversial, approach. Companies would be encouraged to set up nominating committees and implement procedures designed to encourage the submission of shareholder nominees. It was hoped that the approach would encourage communications and even negotiations between management and shareholders, arguably reducing the need to include nominees in the company’s proxy statement. But of course the right to submit nominees to nominating committees did not guarantee that they would be considered seriously. See Exchange Act Release No. 48626 (Oct. 14, 2003) (“While security holders can recommend a candidate to a company's nominating committee, security holder comments suggest that these recommendations rarely are effective”).

Predictably the approach did not work. For one thing, companies had little incentive to respond to bureaucratic prodding. For another, improved communications did not obviate at least the occasional need for shareholders to include their own nominees in the company’s proxy statement. As a result, public companies did not respond vigorously to the efforts. A study of the 1979 proxy season revealed that only 29% of companies had a nominating committee and only 78% of those considered shareholder nominations, results described by the staff as “disturbing.” 

A staff report called for another year of study but warned that a proposal to give shareholders greater involvement in the nomination process could still emerge. "If there is not a substantial increase in the percentage of companies with independent nominating committees who consider shareholder nominations, the Commission should authorize the staff to develop a rule to require companies to adopt a procedure for considering shareholder nominations."  The numbers improved, providing an excuse for further delay. The delay proved terminal, at least in part because of regime change at the Commission.

With the energies of the Commission spent, efforts shifted to self help, something aided by a sympathetic staff.  Although continuing to prohibit the use of Rule 14a-8 for the nomination of specific individuals, the staff took a more liberal approach towards proposals that, if adopted, required management to include a shareholder nominee in the company’s proxy statement. Through the 1980s, the staff declined to allow companies to exclude these proposals.  Shareholders, therefore, received a form of access, without having to undergo the formality of, and controversy surrounding, an amendment to Rule 14a-8.  

The approach generated little controversy. It provided access to the proxy statement for nominees but only if the requisite bylaw was first adopted by shareholders. Proposals made in the 1980s came from individuals, not large institutions. Moreover, they invariably failed. Thus, they posed little threat of actual election of shareholder nominated directors.  By the end of the 1980s, however, the calculus changed. The era of institutional activism had erupted. To the extent activist shareholders got behind access proposals, the odds of passage increased substantially. Perhaps aware of this possibility, the staff undertook a 180 degree shift and, without explanation, issued a no action letter in 1990 agreeing that access proposals could be excluded under Rule 14a-8.

The staff, therefore, cut off the mild form of access to the proxy statement for shareholder nominees.  As shareholder activism grew, however, pressure would build for increased access.  One wonders whether the administrative decision to eliminate access would prove to be another Pyrrhic victory.

Full post as published by The Race to the Bottom on June 06, 2008 (boomark / email).