Debating Proxy Access with Substance, not Bluster

There has been much bluster, but very little substance, in the ongoing debate over proxy access – that is, the ability of certain privileged shareholders to have their own slate of director nominees included in a public company’s proxy materials, whether or not the company’s board of directors approves.

Proxy materials include the proxy statement used to solicit shareholder votes and a voting card that allows shareholders to vote without having to attend the annual meeting. The Council of Institutional Investors, a nonprofit association that represents the interests of public-pension funds and labor-union-related entities, has for many years strongly endorsed the position that “proxy access is a fundamental right of long-term shareowners.” But on what grounds is that right asserted?

As it turns out, long-term shareholders have never had a fundamental right to proxy access, under either corporate or federal securities law. The only requirement in terms of director nominations is that at least some shareholders must have the power to nominate directors at the annual meeting itself. On efficiency grounds, proxy access may have value where the investor base is made up primarily of informed investors. It does not make any practical sense in the context of a large public company with thousands of shareholders, both institutional and retail, who overwhelmingly are uninformed about critical aspects of how the companies they invest in operate or are managed.

One can scream from the rooftops that proxy access is a fundamental right, but it would add very little to the substantive debate – one which has yet to really get started.

To help get that conversation going, I recently published a Mercatus Center working paper (forthcoming in the Journal of Law, Economics & Policy) that provides a theoretical framework for putting the board in control of proxy access and offers a comprehensive review of the empirical research to date on proxy access. I make three primary arguments:

1. The Securities and Exchange Commission’s current proxy-access regime isn’t an enhancement to the “private ordering” of a company’s governance arrangements. The SEC no longer allows companies to exclude shareholder proposals on proxy access from their proxy-solicitation materials. In effect, this change acts as a federal barrier to the more efficient approach of board-initiated proxy access. The SEC should return to its traditional approach, which allowed a board to omit shareholder proposals on proxy access from a company’s proxy materials at its discretion.
2. The superiority of board decision-making in the context of proxy access should create a presumption that universal proxy access (mandatory proxy access for all public companies) would be an inefficient and unnecessary way to nominate and elect directors.
3. The presumption can be rebutted with empirical evidence, provided that it consistently shows, at a high level of statistical significance, that universal proxy access is wealth-enhancing for shareholders. However, the empirical evidence that currently exists does not meet that standard.  As a result, it would be reasonable for the SEC to keep universal proxy access off its agenda.

I have also written two more narrowly focused articles that essentially are spin-offs of the working paper – an R Street Institute policy brief and a piece in the Yale Journal on Regulation Online. The first is a critical review of the CFA Institute’s report on proxy access, which originally was written to encourage the SEC to put universal proxy access back on its agenda. As explained in my review, the report is full of errors and rife with contradictions and practices of questionable methodology in its estimation of the dollar value of universal proxy access. As I put it in the brief:

A closer look reveals shortcomings that should disqualify the CFA (Institute) report from being used as support for mandatory proxy access; for shareholder proposals on proxy access; for board discussions about whether a proxy-access bylaw should be implemented; and, perhaps most importantly, for board discussions about whether a proxy-access bylaw needs to be rescinded.

The Yale Journal on Regulation article reviews the only empirical work to date that tries to estimate how much the stock market values shareholder proposals on proxy access. I found that, while the study is an important first step in understanding the value of proxy-access proposals, to become truly informed about their value, much more data and analysis is required; something that will most likely take a number of years to produce.

I believe the working paper and the two spin-off articles form a critical mass of analysis that allow a substantive debate on proxy access to begin, hopefully before the start of the 2017 proxy season when the next round of shareholder proposals on proxy access are submitted to public companies. In order to participate in that upcoming debate, I encourage you to read these writings.

This post was originally published on the R Street Institute website.

Bernard S. Sharfman is an Adjunct Professor of Business Law at the George Mason University School of Business.