18 Oct. 2016 | Comments (0)
This post originally was published on the R Street Institute website.
Proxy access is the ability of certain privileged shareholders to have their own slate of director nominees included in the company’s proxy materials whether or not the board of directors approves. Proxy materials include a proxy statement used to solicit shareholder votes and a voting card allowing shareholders to vote without having to attend the annual meeting. So far, there has been much bluster and very little substance in the debate on proxy access.
For example, the Council of Institutional Investors (CII), a nonprofit association representing the interests of public pension funds and labor union–related entities, has for many years strongly endorsed the position “that proxy access is a fundamental right of long-term shareowners.” But where does the authority for that statement come from?
As it turns out, long-term shareholders have never had a fundamental right to proxy access under either corporate or federal securities law. The only requirement in terms of director nominations is that at least some shareholders must have the power to nominate directors at the annual meeting itself.
On efficiency grounds, proxy access may have value where the investor base is made up primarily of informed investors, but it does not make any practical sense in the context of a large public company with thousands of shareholders, both institutional and retail, who are overwhelmingly uninformed about the critical aspects of how the companies they invest in operate or are managed. Proxy access as a fundamental right may be screamed from the rooftops, but it adds very little to the substantive debate on proxy access, a debate which has yet to really get started.
To help allow a substantive debate on proxy access to begin, I have recently published a Mercatus Center working paper entitled, What Theory and the Empirical Evidence Tell Us about Proxy Access (forthcoming, Journal of Law, Economics & Policy). This study provides a theoretical framework that puts the board in control of proxy access and also does a comprehensive review of the empirical research that has so far been done on proxy access. Within this framework and review, three primary arguments are made:
- The SEC’s current regime of proxy access, by no longer allowing companies to exclude shareholder proposals on proxy access from their proxy solicitation materials, should not be understood as an enhancement to the “private ordering” of a company’s governance arrangements. Rather, this regime acts as a federal barrier to the more efficient approach of board-initiated proxy access. Therefore, this study recommends that the SEC return to its traditional approach to proxy access, allowing a board to omit shareholder proposals on proxy access from a company’s proxy materials at its discretion.
- The superiority of board decision-making in the context of proxy access creates a presumption that universal proxy access (mandatory proxy access for all public companies) is an inefficient and unnecessary means of nominating and electing directors.
- That presumption can be rebutted with empirical evidence that consistently shows, at a high level of statistical significance, that universal proxy access is wealth-enhancing for shareholders. That premise is required as the null hypothesis to be tested and can be stated as follows: the “preservation of managerial discretion” in the nomination of directors is wealth enhancing for shareholders. However, the empirical evidence does not currently exist to reject the null hypothesis. As a result, it would be reasonable for the SEC to keep universal proxy access off its agenda.
I have also written two additional articles that are more narrowly focused and are essentially spin-offs of the working paper, Critiquing the CFA Institute’s Report on Proxy Access (R Street Institute Policy Brief) and What Shareholder Proposals on Proxy Access tell us about its Value (forthcoming, Yale Journal on Regulation Online). The first article is a critical review of the CFA Institute’s report on proxy access, a report that was originally written to encourage the SEC to put universal proxy access back on its agenda. As explained in my review, the report is full of errors and rife with contradictions and practices of questionable methodology in its estimation of the dollar value of universal proxy access. As stated in my policy brief, “A closer look reveals shortcomings that should disqualify the CFA (Institute) report from being used as support for mandatory proxy access; for shareholder proposals on proxy access; for board discussions about whether a proxy-access bylaw should be implemented; and, perhaps most importantly, for board discussions about whether a proxy-access bylaw needs to be rescinded.”
The second article reviews the only empirical work to date that tries to estimate how much the stock market values shareholder proposals on proxy access. My findings are that while the study is an important first step to understanding the value of proxy-access proposals, to become truly informed about its value, much more data and analysis is required; something that will most likely take a number of years to produce. I believe the working paper and the two spin-off articles form a critical mass of analysis that will allow for a substantive debate on proxy access.
I am hopeful that this debate will begin no later than the start of the 2017 proxy season when the next round of shareholder proposals on proxy access are submitted to public companies. In order to participate in this upcoming debate, I encourage you to read these writings.
The views presented on the Governance Center Blog are not the official views of The Conference Board or the Governance Center and are not necessarily endorsed by all members, sponsors, advisors, contributors, staff members, or others associated with The Conference Board of the Governance Center.
 Council of Institutional Investors, Proxy Access: Best Practices 2 (Aug. 2015), available at http://www .cii.org/files/publications/misc/08_05_15_Best%20Practices%20-%20Proxy%20Access.pdf.  Lawrence A. Hamermesh, Director Nominations, 39 Del. J. Corp. L. 117, 150–51 (2014).  Id.