September 02, 2008
Proxy With Moxie
Posted by J.W. Verret

The battles over proxy access have enjoyed an armistice of late, though the skirmishes have been quite heated. This is sure to pick up after the election is over. Let's explore why there has been little room for compromise. As I see it, the Business Roundtable is concerned about the potential for divisive directors, and the other groups are concerned about one of three things: i) maximization of long term shareholder wealth ii) short term wealth extraction, or iii) furtherance of special interest or corporate social responsibility goals by way of the corporate ballot. What goes unnoticed in this debate is the following: the heart of the proxy access issue is the plurality voting standard.

The plurality voting standard says that the highest number of votes wins, regardless of whether they obtain a majority of the vote. This prevents the possibility of a failed election. Proxy access under a plurality voting regime could allow special interest groups to get a seat or two on Boards. But the plurality voting standard is just a default rule. We could have an outright majority vote for contested elections (not to be confused with majority voting in uncontested elections, a separate issue). This would insure that any nominee would have to obtain the approval of the voting bloc of large institutional investors like TIAA-CREF or Fidelity that actively vote their shares, which would limit instances of goals ii or iii above.

But how, you might ask, can we prevent the prospect of a failed election if we use majority voting for contested elections? We would need to do runoffs, an expensive and time consuming process. For better or worse, I've got a plan. For more, check out Pandora's Ballot Box, or a Proxy with Moxie? Majority Voting, Corporate Ballot Access, and the Legend of Martin Lipton Re-Examined.. My thesis: why not change the ballot around a little to permit shareholders to rank their preferences in a contested election? Then, we could just use those preferences to determine what the results of a runoff would have been. Thus, if you can't impress Fidelity or TIAA-CREF and their like, your shareholder campaign is out of luck.

You might ask: How does a professor flying the Delaware flag get the right to argue in favor of the institutional investor community? Isn't it a little inconsistent, in light of conventional wisdom that Delaware is biased in favor of management? I encountered this reflex reaction on the job talk circuit as well. Read Blasius and its progeny, including Schnell, Stroud, and Liquid Audio. Delaware realizes that the business judgment rule is harsh, but the franchise is how it justifies the rule. As Chancellor Allen would say, "If you don't like it, kick the bums out." Thus Delaware is vigorous in ensuring that use of the right must be protected. Contorting the Williams Act to prevent meaningful participation by shareholders and confer an advantage upon management is an untoward federal intervention harmful to this balance. Let's hope neither side of this debate gets everything they want, and the eventual compromise is crafted with a proper view toward maximization of long term shareholder wealth.

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