Friday, August 28, 2009

shareholder primacy?

One response to the financial market meltdown is a proposed rule by the Securities and Exchange Commission that would allow greater control over corporate board of director nominations by firm shareholders (proposal here). This proposed rule would ostensibly make it easier for shareholders to nominate and elect individual directors to various corporate boards. This rule change seeks to address the criticism that in light of the reckless risk taking engaged in my executives and boards of such companies as AIG, Bear Stearns, Lehman Brothers, Citi, etc., shareholders have very little ability to realistically hold board members accountable for allowing executives to engage in breathtaking risk.

In short, the SEC proposes changes to the proxy rules which would require corporations to include in their proxy materials shareholder nominees for director positions that could make up to 25% of all board members. The SEC summarizes its proposal as follows:

"We are proposing changes to the federal proxy rules to remove impediments to the exercise of shareholders’ rights to nominate and elect directors to company boards of directors. The new rules would require, under certain circumstances, a company to include in the company’s proxy materials a shareholder’s, or group of shareholders’, nominees for director. The proposal includes certain requirements, key among which are a requirement that use of the new procedures be in accordance with state law, and provisions regarding the disclosures required to be made concerning nominating shareholders or groups and their nominees. In addition, the new rules would require companies to include in their proxy materials, under certain circumstances, shareholder proposals that would amend, or that request an amendment to, a company’s governing documents regarding nomination procedures or disclosures related to shareholder nominations, provided the proposal does not conflict with the Commission’s disclosure rules – including the proposed new rules. We also are proposing changes to certain of our other rules and regulations – including the existing exemptions from our proxy rules and the beneficial ownership reporting requirements – that may be affected by the new proposed procedures."

Supporters of the rule change argue that providing shareholders with the right to place director candidates directly onto the proxy card (voted on by all shareholders) would significantly improve director accountability.

Not surprisingly, this rule change proposal has engendered significant opposition from Wall Street. In an unusual move, responding to the Comment period requested by the SEC, seven of the nation's most prominent law firms representing most major corporations, submitted a joint letter opposing the rule change. Mega firms, Cravath, Wachtell, Sullivan & Cromwell, Skadden Arps, Simpson Thatcher, Davis Polk and Latham & Watkins, jointly urged the SEC to proceed with caution in prescribing a "one-size-fits-all" approach to allowing proxy proposals to include director candidacies.

The Comment period for this rule change is now closed.

One thing seems certain now that regulatory overhaul is on the table in light of the economic meltdown: controversial calls for change will be challenged at every quarter. Status quo will be protected at every turn. The United States system of corporate governance and securities regulation is a cottage industry that will be protected fiercely. The Obama administration's attempts to layer the industry with new regulation and the SEC's efforts to propose new proxy rules to improve director accountability will be challenged by the powerful and the entrenched.

At one point, I suspected (hoped) that a silver lining of the economic crisis might be a new impetus to systematically and carefully review U.S. corporate governance and our nations regulation of securities, commodities, derivatives, over-the-counter trading and so forth, with an intended outcome of modern, efficient, investor-protecting reform. Will the powerful allow this regulatory modernization? Will the Obama administration have the steely reserve to challenge the entrenched? Are the right people in place to conduct the systematic and careful review? Will regulatory reform truly occur, or just pacifying window dressing?

This is a story that continues to unfold.


  1. professor cummings:

    how can changes to proxy rules constitute true reform in light of the financial crisis? isn't much more needed?

  2. I think this change would is a great idea by the SEC. I think shareholders should have a say in who and what goes on with the board of directors. However, I also think that most shareholders have no idea who is on the board and what their background is. This is a serious problem and I think there should be a way to inform shareholders about each and every board member or candidate to ensure that when voting, shareholders know who they are voting for!

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