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SEC Tightens Proxy Access
The Securities and Exchange Commission recently allowed companies the authority to deny shareholders access to board-election ballots. The decision may lead to more stability on companies' executive boards-- or it may simply provide more insulation for existing CEOs.
After much debate and 34,000 letters being sent to the Securities and Exchange Commission by concerned stockholders, the agency recently gave companies the authority to deny shareholders access to board-election ballots. That decision, according to advocates of open governance, could make corporations less responsive to investors' interests and further insulate CEOs from criticism. "I am obviously disappointed," the lone Democratic commissioner on the voting board and the only dissenter, Annette Nazareth, told the Associated Press before the 3-1 vote was cast. She said the SEC's action "stands in the way of shareholders' rights to elect directors." Under the system in place, dissident investors who seek to place like-minded directors on a company's board or change its bylaws must wage expensive proxy fights and appeal directly to company shareholders. "A contest for control of a public company is a disruptive event," says David Mittelman, former legal branch chief of the division of corporation finance at the SEC. "It involves time, energy and money that often is better spent elsewhere. The adverse media and board uncertainty that results from contests for control typically has an adverse trickle-down effect upon management and employees." Mittelman says he agrees with the decision. "[By] reaffirming the status quo ... the SEC did the right thing." But, he cautions, "it will not be the last word. "Allowing shareholder access to the proxy card, while positive in concept, may be negative in practice. It may lead to short-term thinking by directors focused on the next election rather than a long-term view necessary to build share value," Mittelman says. From an HR perspective, he says, long-term thinking and board stability are important in order to maintain morale and retention rates among employees. "And that could be undermined by allowing shareholders to readily access the proxy card," he says. Mittelman, who is now counsel at Reed Smith in San Francisco, says the SEC likely felt pressured to act due to a 2nd U.S. Circuit of the Court of Appeals decision that found in favor of AFSCME. The union had sued insurance carrier AIG after the company rejected a binding shareholder proposal that, if approved, would have amended the company's bylines to permit shareholders to nominate board directors. In that case, the appeals court held that AIG could not rely on an SEC rule to exclude a shareholder proposal, rejecting the SEC staff's interpretation of whether the company's shareholder proposal rule bars proxy access proposals. "The SEC action did not settle the matter, it only postponed it," he says, adding that the agency will continue to grapple with the issue because of pressure from investors, new SEC commissioners and Congress. Harlan Platt, a finance professor at Northeastern University in Boston, says he was "shocked" by the SEC's decision. "I don't think the SEC has done any good for anybody other than existing CEOs," he says. His surprise stems from what he perceives as a years-long march towards more transparency in corporate-governance regulations. "The SEC in last five or six years has adopted an open and transparent position [on a variety of issues], and while this proposal is not a transparency issue per se, it is a democratic-governance issue. ... You would have thought the SEC would have been supportive of a move to allow shareholders to break the logjam of governance, which has stymied so many companies," he says. Platt says the issue of who is sitting on a company's board only becomes a public issue when bad things start to happen. "One of those funny things [that happens] when a company is doing well is that you don't really care who is sitting on the board," he says. "But when it starts to do poorly, then your lack of attention to that detail comes back to haunt you." He cited the much-publicized troubles at high-profile companies such as WorldCom, Enron and Citibank. Platt says he believes the SEC made its decision in order to defuse future problems, "possibly because it was concerned with the amount of noise that would occur with too many director battles needlessly taking place. But the cost of that is that they have really insulated CEOs from pressure from dissident shareholders." "Having an independent board does not mean you're establishing a battlefield," he continues. "It simply means there's more of a check-and-balance attitude in place. It means CEOs are forced to vet their ideas to the board first, and that's all to the good." Platt, who has served on the board of six different companies, argues that having "dissident" or independent directors on a board allows for viewpoints that may oppose a CEO's as well as provides "a second set of eyes" on the business. "I'm amazed that anybody would want to be insulated from such ideas," he says. "I don't think you find the best decision-making in that environment." In response to concerns that the SEC decision will make corporations less responsive to shareholders' concerns, Platt says: "I don't think necessarily they will be less responsive, but I think what it will do is perpetuate a culture where the CEO feels invincible and doesn't really worry about their tenure. They'll be less likely to be cautious, more likely to be rash. ... They simply will be less successful [as it pertains] to the goals of the shareholders. There's a difference."
December 11, 2007 Copyright 2007© LRP Publications |
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