Friday, July 22, 2011

Proxy Access for all the Wrong Reasons

The Supreme Court recently tossed out a rule approved by the Securities and Exchange Commission that would have given certain large shareholders a means to put director nominations on proxy ballots.  Referred to as the “proxy access rule,” it was a part of the sweeping reforms adopted over the past two years to response to the apparent failure of some boards of directors to curb excessive risk taking and imprudent business practices. 

The Proxy Access Rule was to give large shareholders a means to place board nominees on company-mailed proxy ballots along with the preferred list of nominees offered by management and the existing board of directors.  This would eliminate the need for an institutional shareholder to spend its own money send out a separate ballot. Proponents argue that the status quo shelters bad leadership by making it difficult for shareholders to make nominations to the board.  The SEC had made the original proposed rule in May 2009, and finally approved it in August 2010.

It is true that at present it is difficult for shareholders to impact the nomination and proxy ballot process.  Shareholders can write letters until their fingers bleed, but their nominations may never see the light of day, if they do not otherwise get a majority of other shareholders to get the nomination on the ballot.  It is clearly an expensive and daunting undertaking. 

That large institutions should have this privilege while other shareholders with smaller holdings do not is another matter.  The Proxy Rule, as the SEC approved it, left much to be desired in my view.  More about this later….

The matter ended up at the feet of the High Court after a couple of heavy hitters, The U.S. Chamber of Commerce and the Business Roundtable, filed a lawsuit against the rule in late 2010.  Such challenges against federal rules automatically go directly to the Supreme Court.  The Chamber alleged in its suit that proxy access of this nature is a distraction for management and could be costly for public companies.  They also alleged that it would benefit labor unions and empower environmentalists who would take positions in companies for the purpose of taking over the board room with their own nominees.

Perhaps the Chamber has a point regarding the benefit to labor unions and empowerment of environmentalists.  Then again, that is the entire purpose behind the Proxy Access Rule  - to benefit and empower those who are harmed by the capricious actions or inaction of incompetent, lazy directors.  There appears to be an inherent assumption in the Chambers’ suit that the interests of labor or the environment are questionable and directly oppositional to the corporation.  All the more reason to keep corporate boards under close scrutiny!

If was unfortunate that the Chamber fought a bad rule for all the wrong reasons, it is an even greater disappointment that the Supreme Court used even worse logic to strike down the rule.  The High Court’s Ruling found that the rule was improperly promulgated because the SEC failed to fully investigate the costs to corporations to fight shareholder nominees. 

Apparently, the judges were able to keep a straight face while handing down this ruling.  Personally, I find it laughable to think that having to put a name on a ballot is going to “distract management.”  The added cost of a lengthier ballot would likely be nominal.  These are the corporations we all know and unfortunately in which we sometimes own stock.  We observe their boards approving multi-million bonus packages for senior management without a moment of hesitation, but a few extra dollars for a proxy ballot is considered a hardship that could bring about the ruin of the entire organization. 

I was not sorry to see the Proxy Access Rule struck down.  I found it a highly undemocratic approach when all shareholders are supposed to have one vote for each share of stock they own.  Giving access to the proxy to select few institutions rendered some shareholders more powerful than others.  The Chamber wants to fight the special interests of labor and environmentalists.  At least these interests are transparent and largely in alignment with the interests of other shareholders. 

Consider the interests of a hedge fund.  Theirs are self-interests not disclosed publically.  The Proxy Access Rule opened the door to the placement of directors on boards who could influence corporate direction to fulfill this unknown interest. Now that is a real reason to fight and strike down the Proxy Access Rule.

It is unfortunate, that no one in the discussion has had the gumption to stand up for the rest of the shareholders.   Minority shareholders across the board can be harmed by incompetence and self-interest in the boardroom whether it is at the hands of the CEO’s cronies from the golf club or the stock broker toady of a hedge fund.

The SEC is now free to try again for a Proxy Access Rule.  They simply need to engage in a more thoughtful process.  The implication of the Supreme Court ruling is that the thought must go into how to protect management and directors from any kind of discomfort.

Why bother?  There is a way to deal with lousy management and even lousier leadership around the boardroom table.  Sell the stock short!

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