Corporate & Securities Law

Federalizing proxy access: the SEC vs. Congress and the states

Lucian Bebchuk objects to efforts in the financial regulatory conference committee to “gut proxy access” by imposing a 5% share ownership threshold requirement for access: He says:

Hard-wiring such an ownership threshold in the financial regulatory bill would be a significant setback for shareholders and corporate governance reform. While shareholder power to elect new directors is supposed to serve as a foundation for our system of corporate governance, American shareholders seeking to replace incumbent directors face considerable legal impediments. Lowering these impediments would make directors more focused on shareholder interests. The case for doing so is supported by empirical evidence indicating that arrangements increasing directors’ insulation from removal are associated with lower company value and worse performance.

Bebchuk would rather the law just clarify the SEC’s power to referee this issue. The SEC has proposed a 1% threshold for large companies. Bebchuk thinks this would provide a “meaningful screen” without limiting access to those, like hedge funds, that can get access even without the rule. Also, the SEC could always lower the threshold if it proved too high. However:

With a hard-wired legislative threshold of 5 percent ownership, however, the proxy-access provisions would be largely practically irrelevant for such long-term institutional investors. Even if all the 10 largest public pension funds hypothetically banded together ? a concerted action that would involve overcoming significant coordination costs and collective action barriers ? they would commonly fail to reach the 5 percent threshold.

Bebchuk is concerned the proposed amendment would remove the SEC’s authority to enact such a rule, and hard-wire a requirement that would be impervious to change as circumstances warrant.

Yes, this is a problem with a congressional takeover of state corporate governance. But it’s a problem that infects all such provisions, as I’ve written, e.g., here. Why not, then, leave all such provisions to the SEC rather than letting Congress dictate some of them?

Moreover, leaving the issue with the SEC is only marginally better than leaving it with Congress. Even if state competition is imperfect, there is no a priori reason to believe the SEC generally will reach better results. A political process necessarily gores somebody’s ox. Although Bebchuk thinks shareholders lose in Delaware, shareholders are a rather diverse lot. Some do better in Delaware than on F Street, some do better on Capital Hill.

Unless all policy arrows point to a particular locus of power, a competitive rulemaking process like the market for state corporate law would seem to trump alternatives.

Full post as published by Truth on the Market on June 21, 2010 (boomark / email).