SEC "Proxy-Access" Rule Won't Really Help Shareholders Manage Big Companies
AIG chairman Robert Miller worries that the SEC's new "proxy access" rule allowing shareholders to nominate corporate directors at public companies will cause "people with narrow-interest agendas" to seek a place on the board, "eroding" the firms' competitiveness. I can think of something else that might erode a company's competitiveness.
The idea that giving investors more say over corporate governance will allow "special interests" to hog-tie management and pursue their agenda, to the detriment of other shareholders, is silly. Here's why: Any board candidate, whether backed by shareholders or the company, will still require majority support to get elected.
Could investors wishing to, say, force a giant, rather self-destructive insurance company to bail out of China because of the country's deplorable human rights record ever succeed in putting a board candidate on the ballot? Sure, could happen. But that nominee would have no chance of winning a seat on the board. That's because most investors -- and certainly the money managers whose jobs depend on maximizing shareholder value and who do much of the voting -- care chiefly about a company's stock price, not its record on social issues.
Another aspect of the proxy-access rule curbing the power of investors is that companies are required to include only a single shareholder-backed candidate on the proxy. Shareholders also are limited to nominating no more than one-quarter of the directors on a company's board.
While business groups are yelling bloody murder, there's good reason to think that opening up corporate proxies will make boardmembers more accountable to shareholders, a hallmark of good governance. "This is a victory for shareholders and an important step toward corporate accountability," Jennifer Taub, an expert in corporate law and governance at the U. of Massachusetts, told me. "Finally allowing shareholders to have at least one of their nominees, and up to 25 percent of the board nominees, included on the official ballot is a meaningful breakthrough."
In a seminal 2003 paper, noted governance expert Lucian Bebchuk of Harvard also pointed to research showing that companies that make it harder to remove directors tend to perform worse and have less value:
[T]he evidence indicates clearly that current levels of insulation [of directors] are costly to shareholders and the economy. It thus provides general support for reforms that would reduce management's insulation, and providing shareholder access to the ballot would be a moderate step in this general direction.Most important, the current system for electing directors improperly shuts shareholders -- a company's owners -- out of the process for choosing management. Writes Nell Minow of The Corporate Library, a governance research firm:
The very term "election" is absurd in this context. Edward J. Epstein has said that shareholder elections "are procedurally much more akin to the elections held by the Communist party of North Korea than those held in Western democracies." Under the current system, management picks the slate of candidates, no one runs against them, and management counts the votes. Managers even know how shareholders vote. As soon as the votes come in, they can call and try to persuade (or pressure) those who vote against them. And, of course, management has access to the corporate treasury to finance its search for candidates and solicit support for their election, while anyone running against them must put up their own money.Yet while the SEC rule is good for investors in principle, it remains to be seen how good it will prove in practice. The biggest concern is the stringent restrictions on who may nominate directors. To run a slate of candidates, shareholders must own at least three percent of a company's stock for a minimum of three years. Trouble is, shareholders rarely, if ever, own that large a stake in big companies.
For instance, the 20 biggest public retirement funds own only 2.8 percent of Goldman Sachs (GS) -- combined. The 10 largest pension funds hold less than 2.5 percent of Bank of America (BAC). Of the 20 largest U.S. companies by market cap, the smallest investment a shareholder would need to have in a company to qualify to nominate a director is $3.5 billion.
Shareholders would've benefited more if the SEC had stuck with its original proxy-access proposal, which established a tiered ownership threshold with shorter holding periods. Under that plan, shareholders would've needed to hold only one percent of the biggest companies for a year to nominate boardmembers. The minimum stake for midsize companies was set at three percent, while shareholders would've needed to own five percent.
Under the rule that was adopted, by contrast, shareholders stand to gain more influence over smaller companies, but not over big firms. "The restrictions in the final rule impose unfortunate limits on its practical use," said Taub, noting that only a third of public companies have a single institutional shareholder who meets the three percent threshold.
It's also unclear what enabling shareholders to nominate directors would do to prevent financial firms from acting recklessly. As I've noted before, shareholders of big banks encouraged them to roll the dice in the years leading up to the housing crash. Everyone was making money, and investors were well aware that taxpayers would be dragooned into rescuing the firms if disaster struck. Even if boardmembers at AIG or Citigroup (C) had been on the ball, in other words, there's still every chance the companies would've gotten themselves -- and us -- in trouble.
Image from Flickr user Altemark
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