U.S. companies will be allowed once again to exclude proxy access proposals from their corporate ballots, the Securities and Exchange Commission has decided.
The access-blocking rule, pushed through by the commission's Republican majority, was denounced by Commissioner Annette Nazareth, labor investors, state pension funds, and Democratic lawmakers.
"In a partisan 3-1 vote, the SEC today attacked the rights of investors to nominate corporate directors," the AFL-CIO labor federation said in a statement after the commission's Nov. 28 open meeting.
The SEC's vote effectively overturns a federal court decision that opened the door for investors to get proxy access on the ballot at three companies in 2007. The commission's action sets the stage for more litigation on the issue, as shareholders this week filed access proposals at financial firms Bear Stearns and JP Morgan Chase, and vowed to return to court if the companies seek to omit those resolutions.
The vote by the shorthanded SEC is a victory for General Motors, Bank of America, and other issuers that urged the commission to bar proposals to allow investors to nominate board candidates to appear on corporate proxy statements. Former SEC Chairman Arthur Levitt (who also is a RiskMetrics Group board member) told Bloomberg News that the SEC's action is "probably the most important vote the commission has taken in nearly 15 years."
The law firm of Watchtell, Lipton, Rosen & Katz, which represents companies and directors, applauded the SEC's decision. The New York-based firm noted that existing proxy contest mechanisms "are more than sufficient," given the potential "negative effects and risks" of contested elections. "Moreover, shareholders have never had as many other, less disruptive, avenues through which to express their views as they have today," the law firm said in a memo.
SEC Chairman Christopher Cox voted with Commissioners Kathleen Casey and Paul Atkins to reassert the agency's past position that companies may exclude proxy access resolutions. Nazareth, the SEC's only Democratic member after Commissioner Roel Campos departed in September, voted against the measure.
Cox said he voted to bar access because it was the only one of two draft rules released by the SEC that could muster a three-vote majority. In July, Cox joined Nazareth and Campos in supporting an alternative proposal that would have imposed a 5 percent ownership threshold and greater disclosure requirements on shareholders seeking to file access bylaw resolutions.
Cox said he hoped the SEC would revisit the issue in 2008 and work on crafting a rule to permit some access proposals. "Today is not the end, and I hope all stakeholders will continue to work with us," he said. "If we use the time between now and the next proxy season wisely, we can act on a new rule proposal next year that does more than just perpetuate the status quo."
At least one Republican commissioner appears unlikely to support a federal access rule in the future. Casey said governance reforms should be handled at the state level rather than nationally.
The SEC has repeatedly failed to reach a consensus on proxy access in the past. Nazareth expressed skepticism that the SEC would approve a pro-access rule next year. She said it appears the Republican commissioners voted for the non-access rule simply to put the matter behind them.
"I don't see a principled way to vote on the non-access release and be supportive of shareholder rights in the longer term," Nazareth said. "Indeed, if this amendment were truly intended to be a temporary stop-gap measure … it would then have a sunset provision. But it does not."
"Shareholder rights face a long uphill battle with this commission," Nazareth said. "I hope that we have not completely lost the opportunity to address these issues."
Ann Yerger, executive director of the Council of Institutional Investors, said the SEC vote is a step in the wrong direction. "It makes no sense for the commission to do the wrong thing now but promise to try to do the right thing next year," Yerger said in a press release. "This is a sad day for shareowners."