August 01, 2007
SEC Chair Cox Votes For Two Opposing Proxy Access Proposals--Both May Curtail Shareowner Rights
by Bill Baue
Republican commissioners support a proposal barring shareowners from nominating directors;
Democrats support one allowing it, though it introduced other reductions in shareowner power.
Battles are fought over the right to vote, because the act carries power: to prioritize one outcome
over others, to register your convictions by the choices you make, to participate in democracy. At
an SEC Open Meeting last week, SEC Chair Chris Cox’s vote for two opposing proposals--each
aimed at solving the mess the SEC has gotten itself into over the past half-decade around proxy
access and shareowner resolutions--sent the opposite message about voting: that he claims to
prioritize neither, that he does not have the conviction to make a choice, that it’s not really
The issues under contention--broadly, shareowner rights to file
resolutions on corporate proxies, and specifically, resolutions seeking proxy access to nominate
board candidates--revolve around voting. As with any disagreement over electoral or referendum
voting, the process of finding solutions is highly politicized--both overtly and covertly.
On the surface, voting on the two proposals by the four other SEC commissioners split along
party lines: the two Republicans supported one proposal, the two Democrats supported the other.
Both proposals seek to solve the same problem, introduced by the September 2006 federal court decision in the American Federation of State, County, and Municipal Employees v.
American International Group (AIG) case.
The court chastised the SEC for allowing AIG to
omit AFSCME’s resolution seeking a bylaw change to allow proxy access to nominate directors. The
decision pointed out that the SEC allowed such proposals until 1990, when it started barring them
without explaining this about-face. So the court challenged the SEC to either start allowing such
resolutions, or provide a valid rationale for its post-’90 practice.
The succinct proposal supported
by Republicans makes no bones: continue barring. The proposal provides a rationale—whether it
proves valid remains to be seen, as it invokes a 1976 decision without ever really explaining why
it took until 1990 to apply the decision.
“[S]ome say the company's proxy materials,
which are produced at the shareholders' expense, should under all circumstances be inaccessible to
the shareholder, when it comes to nominating directors,” said Chair Cox in his speech introducing the meeting.
“That would seem to stand the principle of "fair corporate suffrage" on its head.” Yet his deeds
did not match his words, as he cast support for the proposal advancing this solution.
root problem created by the court decision concerns transparency. The AFSCME resolution seeking a
bylaw change to allow proxy access for nominating directors qualifies as a “contested election,” as
distinct from current corporate elections, which are not really contests like most elections, but
rather board-picked slates that shareowners vote for but not against. Federal
regulations require shareowners who nominate candidates to disclose information about themselves,
such as affiliations, or disagreements, with the company--a requirement not addressed by the AFSCME
resolution nor the court decision.
While the proposal supported by the Republicans
solves this transparency problem by simply eliminating shareowners’ right to nominate directors,
supported by the Democrats seeks to solve the root problem by providing disclosure about nominating
shareowners. In addition, the proposal supported by the Democrats offers a number of other
recommendations for the public to consider and discuss during the 60-day comment period. The SEC
has posted submission sites for public comments on the Republican-supported and for public comments on the Democrat-supported
Perhaps Cox’s dual vote in fact represents a bit of brilliant bipartisanship,
a kind of compromise that allowed both proposals to undergo public scrutiny and the democratic
marketplace of ideas. However, the proposal supported by the Democrats floated some suggestions
that could radically transform the power dynamics between shareowners and companies. At the open
meeting, the Democratic commissioners questioned the wisdom of some of these suggestions in the
proposal, which was drafted by SEC staff. The proposal raises the notion of establishing bylaws
procedures for non-binding resolutions (which comprise 95 percent of all resolutions, including a
great many on social and environmental issues.)
“For example, the Commission . . . could
specify that non-binding proposals would not be eligible for inclusion in the company’s proxy
materials, or alternatively that all non-binding proposals would be included in the company’s proxy
materials without restriction, if these approaches were consistent with state law and the company’s
charter and bylaws,” the proposal states.
While shareowner advocates would likely welcome
the second option, the first option “would set a dangerous precedent,” according to Adam Kanzer,
director of shareholder advocacy and general counsel of Domini Social Investments.
other federal regulations will the SEC allow companies to opt out of?” Kanzer told SocialFunds.com.
Domini sent its shareowners an action alert last week that has
already generated more than 400 comments to the SEC on the proposals.
Why is such a
recommendation, which strays far from the immediate question of proxy access for nominating
directors, even being proposed? Some believe that the very process by which the SEC has considered
the proxy access issue has been compromised by subterranean politicization.
disagree with the SEC opening up the entire shareholder rights process merely to consider access to
the proxy,” said Tracey Rembert, senior corporate governance analyst at the Service Employees
International Union (SEIU) Capital Stewardship Program.
“The SEC has painted itself into
this corner by delaying an access ruling these past few years, when there was strong momentum by
the investment community when the first draft was floated to get something done,” Rembert added,
referring to the 2003 rulemaking proposal for proxy access that the SEC failed to enact. “Now it's
just about politics--not about what is a good check and balance on corporate boards.
concern extends to the structuring of the three roundtables the SEC hosted, ostensibly to
gather viewpoints from diverse experts, yet certain experts appeared multiple times, on the very
first panel when the issues were framed and then again on the very last panel when outcomes were
“The process represented a very fair hanging, indeed, of shareholder advocacy as
the Interfaith Center on Corporate Responsibility created it,” said Peter Kinder, founding
president of KLD Research & Analytics, who has been analyzing developments in the process on the KLD blog. “When
administrative agencies use a roundtable process, they do so to create an aura of 'good government'
and honest inquiry that will support a set of regulations they've already decided on.
“It also has the benefit of allowing the agency to conceal who's driving the regulations,”
Kinder told SocialFunds.com. “The agency can make it appear that the regulations emerged from its
'fair and balanced' roundtables.”
In addition to the possible axing of non-binding
proposals, several other suggestions were floated in the proposals that raise significant concerns
for shareowner advocates. For example, an increase in thresholds of stock-ownership for filing
non-binding resolutions, making it even more difficult to do, and also the exception allowing
companies to omit resolutions “that may involve significant social policy issues” on grounds that
the they address “ordinary business.”