Universal Proxies

Scott Hirst is a Lecturer on Law at Harvard Law School and Associate Director of the Harvard Law School Program on Corporate Governance. This post is based on a recent paper by Dr. Hirst, which was also described in a recent Wall Street Journal article.

The Securities and Exchange Commission is expected to soon propose a rule regarding universal proxies. At the urging of investors groups, SEC Chair Mary Jo White has made a universal proxy rule an objective of her tenure. But a rider to a spending bill passed by the House and pending in the Senate intends to prevent a universal proxy rule, on the basis that it might increase the frequency of proxy fights and empower special interests. The debate between these positions has so far proceeded despite a dearth of evidence.

In my paper, Universal Proxies, which was described in a recent Wall Street Journal article, I provide the first economic and empirical analysis of universal proxies. I show that the current system, whereby shareholders vote by unilateral proxies, can create distortions which disenfranchise shareholders. 22% of proxy contests at large U.S. corporations between 2008 and 2015 may have had distorted outcomes that could be prevented by a universal proxy rule. Contrary to concerns raised by its opponents, a universal proxy rule is unlikely to lead to more proxy contests, or to greater success for special interest groups. The significant benefits of universal proxies in eliminating distorted proxy contests outweigh these perceived costs, and would enfranchise shareholders.

The proxy voting system means that shareholders vote on a proxy card distributed by either management or dissidents. Rule 14a-4(d)(1) of the SEC’s proxy regulations, known as the “bona fide nominee rule,” effectively prevents the inclusion of another party’s nominees on a proxy card. [1] As a result, shareholders vote on unilateral proxy cards, and cannot “mix and match” candidates from the two sides, [2] as shareholders could if they were to attend the meeting in person. [3] A universal proxy rule would permit or require parties to include nominees from each side, allowing shareholders to mix and match their preferred nominees.

The paper demonstrates that the consequence of the unilateral proxy system is to distort the outcomes of proxy contests, which may disenfranchise shareholders. The most prominent form of distorted outcome occurs where the split between the number of management nominees elected and dissident nominees elected is different from the split which would have resulted had investors been able to mix and match nominees. For instance, at the 2009 annual meeting of Biogen Idec Inc., two management nominees and two dissident nominees were elected, including dissident nominee Richard Mulligan. Had shareholders been able to use a universal proxy card, management nominee Alan Glassberg may have been elected in place of Mulligan.

Contrary to the beliefs of many commentators, a universal proxy rule is unlikely to significantly advantage dissidents. Distorted outcomes in proxy contests since 2008 have actually favored dissident nominees slightly; a universal proxy would have slightly favored management nominees: 10% of proxy contests may have involved distorted choices of dissident nominees in place of management nominees, and 8% of proxy contests may have involved distorted choices of management nominees in place of dissident nominees. Universal proxies are also unlikely to result in greater success for dissidents with parochial views that are not shared by a significant proportion of shareholders. As a consequence, universal proxies are unlikely to cause an increase in proxy contests.

The paper suggests that the significant benefits of universal proxies in eliminating distorted proxy contests would outweigh the improbable costs foreseen from universal proxies. The net effect of a universal proxy rule would be to better enfranchise shareholders.

The full paper is available here.

Endnotes:

1Other parties’ nominees can be included in proxy cards if they consent, however such consent is generally refused.
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2As explained further in the paper, in the case of a “short slate,” shareholders may be able to vote for certain management nominees on the dissident card, but only those selected by the dissidents, not any other mix that the shareholder may prefer.
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3As explained further in the paper, shareholders wishing to vote for their own mix of management and shareholder nominees can execute a “legal proxy,” for a proxy to vote in their specified way at the meeting. However, this involves certain difficulties, and is rarely used by shareholders.
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