The Harvard Law School Program on Corporate Governance recently issued our paper, Private Ordering and the Proxy Access Debate. The paper can be downloaded here.

The paper addresses key objections raised against the SEC’s proposal to provide shareholders with rights to include shareholder nominees for election as directors on the company’s proxy statement. Opponents have argued that a preference for private ordering and a recognition that “one size does not fit all” support retention of the current default rule that prevents shareholder nominees from being included on the company’s proxy. We show that this is not the case.

First, opponents argue that, even assuming proxy access is desirable in many circumstances, the existing no-access default should be retained and the adoption of proxy access arrangements should be left to opting-out of this default on a company-by-company basis. Our article identifies strong reasons against retaining no-access as the default. There is substantial empirical evidence indicating that insulating directors from removal is associated with lower firm value and inferior performance. Furthermore, when opting-out from a default arrangement serves shareholder interests, a switch is more likely to occur when it is favored by the board than when disfavored by the board. We analyze the impediments to shareholders’ obtaining opt-outs that are favored by shareholders but not the board, and we present empirical evidence indicating that such impediments are substantial. The asymmetry in the reversibility of defaults highlighted in this article should play an important role in default selection.

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