I'm not a fan of proxy access. As I wrote in my book Corporate Governance after the Financial Crisis
… because proxy access’ effect will be to increase the number of short slates, albeit to an uncertain extent, its impact on corporate governance likely will be analogous to that of cumulative voting. Both result in divided boards representing differing constituencies. Experience with cumulative voting suggests that adversarial relations between the majority block and the minority of shareholder nominees commonly dominate such divided boards.
The likely effects of proxy access therefore will not be better governance. It is more likely to be an increase in interpersonal conflict (as opposed to the more useful cognitive conflict). There probably will be a reduction in the trust-based relationships that are the foundation of effective board decision making. There may also be an increase in the use by the majority of pre-meeting caucuses and a reduction in information flows to the board as a whole. Not surprisingly, early research suggests that proxy access reduces shareholder wealth.
In his dissent [to the SEC’s adoption of former Rule 14a-11], Commissioner Paredes pointed to additional pre-Rule 14a-11 studies undercutting the SEC’s position:
The mixed empirical results do not support the Commission’s decision to impose a one-size-fits-all minimum right of access. Some studies have shown that certain means of enhancing corporate accountability, such as de-staggering boards, may increase firm value, but these studies do not test the impact of proxy access specifically. Accordingly, what the Commission properly can infer from these data is limited and, in any event, other studies show competing results. Recent economic work examining proxy access specifically is of particular interest in that the findings suggest that the costs of proxy access may outweigh the potential benefits, although the results are not uniform. The net effect of proxy access — be it for better or for worse — would seem to vary based on a company’s particular characteristics and circumstances.
To my mind, the adopting release’s treatment of the economic studies is not evenhanded. The release goes to some length in questioning studies that call the benefits of proxy access into doubt — critiquing the authors’ methodologies, noting that the studies’ results are open to interpretation, and cautioning against drawing “sharp inferences” from the data. By way of contrast, the release too readily embraces and extrapolates from the studies it characterizes as supporting the rulemaking, as if these studies were on point and above critique when in fact they are not.
In sum, proxy access is bad public policy, unsupported by the empirical evidence, and the pet project of a powerful interest group. In other words, quack corporate governance.
Yet, institutional investors remain fixated on forcing corporations to adopt proxy access:
For those that can remember, as noted in this Davis Polk blog, it was the NYC Comptroller’s office who really took the proxy access movement to the next level last year. Now, the Comptroller has issued a new list of 72 companies that have received proxy access shareholder proposals – 36 of them repeats from last year’s list of the 75 that received shareholder proposals…
What I find even more curious, however, is the fact that so many companies are caving on the issue:
American businesses are increasingly bowing to investors’ demands for greater boardroom clout, with dozens of companies revising their bylaws in recent weeks ahead of this year’s annual meetings.
Proxy access, embraced by 117 U.S. companies during 2015, gives shareholders more power to oust directors and influence corporate strategy by letting them list competing board candidates on ballots for annual meetings. About 21% of S&P 500 companies have adopted proxy access, up from about 1% in 2014, according to Institutional Shareholder Services, a major proxy-advisory firm.
I can think of several reasons why companies may be caving:
- Corporate managers are generally spineless wimps.
- Over half of shareholder proxy access bylaws are passing and directors are scared by ISS' policy of recommending against reelection of directors who do not comply with proposals that receive a majority vote.
- Because over half of shareholder proxy access bylaws are passing, companies are preempting shareholder activists by adopting access systems that are weaker than those being proposed by shareholders.
But maybe there's a simpler answer. Maybe companies have decided that proxy access really doesn't mater all that much. Marcel Kahan and Ed Rock have argued that "proxy access will lead to few shareholder nominations, that most of these nominees will be defeated, and that the occasional nominee who does get elected will have little impact."
When compared to traditional proxy contests and to withhold campaigns, proxy access involves significant disadvantages, while promising only modest advantages. The cost savings of proxy access compared to traditional contests are overstated because most proxy contests expenses are discretionary campaign expenses or relate to other expense items that are unaffected by the proxy access rule. By contrast, the limitations that come with proxy access are significant: the number of nominees a shareholder can propose is limited; the level of shareholder support required to gain a seat, as a practical matter, is increased; the company retains control over the design of the proxycards; and the company retains exclusive access to preliminary voting information.
So my current bottom line is: If proxy access came into fruition, cases in which shareholder nominees succeed in being elected, undesirable results will follow, but maybe those cases will be rare and proxy access will turn out to be yet another flop.
