Why Proxy Access Won’t Help
New SEC rules will have little impact on corporate governance.
BY Marcel Kahan, Edward B. Rock | November 22, 2010
(From SSRN) On August 25, 2010, the Securities and Exchange Commission adopted a new set of regulations on “proxy access.” As a result, shareholders in publicly traded corporations will gain the right to nominate candidates for corporate boards and to have their candidates included in the proxy statement and ballots mailed out by the company, and at the company’s expense. Proxy access has been a long standing and highly controversial issue. The SEC has first considered passing rules 60 years ago. Several failed attempts later, over heavy opposition by corporations, and only after a close vote along partisan lines, proxy access will soon become a reality.
But although there is significant disagreement among observers over whether proxy access is desirable or not, there appears to be a widespread expectation that the new rules on proxy access will have major effects on corporate governance. Thus, John Finely, formerly a partner at Simpson Thatcher & Bartlett and now general counsel at Blackstone, remarked that proxy access is “the biggest change relating to corporate governance ever proposed by the SEC.” Corporate Board Member magazine opined that “few things make boards more nervous” than proxy access. The Chamber of Commerce viewed proxy access as “extremely significant” and having “enormous impact” and regarded killing it as being among its top five priorities. David Katz and Laura McIntosh, two lawyers at Wachtell, Lipton, Rosen & Katz, see proxy access as potentially “wreak[ing] havoc with American business” and the SEC’s adoption as “dangerous, unwise and unnecessary.” Michael Garland of CtW Investment Group called proxy access a “new and powerful tool.” Deal Magazine notes that proxy access would make it “dramatically less expensive” for shareholders to nominate directors. Brian Cartwright, the former general counsel to the SEC, regards proxy access as a “grand experiment in politicizing the leadership” of U.S. corporations. The Wall Street Journal has called it a “high stakes issue” and headlined that proxy access would “put heat on firms.” And yet others call the new rules either “groundbreaking” and “historic,” or “fatally flawed” and “a giant step backwards,” and predict either that proxy access will result in “profound changes on the boardroom,” and help “restore shareholder confidence” or that it will “handcuff boards,”generate a “fair amount of litigation” and occupy the SEC for “years to come.” Indeed, the Business Roundtable and the Chamber of Commerce have filed suit to enjoin and invalidate proxy access.
In this Article, we will argue that all of these commentators are mistaken. We predict that proxy access will have little impact on corporate governance and that its net effects will be negligible. Few shareholders will use proxy access to make nominations, few of the nominees will succeed in getting their nominees elected to boards, and the rare nominee who does get elected will make little difference on the way companies are run and have even less of an effect on company value. Read the full article.