At a legislative hearing this week, investor advocates criticized the Securities and Exchange Commission's proposed proxy access rules, while business representatives expressed wariness about giving shareholders the right to nominate directors to appear on corporate proxy statements.
Rep. Barney Frank, the Democratic chairman of the House Committee on Financial Services, invited five investor and business representatives to a Sept. 27 hearing to testify about two competing rule proposals issued by the SEC in July. The so-called "long" rule would impose a 5 percent ownership threshold and additional disclosure requirements on shareholders who file access bylaw proposals. The "short" rule would reaffirm the SEC's earlier position that firms can omit those shareholder resolutions.
John Castellani, president of the Business Roundtable, warned that proxy access "would result in special interest nominees and politicize the director election process."
"Proxy access is a bad idea whose time has passed," he told lawmakers at the hearing in Washington.
Donald Kirshbaum, investment policy officer for Connecticut's state pension funds, emphasized that proxy access would provide investors an alternative to "onerous and costly" proxy fights. He recalled that proxy access received wide support from investors this year when it appeared on the ballot at three companies.
Investor advocates said the status quo--under which shareholders face no additional barriers to filing access proposals--is preferable to either of the SEC's draft rules.
Ann Yerger, executive director of the Council of Institutional Investors (CII), told lawmakers that the SEC's proposed 5 percent ownership requirement would be too high for most institutional investors--even large ones like state pension funds. "Even the 10 largest pension funds combined would be unlikely to meet the threshold in any public company, large or small-cap," she said.
Paul Schott Stevens, president of the Investment Company Institute, an association of U.S. mutual fund companies, disagreed, and said the SEC should consider even a higher threshold. Stevens said a group of investors could easily band together to reach the 5 percent mark. For example, he said the State of Wisconsin Investment Board has 5-percent holdings in 28 different companies, although he acknowledged that most of them are smaller firms.
Castellani and several Republican lawmakers expressed concern that proxy access would lead to split votes and less-cohesive boards.
"The last thing shareholders need is fractured boards representing special interests or small groups of shareholders," Castellani said. The current system of board elections has produced high-volume returns for shareholders, he said.
"Fractious boards are the model in Europe; they have proven to be ineffective in generating returns," agreed Rep. Deborah Pryce, a Republican from Ohio.
A board's nominating committee already does the job of selecting directors who will serve the interests of all shareholders, not just a select few, Castellani argued.
In response to these concerns, investor advocates noted that shareholders would have to undertake a lengthy process before getting a representative on a board. A proxy access bylaw first would have to be approved by at least a majority of shareholders to go into effect, and the shareholder nominees in turn would have to win majority support in order to take a board seat. Yerger noted that most institutional investors are "sophisticated" and "would not elect someone who was just there to promote a special interest."
Rep. Emanuel Cleaver, a Missouri Democrat, and Rep. Frank challenged Castellani about his concerns about split votes and special interests. Frank said boardroom debate can be healthy and lead to better decisions. He repeatedly pressed Castellani to answer whether the "special interest" label would apply to investor proponents of divestment from companies with ties to Sudan or Iran.
Timothy Smith, senior vice president of Walden Asset Management and board chair of the Social Investment Forum, told lawmakers that it is dangerous to assume that investors advocating labor, social, or environmental interests would neglect their fiduciary duty to the rest of the company's shareholders.
"The business community too often falls into the mentality of 'we don't like what you're doing, therefore you're a special interest,'" Smith said.
New Disclosure Requirements
Investor advocates also voiced opposition to the new disclosure requirements that the SEC would impose on filers of access bylaw resolutions. The SEC is seeking input on whether proxy access proponents should be required to disclose their intent in filing, their relationship and communications with the company in the past 12 months, and dealings with competing companies. The company would also be required to disclose its communication with the shareholders(s) filing the access proposal.
"The disclosures really go far beyond what any shareholder would find useful," Kirshbaum told lawmakers, adding that they would impose unnecessary costs on both companies and investors.
"As with the ownership threshold, it is not clear that any additional disclosure is warranted simply because a proposal concerns proxy access," Kirshbaum said in a prepared statement.
Investors were able to file access proposals (without having to meet additional ownership and disclosure requirements) during the 2007 proxy season after the U.S. Court of Appeals for the Second Circuit ruled in September 2006 that the SEC improperly allowed American International Group to exclude an access proposal. After that ruling, the SEC staff took an official position of "no view" on corporate requests to omit proxy access proposals. Three proposals appeared on corporate ballots and one received majority support--at small biotech firm Cryo-Cell. The others--at S&P 500 firms Hewlett-Packard and UnitedHealth Group--each won more than 40 percent support.
Kirshbaum pointed to these examples as evidence that mainstream investors--not just "special interests"--support proxy access.
After the hearing, Rep. Frank told reporters that the SEC should scrap the two proposed rules and start over. "This is a case where more work needs to be done," Frank said, according to Bloomberg News.
SEC Action Appears Less Likely
The SEC has set an Oct. 2 deadline for public comments on its proxy access proposals. However, a final decision on this issue before 2008 appears unlikely after the Sept. 18 departure of Commissioner Roel Campos, a long-time supporter of access.
Speaking at a CII conference just before he left the SEC, Campos said he doubted that Senate Democrats would be able to approve his replacement in time for that new commissioner to participate in deliberations on proxy access before the filing deadlines for the 2008 proxy season. Chairman Christopher Cox is not likely to push for a final decision on the issue without a full complement of five commissioners, Campos told the CII attendees in San Diego, according to Money-Media's Agenda newsletter.
"I've never seen people from all sides dislike everything," he told the CII conference. "The consensus is the long one is horrible and the short one is very bad."
In addition to this week's Financial Services committee hearing, Frank's Senate counterpart, Christopher Dodd of Connecticut, who chairs the Senate Committee on Banking, Housing, and Urban Affairs, has also threatened to hold hearings on proxy access if the SEC does not act.
Director of Publications Ted Allen contributed to this article. This article appeared in the September 27 edition of Risk and Governance Weekly.