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Monday, May 24, 2010

Proxy Access Reform Being Considered by the SEC: An Overview

Gary Shorter
Specialist in Financial Economics

Members of public company boards are supposed to play key fiduciary and management watchdog roles for the shareholders. At annual public company shareholder meetings, incumbent boards submit slates of board nominees for shareholder consideration as part of the official corporate proxy materials and statement sent to shareholders in advance of the meeting. Whereas states like Delaware (the home of a large proportion of sizeable public firms) have largely governed substantive corporate matters for firms that they incorporate, the Securities and Exchange Commission (SEC) oversees matters related to the content of proxy materials. 

Historically, the SEC has interpreted applicable federal securities laws as allowing companies to exclude from proxy materials shareholder proposals involving the nomination of persons to their boards, thus denying shareholders proxy access. Shareholders interested in pushing an alternative slate of nominees for fellow shareholder consideration must bear the printing and distribution costs themselves, which many believe poses a significant obstacle to such proxy fights: there are fewer than 100 a year in a universe of several thousand U.S. public companies. 

In May 2009, for the third time in seven years, the SEC proposed proxy access reforms. The most controversial proposal would amend federal securities laws to give shareholders with certain levels of stock holdings the right to include the names of their director nominees in company proxy materials. The agency observed that it needed to "structure the proxy rules to better facilitate the exercise of shareholders' rights to nominate and elect directors ... " 

The proposal has earned the support of several union and pension funds, including the Council of Institutional Investors, a large investor advocacy group. Opposition to the proposal has come from various U.S. corporations, business advocacy groups such as the U.S. Chamber of Commerce, the Business Roundtable, and the American Bar Association. 

Supporters argue that public company boards, many of whom have chairs who also serve as CEOs, too often display a management bias, inadequately discharging their duty as the shareholders' champions and fiduciaries. By helping to produce boards with greater numbers of directors who are more sensitive to shareholders' needs, and by injecting greater competition into board elections, many supporters of proxy access characterize it as a much needed development. 

By contrast, opponents of the proxy access proposal express concerns that it would usurp traditional state-based corporation laws, ignore strides that have been made in empowering shareholders (including the growing adoption of majority voting), undermine collegiality that is arguably critical to the viability of corporate boards, and subject corporations to a uniform and inflexible regime of proxy access that would be insensitive to their differences. Concerns over the alleged inefficiencies of a "cookie cutter" federal proxy access regime have led many of the opponents of the SEC's access proposal to advocate an "opt out" feature: companies, through shareholder action, would be allowed to adopt bylaw amendments that provided for more restrictive proxy access provisions than are in the SEC access proposal. 

H.R. 4173, the financial regulatory reform bill that passed the House in December 2009, would authorize the SEC to prescribe rules for proxy access. S. 3217, the financial regulatory reform bill currently under consideration in the Senate, says that the SEC "may" prescribe rules giving shareholders proxy access.

Date of Report: May 20, 2010
Number of Pages: 17
Order Number: R41247
Price: $29.95

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