Glen Lammi argues that the titular SEC rules have had important and deleterious unintended consequences.
An important new paper argues that:
The prerogative of boards of directors to nominate the members of the board for election by the shareholders is now challenged by institutional investors determined to acquire the right, under certain conditions, to nominate their own candidates. This challenge to a board prerogative is called proxy access by shareholders to the director nomination process.
As a result of amendments to the existing regulations in the United States, there has been a flood of proposals from shareholders to institute rules granting them access to the nominating process. In Canada, a form of access is already provided for by the Canadian Business Corporations Act (CBCA), but the conditions of this access are not perceived – by institutional investors, in particular – as sufficiently congenial because, among other factors, of the differential treatment for candidates put forward by shareholders.
Several plausible arguments may be marshalled in support of access to the nominating process by shareholders, such as the enhanced legitimacy of the directors sitting on the board. However, this proposal also raises a host of issues related to the logistics of its application and the potential adverse effects on governance and board dynamics. After an in depth analysis of the arguments for and against proxy access, IGOPP concludes that any process that would grant shareholders the right to put forward candidates for election to the board, whether such a process arises from new regulations or spontaneous proposals from shareholders, is unwise and likely to create serious dysfunctions in corporate governance.
We do recommend however that the nomination committee of the board implement a robust consultation process with the corporation’s significant shareholders and report in the annual Management Information Circular on the process and criteria adopted for nominating any new director.
Given the popularity of proxy access proposals among institutional shareholders, this policy position includes an appendix outlining the typical features, conditions and mechanics proposed for this shareholder access to the director nominating process. All these aspects of the proxy access initiative raise difficult questions to which we unfortunately find few satisfactory answers.
Allaire, Yvan and Dauphin, Francois, Who Should Pick Board Members? Proxy Access by Shareholders to the Director Nomination Process (October 30, 2015). Available at SSRN: http://ssrn.com/abstract=2685790
What can a shareholder do if she disagrees with a corporate expenditure, whether on a particular busi- ness strategy or in support of a political position? The short answer is very little. Shareholders do not typically have any right to control or direct the use of capital they have invested in a corporation, whether publicly or privately owned. ...
Expenditures by corporations on politics do not typically generate heightened scrutiny, and shareholders cannot use derivative lawsuits to override decisions about such expenditures by boards. These facts about corporate law hold true even if (in an unrealistic hypothetical) shareholders were uniform in their political views, and uniformly opposed an expenditure approved by the corporate board. These facts are unquestionably true in a more typical situation where shareholders disagree among themselves about politics. Nor do shareholders have indirect means to accomplish this goal—such as selling shares or using votes—as explained next.
They go on to elaborate the point for 39 pages.
I agree with their characterization of corporate power. After all, who developed the director primacy model? (Well, Mike Dooley did, but that's beside the point.) So I'm glad to see such a select group of my fellow corporate law academics at least endorsing director primacy as a positive account of corporate law.
But where does that leave us? After all, their analysis of the limited powers of shareholders applies with equal force to virtually everything the board of directors do. (See Bainbridge, Stephen M., The Case for Limited Shareholder Voting Rights. UCLA Law Review, Vol. 53, pp. 601-636, 2006; UCLA School of Law, Law-Econ Research Paper No. 06-07. Available at SSRN: http://ssrn.com/abstract=887789.)
In fact, at this point, the amici's argument stops. On its face, the brief is mostly descriptive with the normative argument limited to the claim that "If the Court decides to give union non-members additional rights to refuse to contribute to union speech, the Court should not act on the erroneous belief that this will accord union non-members the same rights enjoyed by individual investors." (5)
But words have consequences. Normative arguments will be made on the basis of the foundation laid by the brief.
As I see it, there are three normative moves that follow logically from the strong positive account of director primacy offered in the brief. (1) One can accept the normative claims of director primacy, as well as the positive ones, and thus endorse the power of directors to run the corporation's political contributions in the same way they run everything else. See Bainbridge, Stephen M., Director Primacy: The Means and Ends of Corporate Governance (February 2002). UCLA, School of Law Research Paper No. 02-06. Available at SSRN: http://ssrn.com/abstract=300860. Obviously, this is the correct solution to the problem, but I see some names on the list of signatories that would reject this option out of hand.
(2) One can go in the exact opposite direction and endorse an expansive theory of shareholder empowerment that gives shareholders broad powers to overturn board decisions. Some of them already have, of course. Compare, e.g., Bainbridge, Stephen M., Director Primacy and Shareholder Disempowerment. Harvard Law Review, Vol. 119, 2006; UCLA School of Law, Law-Econ Research Paper No. 05-25. Available at SSRN: http://ssrn.com/abstract=808584 with Bebchuk, Lucian A., The Case for Increasing Shareholder Power. Harvard Law Review, Vol. 118, No. 3, pp. 833-914, January 2005; Harvard Law and Economics Discussion Paper No. 500. Available at SSRN: http://ssrn.com/abstract=387940. IMHO, I'm right and they're wrong, although YMMV.
(3) One can generally accept director primacy as a normative matter but can try to argue that political spending is special and that therefore it needs special rules. But I don't buy it:
Having said that, I am nevertheless willing to assume most academics that believe political contributions are special also believe there is there is a neutral principles-based account that supports their view. But even if that's true, their arguments will be used by those who think political contributions are special because they believe that corporate political contributions favor one political party over the other, while those folks support the purportedly disfavored party.
In sum, this is not some ideologically neutral academic debate being discussed by corporate law technocrats. It has implications for shareholder activism, which itself is an increasingly politicized phenomenon. More important, the academic debate is inextricably intertwined with the left's effort to defund the right. Those of us who participate in this debate as academics cannot close our eyes to this basic fact.
As both a proponent of director primacy and a man of the right, I thus come down against treating politics as special. As an academic, I'd like to see my colleagues be equally forthright about their take on the politics of the issue.
Update: I suppose that there is a non-corporate governance move available, as well: One can argue that the law should treat union members and shareholders the same. But I'm not convinced that shareholders and union members are similarly situated. On this issue, however, I'm going to tag in folks like Brad Smith and Paul Atkins, who know more about the law governing unions than yours truly.
Update 2: One of the brief authors pointed out that "You might acknowledge that corporate law academics might agree on the descriptive points in the brief while disagreeing about whether those facts are good or bad from a normative perspective, and so to say we should be 'forthright' about those normative views would be impossible, yet the descriptive facts are important — and something SCOTUS has consistently gotten wrong."
Fair enough. But looking beyond this brief to the larger debate in the academic literature, I still think scholars on both sides of the issue need to acknowledge that their arguments have important real world consequences for the functioning of our political system and be transparent about whether they have skin in the political game.
Update 3: I've been going back and forth with the professor mention in the previous update. My last word on the subject was:
A WLF Legal Backgrounder poses the titular question and points out the potential for massive expansion of SEC-mandated corporate social responsibility disclosures if the answer to that question is no. Go read the whole thing.
The WSJ reports that:
Lisa Fairfax, a professor at George Washington University Law School and an expert on shareholder activism, is the nominee for the open Democratic seat [on the SEC].
Ms. Fairfax is favored by many Democratic lawmakers and activist groups. Her name surfaced earlier this year on a list of candidates that Sen. Elizabeth Warren (D., Mass.) urged liberal groups to consider. Ms. Warren’s aides say she didn't directly express an opinion about Ms. Fairfax to the White House. Ms. Fairfax became a contender after left-leaning groups criticized the White House for considering a corporate attorney to fill the post.
Hester Peirce, who used to work at the SEC and the Senate Banking committee, is the nominee to fill the open Republican seat.
I don't know anything about the GOP candidate. But I have no Lisa for a long time and like her very much. She's a great person, a thoughtful and insightful scholar, with sound judgment. As such, I'm setting aside my presumption that anything Liz Warren supports is per se a bad idea. After all, even a stopped clock is right twice a day.
I expect Lisa to be open minded and not the sort of knee-jerk partisan that some SEC members (on both sides) have been lately.
The D&O Diary has a useful review of recent SEC actions involving “significant departure[s] from normal corporate governance and appropriate director conduct.”
UIUC law professor Suja Thomas and SEC fan Mark Cuban have an article in the NY Times on the problem of the SEC employing judges who pass on cases brought by SEC enforcement lawyers:
After losing several cases before juries, the S.E.C. went to a place where it generally cannot lose: itself. When it accuses a person of a securities violation, the S.E.C. has often brought the case in an administrative hearing where one of its own judges decides the case, not a jury. Rarely does the agency lose such cases before its judges, and when it has lost, the loss is not well-received. At least one judge has reported being criticized for finding too often in favor of defendants. That same judge ultimately resigned. ...
Specifically, the jury provided such protection. Under the Seventh Amendment, if the government sued a person, a jury was to decide if he was liable and required to pay money to the government.
The federal courts should recognize the constitutional authority granted to juries to decide civil cases as well as the related limitations on the legislature and the executive to determine who decides. Importantly, a defendant accused of wrongdoing by the government and facing significant monetary penalties should have the option of a jury deciding his case.
Kindly go read the whole thing.
A Report on Corporate Governance and Shareholder Activism by James R. Copland and Margaret M. O’Keefe:
In the last two decades, shareholders have gained power relative to corporate boards. One way shareholders exert influence over corporations is by introducing proposals that appear on corporate proxy ballots. In 2015, shareholders were both more active and more successful in these efforts:
- The number of shareholder proposals is up. The average large company faced 1.34 shareholder proposals in 2015, up from 1.22 in 2014. This is the highest level of shareholder-proposal activity since 2010. The increase in 2015 has been driven largely by the New York City pension funds’ push for “proxy access,” which would give large, long-term shareholders the right to nominate their own candidates for director on corporate proxy ballots.
- The Securities and Exchange Commission has been more lenient in allowing shareholder proposals on the ballot. Another reason for the uptick in shareholder-proposal activity in 2015 is a more permissive stance adopted by the SEC in assessing shareholder proposals’ appropriateness for proxy ballots. In January 2015, the agency suspended the application of its “conflicting proposals” rule—and several companies this year faced shareholder proposals that conflicted with management proposals on the ballot. In 2015, the SEC issued 82 letters assuring companies that it would take no action if they excluded a shareholder proposal from their proxy ballot, down from 116 in 2014; the agency declined to issue no-action letters on 68 petitions in 2015, up from 50 in 2014.
- A small group of shareholders dominates the shareholder-proposal process. As in 2014, one-third of all shareholder proposals in 2015 were sponsored by just three individuals and their family members: John Chevedden, the father-son team of William and Kenneth Steiner, and the husband-wife team of James McRitchie and Myra Young. The NYC pension funds sponsored 11 percent of all proposals in 2015, but the overall percentage of shareholder proposals sponsored by labor-affiliated pension funds—28 percent—is below historical norms because private labor unions’ pension funds have been less active. Institutional investors without a labor affiliation or a social, religious, or policy orientation sponsored only one proposal.
- A plurality of shareholder proposals involve corporate-governance issues. Forty-three percent of 2015 shareholder proposals involved corporate-governance concerns—including 11 percent that sought proxy access. Forty-two percent involved social or policy issues, including 19 percent that focused on the environment. Although shareholder proposals focusing on corporate political spending or lobbying remained common—17 percent of all proposals—the overall number of such proposals fell to 51, down from 67 in 2014.
- The percentage of shareholder proposals receiving majority shareholder support is up. Eleven percent of shareholder proposals were supported by a majority of shareholders in 2015, up from just 4 percent in 2014. This uptick was due to substantial support for proposals seeking proxy access: 23 of 35 proxy-access proposals won majority shareholder backing. Aside from proxy-access proposals, only 4 percent of shareholder proposals—ten in total—received majority shareholder votes. Among the companies in the Fortune 250, not a single shareholder proposal involving social or policy concerns won majority shareholder support over board opposition—as has been the case for the past ten years.
In addition to capturing overall shareholder proposal trends, this report and a companion econometric analysis by University of Tennessee professor Tracie Woidtke assess shareholder-proposal activism by public-employee pension funds:
- Public-pension fund shareholder-proposal activism is associated with lower stock returns. Fortune 250 companies targeted by shareholder proposals by the five largest state and municipal pension funds from 2006 through 2014 saw their share price, on average, underperform the broader S&P 500 index by 0.9 percent in the year following the shareholder vote. Companies targeted by the New York State Common Retirement Fund, which in 2010 launched an aggressive shareholder-proposal effort focused on social issues, such as corporate political spending, saw their share price drop by 7.3 percent, relative to the broader market.
- Social-issue-focused shareholder-proposal activism helps explain a negative share-value effect associated with public-pension fund ownership. Controlling for various factors, companies in which public-pension funds invested from 2001 through 2013 were less valuable than those owned by private pension funds and other investors. This negative ownership effect was particularly pronounced for companies targeted by the New York State Common Retirement Fund with social-issue proposals and does not exist for the 2001–07 period, when that fund did not sponsor social-issue proposals.
- Shareholder votes supporting 2015 proxy-access proposals are associated with a negative stockprice reaction. When shareholders approved a Fortune 250 company’s proxy-access proposal in 2015, the company’s share price underperformed the S&P 500 index by 2.3 percent, on average, in the days following the annual meeting. Conversely, when shareholders voted down a company’s proxy-access proposal, the company’s share price outperformed the market index by an average of 0.5 percent.
In light of these findings, states and municipalities should consider how their public-employee pension funds should engage in future shareholder-proposal activism, if at all.
In yesterday's WSJ, former SEC Commissioner Paul Atkins argued against the proposals being made by many to force corporations to disclose political contributions:
The article “CFO Journal: A Stubborn Political Divide” (Business & Tech., Sept. 15) grossly overstates the amount businesses donate to candidates and political groups. Any personal contribution that identifies an employer is considered a business contribution. In fact, individual contributions make up well over half of the alleged “business” contributions that were reported.
The article states that for 10 years, “shareholders” have submitted proposals to Charles Schwab requesting more information related to its public-policy expenditures. Let’s be clear. Ordinary investors aren’t filing these resolutions. The New York City Pension Funds, which are solely controlled by a partisan political official, have filed shareholder proposals at Schwab for the past nine years in a row. Unsurprisingly, actual shareholders focused on their return on investment think otherwise, and every time have overwhelmingly rejected these proposals by more than a 3-to-1 margin, which is consistent with the average level of opposition to such shareholder proposals related to public-policy advocacy.
Public companies need to recognize that this movement isn’t about transparency and good governance but is instead an effort by political activists to silence the business community.
The Washington Legal Foundation has published a new article co-authored by SEC Commissioner Daniel Gallagher. It proposes "an idea last raised in the late 1990s:"
... devolve shareholder proposals back to the states, which traditionally and appropriately have been allotted authority over corporate governance matters. The state in which a company is incorporated would have the latitude to decide under what circumstances to permit shareholder proposals, and would adjudicate any questions about whether a proposal must be included. The SEC staff’s role could be limited to determining whether the proposal and any supporting or opposing statements authorized by state law contain any material misstatements or omissions.
Let's do it.
Larry Ribstein coined the phrase. Roberta Romano has written about the question, while inventing the term "quack corporate governance." And, of course, my book Corporate Governance after the Financial Crisis argues at length that Sarbanes-Oxley and Dodd-Frank were bubble laws that imposed burdensome and senseless new rules.
Now Paul Mahoney offers a complementary theory of bubble laws:
Critics argue that the statute imposes disproportionately large compliance costs on small community banks, institutionalizes “too big to fail,” and drives up the cost of banking services to consumers. Comparing Dodd-Frank to past securities reforms, particularly those of the New Deal, shows that these three problems are related and are nearly inevitable features of post-crisis legislation. ...
Every major financial reform in U.S. history was enacted in the aftermath of a substantial decline in equity prices. Each, in other words, was crafted during a time of public anger that politicians hoped to deflect from themselves to Wall Street. The congressional authors always compose a narrative of the stock market crash that blames unscrupulous financial intermediaries or public companies and insufficient regulation of the markets. Just as inevitably, proponents studiously avoid any suggestion that their own prior regulatory innovations had unintended consequences that contributed to the crash. Meanwhile, firms in the regulated industry concentrate on determining who the winners and losers may be under a new regulatory regime, so they can make sure they end up on the winning side.
This routine ensures that the primary losers from financial reform are investors and small, regulated firms. Costly new rules simultaneously serve the ends of Congress and the major financial institutions. They allow Congress to argue that it filled the regulatory gaps that it claims caused the crisis. Large firms can spread the new costs over a large number of transactions, giving them a structural advantage over their smaller and previously nimbler competitors. All firms will seek to pass on to their customers as many of the regulatory costs as possible.
All of this would be unfortunate but bearable if the new regulations generated benefits in excess of their costs. But that is unlikely with post-crisis legislation. The objective is to show the public that Congress is doing something and time is short. Congress knows relatively little about the details of market practices and so relies on the financial industry for information. The largest firms have skilled lobbyists and contacts with legislative staff. They argue, often successfully, that their ways of doing business are “best practices” and their competitors’ practices are shoddy or unfair. The process almost guarantees that the legislation will harm competition and therefore investors.
I think Mahoney's take is consistent with the story that Ribstein, Romano, and I told. Perhaps I should welcome him to the "Tea Party caucus" of corporate law.
Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending.
Now put that fact together with this report from the LA Times:
Hillary Rodham Clinton knows her plan to stop big businesses from secretly funneling tranches of cash into politics may not fly with the Supreme Court and Congress, so she has a backup plan: publicly shame the companies.
Clinton is embracing one of the few effective tactics for loosening the grip on big money in politics. The plan she announced Tuesday to force publicly traded companies to disclose all political giving comes as a growing chorus of academics and activists are finding new ways to expose companies that hide their political maneuvering. ...
"This orchestrated 'disclosure' campaign by opponents of the business community is meant to intimidate corporations from participating in important policy debates, either directly or through trade associations and organizations such as the U.S. Chamber," chamber spokeswoman Blair Latoff Holmes said in an email.
Those joining the chamber in pushing back against the proposal say at the very least, it is not a matter that should be decided by financial regulators.
"Supporters of this say they want what is best for shareholders, but there is lots of information at firms that shareholders do not have access to," said David Primo, a professor of political science and business administration at the University of Rochester in New York. "Shareholders cannot micromanage every decision a CEO or their team makes."
So one continues to wonder why Professors Bebchuk and Jackson are providing academic cover for HRC and the left's plan to defund the right?
Full Disclosure: I vote Republican. I contribute Republican. But I would think Bebchuk and Jackson's proposal is a horrible idea despite my political affiliations, because it runs directly counter to the director primacy model of corporate governance that I espouse. My political views just fuel that fire. (Admittedly, they make that fire quite hot!)
The Obama administration is considering a law professor favored by Sen. Elizabeth Warren (D., Mass.) for an open spot on the Securities and Exchange Commission, according to people familiar with the process.
Lisa Fairfax, a professor at George Washington University Law School, was floated by Ms. Warren earlier this summer as part of a list of potential candidates that she and others who back tighter Wall Street oversight offered to fill the Democratic seat on the U.S.’s top securities regulator, these people said. ...
In her academic work, she has focused on how investors choose company directors and boardroom diversity, and she has written a primer on shareholder activism. Earlier this week, she was tapped by SEC Chairman Mary Jo White to fill a vacancy on an advisory panel that makes policy recommendations to the commission on investor concerns.
I've met and corresponded with Lisa many times and am a great admirer of her as a scholar and person. She's super smart and super nice. I think she'd make a great SEC Commissioner, especially because (despite being a Democrat) she's got a solid base of knowledge and common sense.
Some of my friends on the right likely will be inclined to oppose Lisa just because Liz Warren is backing her. If so, however, they'd be making a sense. Lisa's got more common sense and basic decency in her little finger than Warren does in her whole body.
I cannot imagine a Democrat candidate for the SEC I'd feel better about. I hope she makes it.