July 20, 2010
Dodd-Frank Forum: Finally, Proxy Access?
Posted by Lisa Fairfax

I certainly agree that the reform bill falls short in a number of important ways, and I also concur with Kim's assessment that the bill punts a lot of the significant issues to regulators.  This includes proxy access.  That is, with respect to proxy access, the bill does not spell out any particulars, but instead Section 971 grants authority to the SEC to issue proxy access rules under terms and conditions it deems appropriate to protect investors and safeguard shareholders' interest.  Should one view that grant of authority as a positive development?

To be sure, there is considerable debate about the relevance of proxy access to the financial crisis and recovery effort.  One the one hand, as the Wall Street Journal notes, some advocates of proxy access place "blame for much of the recent financial crisis on a lax culture inside corporate boards," and presumably believe that proxy access can counteract that culture.  On the other hand, opponents, like the head of the Business Roundtable, insist that provisions like the proxy access rule are "totally unrelated" to the financial crisis.  Even those who may acknowledge some connection between the financial crisis and issues of board accountability sought to be addressed by proxy access, nevertheless contend that the web of issues that triggered the financial crisis are far too complex to be resolved by a proxy access rule.

There is also debate about the benefits of the specific proxy access provisions contained within the bill.  Indeed, the provisions do not mandate proxy access, but rather toss the ball back in the SEC's court.  The SEC's history of proposing and abandoning proxy access rules suggest that it has managed to fumble that ball on a number of occasions (which may be good or bad news depending on your views with respect to this subject).   From this perspective, the reform bill may not have any impact on the passage of a proxy access rule.  However, proxy access advocates may nevertheless view the rule as a net positive for at least three reasons.  First, perhaps the SEC is in the best position to shape the specifics of a proxy access rule, and hence advocates would rather that the ball be in the SEC's court.  Second, the final bill leaves out the 5% ownership threshold that most proxy access advocates found objectionable.  Third, the SEC may have been waiting for the grant of authority to make its next move.  Indeed, just last week the SEC sought public comments on a variety of issues associated with proxy mechanics.  This release, coupled with the specific grant of authority by Congress, may be viewed as setting the stage for proxy access.  In this respect, the provisions may have been a necessary pre-condition to the SEC's proxy access rule.

Of course, the biggest area of contention has always revolved around the potential impact of a proxy access rule on issues of board governance, accountability, and misconduct.  At the very least, it does not seem likely that the rule will sit idle.  This report from the Wall Street Journal indicates that investors like Calpers are gearing up to take advantage of proxy access by generating a list of potential board candidates to nominate at poorly performing firms.  And what will happen if those candidates manage success in their election runs?  Opponents predict dire consequences.  In fact, in his proxy access discussion, Bainbridge quotes the National Association of Manufacturers as predicting that proxy access will unleash "an onslaught of activists trying to manipulate the proxy process to force corporate decisions that adversely impact shareholders as a whole in order to further their parochial social or political agenda."  Needless to say, proxy access advocates clearly hope for more positive developments. 

Ultimately, if the reform bill has managed to make proxy access a reality, then at the very least it will be responsible for finally resolving the long-standing debate about the benefits of such access.  Time will tell if such a resolution is a good or bad thing.

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