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Ribstein on Stout on the SEC Proxy Access Proposals

I agree with almost everything my friend and UCLAW colleague Lynn Stout said in her W$J editorial on SEC proposals to expand shareholder access to corporate proxy statements.

Securities and Exchange Commission Chairman Christopher Cox faces a critical decision. Oct. 2 is the deadline for comment on two different proposed SEC rules for governing director elections in U.S. corporations.

One “proxy access” rule, backed by the SEC’s Democratic commissioners, would transform U.S. corporate law by requiring companies to pay the expenses of dissident shareholders seeking to replace the company’s board or directors. The other, a “no access” rule backed by the agency’s Republicans, preserves longstanding regulations that discourage shareholder activism by requiring that dissidents use their own funds to mount a proxy fight. The chairman holds the swing vote that will determine which rule is passed.

Mr. Cox should vote “no access.” The proposed proxy access rule is driven by the emotional claim, unsupported by evidence, that American corporations benefit from “shareholder democracy.”

I also agree with almost everything my friend and fellow blawgger Larry Ribstein said about Lynn’s editorial.

I agree with three ideas here: (1) that the SEC shouldn’t mess with proxy access; (2) that “shareholder democracy” is a misguided idea; and (3) that corporate governance ultimately is subject to the global market for capital. ... Having noted my significant agreement, I want to offer a couple of caveats. First, the reason why the SEC should keep its hands-off here has more to do with the appropriate limits of SEC power than with the substance of the proposal. This is a matter of internal corporate governance which should be for the states. ...

Second, we must distinguish the silly notion, pushed by some shareholder activists and embodied in the term “shareholder democracy,” that corporate voting is something like a political process from the far more legitimate notion that the capital markets can and should provide meaningful constraints on managerial agency costs.

A couple of my articles are particularly relevant here. First, The Case for Limited Shareholder Voting Rights:

Abstract: Recent years have seen a number of efforts to extend the shareholder franchise. These efforts implicate two fundamental issues for corporation law. First, why do shareholders - and only shareholders - have voting rights? Second, why are the voting rights of shareholders so limited? This essay proposes answers for those questions.

As for efforts to expand the limited shareholder voting rights currently provided by corporation law, the essay argues that the director primacy-based system of U.S. corporate governance has served investors and society well. This record of success occurred not in spite of the separation of ownership and control, but because of that separation. Before changing making further changes to the system of corporate law that has worked well for generations, it would be appropriate to give those changes already made time to work their way through the system. To the extent additional change or reform is thought desirable at this point, surely it should be in the nature of minor modifications to the newly adopted rules designed to enhance their performance, or rather than radical and unprecedented shifts in the system of corporate governance that has existed for decades.

Second, A Comment on the SEC Shareholder Access Proposal:

Abstract: The Securities and Exchange Commission (SEC) recently proposed a set of amendments to its proxy rules intended to provide shareholders of public corporations with a limited ability to nominate candidates for a corporation’s board of directors and to have their nominee placed on the corporation’s own proxy statement and card. This essay reviews the principal features of the proposal and identifies several issues remaining for resolution. The essay concludes that the SEC likely has authority to adopt the proposal, but argues that the costs the rule will impose on corporations outweigh any likely benefits from greater shareholder democracy.

The proposal to which the latter paper was addressed was not the current one, but rather an earlier SEC look at shareholder democracy. The analysis, however, will be relevant to the present debate.