Proxy Access is Back to Life

Media reports indicate that last night, as part of the agreement of the senators and representatives on the conference committee regarding the financial reform overhaul, the senators agreed to withdraw the proposal they made last week to impose a hard wired 5% ownership threshold proxy access, and the proxy access provisions in the financial reform bill are now expected to affirm the authority of the SEC to adopt a proxy access rule without limiting the SEC’s discretion to set standards and thresholds.

This is a welcome development. As Lucian Bebchuk explained in an op-ed  in the New York Times’ DealBook section on Monday (available on the Forum here), adoption of the senators’ proposed amendment would have been a serious setback for investors and for governance reforms.  Hard wiring thresholds into legislation is inferior to letting the thresholds be set by the SEC, and adjusted over time as circumstances warrant. Furthermore, a 5% threshold would have made the proxy access provisions largely irrelevant for most long-term institutional investors, whose involvement in the director nomination process the proxy access reform is intended to facilitate.

We now expect the ball to move to the SEC’s court.  Indeed, we hope that the discussions of the last week will highlight for the SEC the dangers of setting excessive thresholds. A comment letter filed with the SEC by a bi-partisan group of eighty professors of law, business, economics, or finance in favor of facilitating shareholder director nominations (which is available on the Forum here) stated as follows:

“In designing the final rule, the SEC should be careful to avoid eligibility or procedural requirements that would undermine or unnecessarily detract from the Proposed Rule’s value for investors. In evaluating these requirements, it is important to keep in mind that, no matter how moderate eligibility or procedural requirements may be, shareholder nominees must still meet the demanding test of getting elected before they can join the board. A shareholder nominee will join the board only if the nominee obtains more votes than the incumbents’ candidate in an election in which incumbents, but not the shareholder nominee or the nominator, may spend significant amounts of the company’s resources on campaign expenses.

In evaluating eligibility and procedural requirements, the SEC should also keep in mind that many institutional investors lack incentives to invest actively in seeking governance benefits that would be shared by their fellow shareholders. Accordingly, the final design of the rule should avoid imposing any unnecessary hurdles or costs on shareholders organizing or joining a nominating group.”

With Congressional affirmation of the SEC’s power to adopt a proxy access rule and to determine its design, we hope that the final design of the rule will indeed avoid imposing any unnecessary hurdles or costs on shareholders organizing or joining a nominating group.