September 23, 2011
Despite Court Ruling, Opportunity for Proxy Access Remains
by Robert Kropp
SocialFunds.com talks with corporate governance advocate James McRitchie about the challenges and
potential benefits provided by SEC Rule 14a-8, which was left standing when Rule 14a-11 was struck
Advocates for improved corporate governance considered a Court of Appeals decision to strike down
the Securities and Exchange Commission's (SEC) rule on proxy access a defeat, and many are dismayed
over the Commission's decision not to seek an appeal.
Rule 14a-11 would have
permitted shareowners who have owned at least three percent of a company for at least three years
to have their nominees for boards of directors included in corporate proxy materials. While the
requirements would have made mounting such an effort challenging, particularly at large companies,
investors could have formed coalitions in order to meet them.
When SEC Chairman Mary
Schapiro announced the Commission's decision not to go forward with an appeal, she added, "Rule
14a-8 will go into effect." Known as the shareholder proposal rule, it permits shareowners "to
require companies to include shareholder proposals regarding proxy access procedures in company
proxy materials." Schapiro stated. "Through this procedure, shareholders and companies have the
opportunity to establish proxy access standards on a company-by-company basis."
requires companies to permit shareowner proposals that either request the implementation of proxy
access, or seek to directly amend bylaws in order to implement proxy access.
14a-8 requires a multi-year process to allow shareowners to nominate candidates for corporate
boards of directors—and, given that overwhelming majorities of shareowners voted in favor of
executive compensation packages recommended by management this year, would face steep challenges in
attracting meaningful votes in support—it does set significantly lower thresholds for submission of
To be eligible under the rule, shareowners must have continuously held at
least $2,000 in a company's market value for at least one year. According to a recent article in Bloomberg, "Advisers to companies and shareholder groups say this
measure's impact is likely to be felt during next year's corporate proxy season."
SocialFunds.com asked James McRitchie, the founder and publisher of CorpGov.net, about the potential effect on proxy access of Rule
14a-8. McRitchie was recently rewarded for his efforts on behalf of corporate governance by being
named for the second year in a row to the National Association of
Corporate Directors' (NACD) list of People to Watch.
"What actually went through was
more like what I proposed ten years ago," McRitchie told SocialFunds.com. "It's a multiple year
approach. Some of the legal advisories speculated that shareowners wouldn't use Rule 14a-11 unless
the company was in trouble and shareowners perceived serious problems."
"I view Rule 14a-8
as insurance," McRitchie continued. "It's a good governance measure, like majority voting. I
wouldn't wait until a company that I hold is in real trouble."
Writing on CorpGov.net,
McRitchie expanded upon the notion of the rule as insurance, stating, "Shareowners shouldn't be
waiting until companies are in trouble before putting in an access rule. After all, it is likely to
take a year or two after initiating a proposal before a rule is in place and than another year or
two to nominate and elect directors. Even then, such nominees are liable to constitute a distinct
minority of directors. A lot can happen in four years. Don’t wait until there is a fire to put in a
"The challenge now is to come up with language that will get a reasonable
percentage of votes," McRitchie said. Noting on CorpGov.net that "proposals must be aimed at how
future elections will be conducted; they cannot be used in an attempt to influence the next
election of directors," McRitchie described the basic elements that should be included in such a
proposal, and said, "I'm advocating that legally nominated candidates appear on the corporate
The language that McRitchie is contemplating would include a universal proxy to
ensure that special interests do not seek control of a board of directors, "since many shareowners
will choose directors ala carte, rather than along party lines."
As opposed to Rule
14a-11, which would have permitted shareowners to nominate candidates for only 25% of a board, Rule
14a-8 allows for full access, which, according to McRitchie, "is needed to ensure changes in
control can occur in a timely manner."
Describing the barriers of Rule 14a-11 as
"arbitrary and capricious, especially given the SEC’s longstanding requirement of $2,000 worth of
shares held for one year to submit shareowner proposals under Rule 14a-8," McRitchie argued that
the low barriers of Rule 14a-8 would allow for increased access by more individual and
"The thresholds of Rule 14a-11 left SRI (socially responsible
investing) funds out in the cold, unless they could rally public pension funds," McRitchie told
McRitchie also advocates for full disclosure of costs by all candidates,
both pre- and post-election. "There should be an accounting of all campaign expenditures, including
in-kind contributions and those expended by corporations or other interested entities on behalf of
candidates they support," he wrote on CorpGov.net.
In a speech delivered recently to the International Corporate Governance Network (ICGN),
shareowner activist Robert AG Monks stated, "The ugly reality (is) that many institutional
shareholders – conspicuously those considered educational and philanthropic leaders – simply
―choose not to function as stewards of the equity shares in their portfolios."
leaves public, union and SRI funds as the only ones left on the field," McRitchie observed on
"I support a lot of the work that socially responsible funds do," McRitchie
told SocialFunds.com. "Their proposals are important. But the key is to get directors on boards who
are concerned about social issues, and who care about ethics. Until we get proxy access and can
hold those directors accountable, then we'll be chasing symptoms until we're blue in the face."