November 29, 2009
For Many Shareowners, Private Ordering Will Mean No Proxy Access
by Robert Kropp
Report finds that unless SEC regulations on proxy access are enacted at a federal level, many
shareowners will continue to face restrictions on corporate governance.
In June, the Securities and Exchange Commission (SEC) issued proposed regulatory reforms that would
allow for increased shareowner proxy access. By the end of the comment period on August 17, it had
received more than 500 letters commenting on those changes. Comments on behalf of corporations
often argued in favor of "private ordering to permit shareholders at each individual company to
decide whether proxy access is desirable and to establish its precise contours," instead of a
uniform federal rule, according to a recent report.
The report, entitled The
Limits of Private Ordering: Restrictions on Shareholders' Ability to Initiate Governance Change and
Distortions of the Shareholder Voting Process, was written by Beth Young, a senior research
associate at The Corporate
Library, for ShareOwners.org
and the Council on Institutional Investors (CII).
According to the report, much of the debate thus far on the issue of proxy access has
focused on the legitimacy of federal regulation, with "opponents arguing that the proposed rule
represents too much of an incursion on states' traditional jurisdiction over corporations' internal
affairs." Supporters of private ordering, which would allow the adoption by shareowners of proxy
access rules on a case-by-case basis, argue that recent changes in the General Corporation Law in
Delaware, where more than half of the largest corporations in the US are incorporated, now permit
bylaws establishing a proxy access regime.
However, at the 40% or more of companies
incorporated elsewhere, "there is no assurance that a shareholder-initiated bylaw amendment on
proxy access would be valid." Some states, for instance, prohibit shareowners from amending proxy
access bylaws, while others allow for such amendment but also permit companies to eliminate the
Only a small percentage of companies prohibit shareowner bylaw amendments, but more
than one-third require a supermajority of votes for such amendments to be passed. While most votes
on shareowner proposals require a plurality, or a simple majority, for passage, votes on bylaw
amendments at these companies require a majority of total shares outstanding for passage.
Furthermore, nearly 10% of the largest US corporations have more than one class of voting
stock. At these companies, holders of one class of shares—"often insiders or members of a company's
founding family or group," according to the report—are assigned often significantly greater voting
power, allowing "holders of what may be a very small number of shares to determine voting
The report concludes that, if the SEC's regulatory reforms are not enacted,
shareowners at about 40% of companies will either be prohibited from amending bylaws, or will "face
significant challenges in the form of supermajority vote requirements."
the executive director of ShareOwners.org, said, "The only alternative that will enfranchise
investors is a uniform SEC proxy access policy. Private ordering would mean that shareholders at a
significant number of companies in the broad market indexes would be disenfranchised and
essentially have no choice."