Corporate Board Member recently sat down with Colin Diamond, a partner in White & Case LLP’s New York office, to discuss proposed rule amendments issued by the US Securities and Exchange Commission on May 20 that could dramatically change proxy rules and shareholder access rights.
Was there anything surprising about the SEC’s proposal?
I don’t think there was anything surprising about it. It’s been long in coming and long discussed. I do think that there are aspects of the proposal that are likely to be subject to significant discussion and then, obviously, the concept underlying the entire proposal is still likely to be subject to discussion. Boards probably need to reconcile themselves with the reality that shareholder access is going to come in some form or another, but whether it will come in the form of a single federally mandated solution for all companies or whether the SEC might still pull back and provide for an individual company and state-by-state solution remains to be seen.
What can boards of directors do during the 60-day comment period to educate company management on the possible changes brought about by the SEC’s proposal?
I think the first thing is to recognize that shareholder access is likely to come in some form or another. So point one is to educate themselves about the concept. I think in the 60-day period if companies do have views on the proposal then through the organizations that represent either boards of directors or governance professionals, they should make those views known and I assume that some companies may choose to make those views known directly to the SEC. I do think the value of the SEC process is that they take comments seriously and, even if it is not possible to fundamentally change the entire proposal, if it is going to be implemented, boards can at least take steps to get aspects of it to work a little better and be a little more favorable to companies.
The other thing I would say is that irrespective of whether this passes SEC’s proposed form or some other form, boards need to be increasingly attuned to the importance of engaging with their significant shareholders on an ongoing basis. Many boards have already adapted to that new reality, but it’s very hard to view proxy access in isolation. I think it has to be viewed in the context of majority voting, which has now sort of swept the S&P 500 and most large companies. The final thing that I think companies need to be aware of is the possibility that the SEC’s rule on director annual elections may be amended so that brokers no longer have discretionary voting over shares in connection with director elections. What that means is that retail shareholders are going to lose even more clout and the institutional shareholders, who are more likely to vote, are going to have greater clout. That, again, is another reason why boards should be focused on how to engage with their shareholders during the year to avoid problems coming up now that shareholders have greater means of influencing companies.
What are some of the big-picture perspectives boards should be cognizant of relative to this proposal?
From a big-picture perspective, one of the reasons not to rush with this is that states and shareholders, together with companies, have tended to be very successful in addressing shareholders’ needs. We’ve seen change over the course of time. And so we think one thing the SEC should really consider is not to impose a single solution on all companies, but instead to allow shareholders to propose different forms of proxy access for their particular companies based on the particular state in which they are incorporated. We think that’s the best way to go, assuming that proxy access is going to be a reality. One state, North Dakota, has already essentially mandated proxy access. Delaware has expressly permitted it and the other states would likely allow it since there’s nothing in their statutes prohibiting it. The point is that shareholders can make proposals for companies to reincorporate or can simply make proposals for proxy access. Current SEC rules don’t permit those proposals to be included in a company’s proxy statement and our view would be that it’s sufficient to allow those proposals to be included and if there is support at that particular company those proposals would doubtless be passed.
Assuming the SEC doesn’t go that route and instead adopts a solution that is intended to apply to all public companies, just one example of the type of thing we think would need to be fixed in the current SEC proposal is that the first shareholders to file details of their nominees are the ones that will be given precedence if the total number of nominees exceeds 25% of the board. We think this notion of people rushing to file their nominees as early as possible in order to get precedence is not the best way; rather we think deference should be given to the larger stockholders. Having people all run to file as fast as possible and someone getting in two seconds before someone else seems like an arbitrary way to make that determination. I suspect that if this proposal survives review, then at least part of the comment process will iron out some of those kinks and at least make it a process that is workable and fair to all stockholders.
The US Chamber of Commerce has come out in opposition of the proposal. Where do you see support and opposition coming from on this issue?
I think there will be a wide range of views. We see that from the SEC approval process of the rule proposals—three votes for, two votes against. The commissioners themselves are split on this, and both sides have tried to put forth persuasive arguments. What I do think we might see, though, is reconciliation to the fact that there’s going to be some form of proxy access. And I would expect that some of the people who are against proxy access in any form might move to that position as one that still takes account of the primacy of state corporate law and gives deference to shareholder democracy, rather than just picking one solution and imposing it on every public company in the country.
In closing, is there anything else pertinent for corporate boards to bear in mind as this proposal is debated over the next 60 days?
The only thing I would say is that this proposal is important, and clearly has the potential to fundamentally shift the relationship between a company’s shareholders and the company. That said, I think boards should also continue to view it in the context of everything else that’s going on. We haven’t even talked about e-proxy, but e-proxy is also a means where dissident shareholders can, on a fairly small budget, attempt to influence elections. Then there is the proposal to eliminate discretionary voting of shares by brokers in director elections. There’s also the trend towards majority voting. So in light of all of this, I would advise boards to speak to their advisers. It may be worthwhile to have someone come in to the board and put this rule proposal in context. There have been a lot of other things going on over the course of last year, and the year before, and we have additional rules in the pipeline, including the Shareholders Bill of Rights that’s being proposed in the Senate.
This article was published in a slightly different form in the May 29, 2009 issue of the BoardMember.com