Lucian A. Bebchuk: Don’t Gut Proxy Access
[Lucian A. Bebchuk, a professor of law, economics and finance and the director of the Program on Corporate Governance at Harvard Law School, is the author of “The Case for Shareholder Access to the Ballot,” “The Myth of the Shareholder Franchise” and “Private Ordering and the Proxy Access Debate.”]
The Senate’s representatives on the conference committee finalizing financial regulatory overhaul have proposed weakening the proxy-access provisions included in both the House and Senate bills. The senators’ amendment would prevent shareholders owning less than 5 percent of a company’s shares from ever placing director candidates on a corporate ballot.
Hard-wiring such an ownership threshold in the financial regulatory bill would be a significant setback for shareholders and corporate governance reform.
While shareholder power to elect new directors is supposed to serve as a foundation for our system of corporate governance, American shareholders seeking to replace incumbent directors face considerable legal impediments. Lowering these impediments would make directors more focused on shareholder interests. The case for doing so is supported by empirical evidence indicating that arrangements increasing directors’ insulation from removal are associated with lower company value and worse performance.
Any reform of corporate elections should include ending incumbents’ monopoly over the corporate ballot — the proxy card sent by the company at its expense to all shareholders. Only board-nominated candidates get to appear on this ballot; challengers must bear the costs of sending (and getting back) their own proxy card to shareholders. Providing shareholders with proxy access — the right to place candidates on the ballot — would contribute to leveling the playing field.
Managements have long opposed proxy-access reform and have thus far succeeded in blocking it. In the wake of the financial crisis, however, the Securities and Exchange Commission proposed a proxy-access rule and seemed determined to adopt it this year. Because business groups threatened to challenge in court the S.E.C.’s authority to adopt such a rule, the Senate and the House bills sought to support the agency’s reform by affirming this authority. Under the senators’ amendment, however, the financial regulation legislation would not merely affirm the S.E.C.’s authority but rather severely limit it....
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The Senate’s representatives on the conference committee finalizing financial regulatory overhaul have proposed weakening the proxy-access provisions included in both the House and Senate bills. The senators’ amendment would prevent shareholders owning less than 5 percent of a company’s shares from ever placing director candidates on a corporate ballot.
Hard-wiring such an ownership threshold in the financial regulatory bill would be a significant setback for shareholders and corporate governance reform.
While shareholder power to elect new directors is supposed to serve as a foundation for our system of corporate governance, American shareholders seeking to replace incumbent directors face considerable legal impediments. Lowering these impediments would make directors more focused on shareholder interests. The case for doing so is supported by empirical evidence indicating that arrangements increasing directors’ insulation from removal are associated with lower company value and worse performance.
Any reform of corporate elections should include ending incumbents’ monopoly over the corporate ballot — the proxy card sent by the company at its expense to all shareholders. Only board-nominated candidates get to appear on this ballot; challengers must bear the costs of sending (and getting back) their own proxy card to shareholders. Providing shareholders with proxy access — the right to place candidates on the ballot — would contribute to leveling the playing field.
Managements have long opposed proxy-access reform and have thus far succeeded in blocking it. In the wake of the financial crisis, however, the Securities and Exchange Commission proposed a proxy-access rule and seemed determined to adopt it this year. Because business groups threatened to challenge in court the S.E.C.’s authority to adopt such a rule, the Senate and the House bills sought to support the agency’s reform by affirming this authority. Under the senators’ amendment, however, the financial regulation legislation would not merely affirm the S.E.C.’s authority but rather severely limit it....