New Research Bolsters Case for Proxy Access: Will SEC Take Action?

In 2010, as mandated by the Dodd-Frank Act, the SEC proposed granting shareowners in the United States “proxy access” (Rule 14a-11 of Dodd-Frank), which refers to the ability of shareowners to place director nominees on a company’s proxy ballot. Proponents of proxy access argue that it increases the accountability of corporate boards by allowing shareowners to nominate a limited number of board directors. However, opponents of proxy access are concerned that special interest groups could hijack the process, are worried about the cost of proxy access, and remain unconvinced that proxy access would improve either company or board performance.

The proposed SEC proxy access rule was challenged in court and ultimately struck down by the DC Circuit Court of Appeals in 2011. In its opinion, the DC Circuit Court stated the SEC failed to adequately assess the economic effects of the proposed rule.

In Proxy Access in the United States: Revisiting the Proposed SEC Rule, CFA Institute confronts the questions raised by the DC Circuit Court. The report analyzes available event studies as well as case studies of how proxy access is used globally to draw important conclusions about the costs and benefits of proxy access.

Based on the available event studies, our research revealed positive market reaction to news regarding the implementation of proxy access, and a conversely negative reaction when proxy access was delayed or vacated. These event studies tend to show that markets placed a positive value on proxy access and believed it would improve board performance.

Event studies offer a before-and-after comparison of stock prices pursuant to regulation. When the SEC conducted its cost-benefit analysis of the proposed proxy access rule in 2010, it did not have the benefit of hindsight that event studies offer — you need a surprise in the market (for example, proxy access being struck down) to study the event. In contrast, if an event is well anticipated by the market, it will be priced in to the value of a company or a market as a whole. Stock price data needed for an event study were not available to assess the market’s valuation of proxy access until the SEC passed its proxy access rule, and then the rule was surprisingly vacated. With the benefit of hindsight, in 2014, we are able to assess the stock price return for firms affected by proxy access relative to those unaffected precisely because a rule was passed and then vacated.

CFA Institute also explored how proxy access has been implemented in other developed markets to allow shareowners to directly place director nominees on the corporate proxy. Access to the proxy is available to shareowners in most other developed markets, with the United States serving as a notable exception.

In general, we find that proxy access is used sparingly where it is permitted. In Canada, the United Kingdom, and Australia, for example, where the style of proxy access in use is similar to that proposed by the SEC, investors have used proxy access to nominate directors for board service fewer than 10 times per year, over the past three years. In Canada, there was only one instance of proxy access used in the past three years. The sample is of course small, but over the past three years in Australia, Canada, and the UK, 63% of companies outperformed their annual return the year following a proxy access event in which shareowner nominees were elected, relative to the preceding year.

Study Conclusions

Based on our investigation of the available global data, we have reached the following conclusions concerning proxy access in the United States:

• Limited proxy access examples and director nominations on a global basis, coupled with the limited availability of corresponding market impact data, challenge whether a more detailed cost-benefit analysis was possible in the context of the DC Circuit Court’s decision.
• The results of existing event studies suggest that proxy access has the potential to enhance board performance and raise overall US market capitalization.
• Assessing and measuring increased board accountability and effectiveness is challenging. None of the event studies indicates proxy access reform will hinder board performance.
• Proxy access is used infrequently around the world, even where low thresholds for ownership and duration of ownership exist. Evidence in these markets suggests that proxy access has not disrupted the election process in jurisdictions that allow it.
• Likewise, there is limited evidence to suggest that special interest groups can use proxy access to hijack the election process or pursue special interest agendas. Ownership thresholds to use proxy access are relatively high, and if reached, an investor still must convince those holding 50% of a company’s shares to support the director nomination.

Based on our findings, it is clear that proxy access would serve as a useful tool for shareowners in the United States, and ultimately would benefit both the markets and corporate boardrooms with little cost or disruption to companies and the markets as a whole. We therefore urge the SEC to revisit the issue of proxy access in the United States, taking into account all available data to devise the most meaningful cost-benefit analysis possible in reconsidering whether the proxy access rule is beneficial to shareowners and the market.

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