It is a pleasure to be speaking at this timely conference on “Shareholder Rights, the 2009 Proxy Season, and the Impact of Shareholder Activism” hosted by the U.S. Chamber of Commerce. Before I begin, I must remind you that the views I express here today are my own and do not necessarily reflect those of the U.S. Securities and Exchange Commission or my fellow Commissioners.

As a practical matter, public company shareholders are not well-positioned to run the enterprises in which they invest. Managerial responsibility over a firm’s corporate strategy and day-to-day business and affairs instead is in the charge of directors and management. That said, shareholders retain the right to vote on fundamental corporate changes, such as a merger, a sale of all or substantially all of the corporation’s assets, and an amendment to the corporate charter or bylaws. Most notably, shareholders vote for board members. Shareholders also have the right of “exit,” as they can sell their shares if they disapprove of the company’s performance.

The animating question behind any discussion of shareholder rights thus presents itself: What is the proper institutional arrangement for ensuring that the company is managed in the best interests of shareholders when those who own the firm do not actively run it? [1]

Last month, in May, the SEC took a significant step toward setting the balance of control in corporations. [2] The Commission proposed new Exchange Act Rule 14a-11 creating a direct right of access for shareholders to the company’s proxy materials for nominating board members. For example, for the largest public companies, a nominating shareholder or group would have the right to include director nominees in the company’s proxy materials if the shareholder or group beneficially owned at least one percent of the company’s shares for at least one year.

The Commission also proposed amending Exchange Act Rule 14a-8(i)(8) to allow shareholders to include in the company’s proxy materials a proposal to amend the company’s bylaws to provide for a shareholder access regime. Notably, the SEC’s proposal prohibits shareholders from adopting a bylaw that opts out of the Rule 14a-11 access regime, even if shareholders want to.

As you may know, I voted against the Commission’s proposal and instead offered a counterproposal, which I will discuss later. [3] First, let me explain my core concern with what the SEC has advanced. As always, I look forward to considering the comments we receive on the proposal.

(more…)