The Securities and Exchange Commission is clashing with itself over "shareholder access." That term, in plain English, involves providing shareholders with the right to use the company proxy statement to nominate an opposing slate of directors and to use the company proxy card to collect votes for the opposing slate. Corporate lawyers view that process as a proxy fight and view the SEC mandate as limited to disclosure. Some Commissioners and some staff view the process as promoting shareholder democracy and view shareholder democracy as part of its legislative mandate.
No one can predict what the SEC will do. History is instructive, however. The SEC rules that mandate a corporation to include shareholder proposals in a company proxy statement have been around for over six decades. The SEC studied "shareholder access" for nominations several times since the 1940's but took no action. In 2003, the SEC published a proposal to allow shareholder access by significant shareholders if previously a shareholder proposal garnered majority support. That proposal was one of several in that era which split the Commissioners. Commissioner Paul Atkins, who remains on the SEC, questioned the authority of the Commission to adopt the proposal. The business community attacked the proposal. Eventually the SEC took no action.
In early 2005, the American Federation of State, County and Municipal Employees' Pension Plan ("AFSCME") submitted a shareholder proposal to AIG to amend AIG's by-laws to permit shareholders to nominate directors if certain conditions, similar to the SEC proposal in some ways, were met. The SEC staff allowed AIG to exclude the proposal and AFSCME sued AIG. The Federal District Court upheld AIG, but AFSCME appealed. The Court of Appeals at oral argument asked for the SEC's position. Both AIG and AFSCME sought the help of the SEC in an amicus brief. The Commissioners could not agree on what to do. Instead, the Commission allowed the staff to submit a brief supporting the staff's historical position. The Second Circuit, on September 5, 2006, ruled against the SEC interpretation, in essence authorizing shareholders to submit "shareholder access" by-laws at least in a case covered by the Second Circuit.
The SEC reacted immediately, issuing a press release announcing that at the Commission meeting on October 18 it would consider a proposal in response to the Second Circuit decision.
But no action was taken at the meeting on October 18. On October 19, Commissioner Roel Campos, in a speech at the Willamette Securities Regulation Institute, suggested that the proposal for the October 18 meeting may have been to reverse the ruling of the Second Circuit and insisted the Commission had to take the opportunity to fashion a shareholder access proposal. He also noted that if nothing were done, the Second Circuit case would provide "a court-imposed pilot program." However, the SEC released an agenda for its December 13 meeting which again included consideration of a proposal on the issue. At the American Bar Association Federal Regulation of Securities meeting on December 1, both John White, Director of the Division of Corporation Finance, and Commissioner Annette Nazareth talked extensively - although vaguely - about the upcoming Commission meeting on the proposal and what might be done. Nonetheless, early the next week, without fanfare, the item was dropped from the agenda of the December 13 Commission meeting. At the ABA meeting, the SEC leader for the group that reviews shareholder proposals stated the SEC had received one "shareholder access" by-law proposal with respect to Hewlett-Packard Company.
Chairman Christopher Cox is known to prefer to avoid dissension at the Commission. But dissension there clearly is, both among the Commissioners and between the staff at Corporation Finance and the Commission that will not support the long-standing staff position. So is Commissioner Campos getting his way, a "court-imposed pilot program?"
Shareholder proposals are both serious and silly. For example, Exxon Mobil Corporation had 15 shareholder proposals at its annual meeting. One shareholder felt it was necessary for him to speak to all 15 proposals. When he also was first in line to ask questions after the proposals were voted on, the Chairman and CEO, to the applause of the audience, asked him to step aside. Institutional shareholders take these matters seriously, but for a variety of reasons. And, as in politics, the most vague and most populist proposals garner the most votes. And would not hedge funds be happy to have a cheaper method of running election contests and getting the company sold?
Imagine sitting on the board of a large corporation, like GM, Citigroup, Pfizer or Exxon Mobil, where risk management is one of the highest and most difficult priorities. Is facing the possibility of annual election contests because of minority or even majority dissent helpful to you? Is being part of a court-mandated pilot program helpful to focusing on your fiduciary duties?
Mandating democracy in corporate governance is nothing like what motivated us to transform Iraq into a "democracy." But the SEC leadership that puts U.S. publicly traded business corporations in this position has the same limits on its circumspection. Mandating shareholder democracy for corporations will not cause immediate chaos. On the other hand, is it not likely to lead to more companies going private and being sold to private equity firms, and to more hedge fund profits? And eventually it will lead to a further decline, even if incremental, in the U.S. securities market.
We expect the SEC to focus on full and fair disclosure, to make the U.S. financial markets a robust, admirable and respected model for transparency. Shareholder access does not advance that cause.
Published January 1, 2007.