Though arguably the weightiest potential corporate governance change in decades, a U.S. appeals court’s Friday ruling striking down the SEC’s proxy access rule seemed to get lost in the sweltering weekend heat wave and in the highly publicized debt-ceiling debate. Shareholders have bigger concerns when default looms in both the U.S. and Europe. And so proxy access was allowed a quiet repose, at least for now.
Investors have argued for decades they should have the right to run their own director candidates, especially where company-sponsored directors have been completely unaccountable to shareholders. Meanwhile, companies fear the power would be hijacked by unions and takeover activists with parochial agendas.
The proxy access that U.S. investors are seeking is already taken for granted in most other developed markets. Practices vary, but generally speaking access is available with either 5 percent or 10 percent of shareholders nominating in those markets. Sometimes, it is less. For example: in Australia, there is a 5 percent threshold, or 100 shareowners. This makes it relatively easy to put forward a nominee in that country.
Such proxy-access provisions have come close to reality on several occasions in the U.S., only to be thwarted by corporate opponents. Dodd-Frank was the first time such a plan was actually advanced and formally proposed by the SEC, spurring its corporate detractors to pull out all the stops and mount aggressive legal challenges. The result was Friday’s ruling, essentially holding that the SEC had violated the Administrative Procedure Act by failing to fully assess the costs of such a proposal. The SEC said it will further review its options.
At this juncture, all of the key players in this debate know that access is the main event in corporate governance reform — more important and potentially more transformative than the majority voting and “Say-on-Pay” initiatives in the U.S. Fact is, it has lingered for years and opposition will remain intense both now and well into the future. In terms of Friday’s ruling, it could mean either “Taps” or “Revelry,” depending on what the SEC chooses to do next.
If you were in the SEC’s position, you might think about just dropping the idea altogether. Indeed, rather than face a multi-headed, well financed corporate lobby in an election year — especially when SEC finances are already being starved — it would be easy to pick other battles. You might consider moving on to your still-lengthy list of other Dodd Frank provisions and leave this for another day.
But you could just as easily decide, for all the same reasons, that the time has come for reform. Enough is enough you might say — the battle for proxy access is worth the fight. Because the legal ruling is a call for more thorough examination and reporting on potential costs, the provisions of the access plan can be tweaked and refined to address the court’s concerns; it would ensure at least one prominent reform moves forward from the Dodd-Frank morass.
I hear the faint sound of a bugle in the background, but the melody is not yet clear.