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: Institutional Shareholder Services -- Corporate Governance Blog

Investor Group Opposes ?Private Ordering? Alternative to AccessSubmitted by: Ted Allen, Publications

The Council of Institutional Investors, which represents public pension funds and other institutions with more than $3 trillion under management, is urging its members to ask the U.S. Securities and Exchange Commission not to allow companies to opt out of a proposed proxy access rule.

The SEC surprised access supporters in mid-December when it reopened the comment period on proxy access for another 30 days. Comments now are due by Jan. 19. Based on the SEC?s rulemaking notice, it appears that the agency wants more input on the potential costs and benefits of the rule and whether to permit issuers to opt out of federal access standards.

Corporate advocates and the SEC?s two Republican commissioners have urged the commission to refrain from imposing marketwide access requirements and instead allow ?private ordering? by permitting shareholders and companies to work out their own access procedures through the corporate bylaw process. For investors to nominate board candidates, the SEC?s proposed Rule 14a-11 would impose a one-year holding period and minimum ownership thresholds that range from 1 to 5 percent based on an issuer?s market capitalization. The draft rule already has generated more than 500 comment letters. Many investors support the concept of access, but some institutions have called for higher ownership thresholds or a longer holding period.

The council and other long-time access supporters assert that a uniform, federalized approach to proxy access is preferable and is consistent with the uniform disclosure standards that have been in place for 75 years. In a Dec. 28 memorandum, the council outlined its arguments against permitting companies to opt out of the proposed access rule. Those points include:

* The need for a [SEC] proxy access rule to facilitate the exercise of shareowner rights has not been diminished by recent changes to state corporate law. While Delaware recently adopted a change to its corporation statute that allows companies or shareowners to adopt a proxy access rule, that change is unlikely to result in any significant proxy access reform for shareowners.

* The costs of addressing proxy access via individual company petitions would be prohibitive.

* The 500-word limit for shareowner proposals severely constrains an investors? ability to draft and discuss a proxy access bylaw provision.

* Many companies have supermajority voting requirements to amend the bylaws. These supermajority requirements would make shareowner-proposed bylaw amendments nearly impossible to implement.

* Leaving proxy access reform to Delaware and other states could result in a hodge-podge of standards that would differ from company to company and from state to state. This would be burdensome, costly, and unnecessarily complex to shareowners, particularly those . . . with diversified portfolios of thousands of companies.

* Companies most in need of corporate governance improvements are those most likely to opt out of a proxy access rule. Even if individual companies were to adopt a proxy access bylaw, the ownership threshold may be set so high that proxy access could rarely, if ever, be exercised, even by long-term institutional investors.

* A rule that provides for a proxy access opt-out is hardly an ?investor choice? model, but rather a ?management choice? model that permits public companies to continue to deny their shareowners the fundamental right to nominate and elect directors.

Full post as published by Institutional Shareholder Services -- Corporate Governance Blog on December 30, 2009 (boomark / email).