Academic

I have mixed feelings about the new proxy access rules.  The new rules change both the default rule and the altering rule for proxy access.  Essentially, I like the default rules pretty well, but hate the altering rule.

Until yesterday, the default rule (except for North Dakota corporations) was no proxy access.  Now the default rule is that shareholders who have owned 3% of a corporation's shares for at least 3 years can nominate candidates for up to 25% of the board seats using the corporate proxy.  As I explain at length in my forthcoming article, it makes more sense to have some degree of access as the default.  In part that's because access gives some real meaning to board elections as an accountability device, and board elections are one of the most plausible and easy to defend accountability devices available.  In part it's because a pro-access default reduces the transaction costs for companies who want to tailor their own rules.  So long as the altering rule is flexible (see next paragraph), if the default rule allows access but you want no access, that is an easy rule to write.  Or, if you like the default rule in most respects but want to change one or two dimensions, that is easy to do as well.  But if the default is no access, opting in to a pro-access rule is complicated.  There are a lot of moving parts in an access rule--see the SEC's rules.  Putting all that into the bylaws, and perhaps up for a shareholder vote, is complicated and hard to read.  (Imagine a shareholder proposal creating a proxy access regime from scratch--how would you do that within the 500 word limit?) Best to have a detailed, well-known template as the default, and then let companies write around that if they so choose.  I'm rather worried that the 3%/3 year combination rules out too many shareholders, but I think those levels are at least plausible guesses as to the best levels for most companies.

Where I disagree is the altering rule.  Altering rules specify whether and how a company may opt out of the default rule.  In the SEC's new system, companies may choose to adopt more generous proxy access rules, but they can't adopt less generous rules or opt out completely.  That's too inflexible.  I think the SEC's default rules are a good guess, but they may be wrong, either for most companies or at least for some.  If a majority of shareholders think the rules should be more stingy, why not let them choose more stingy rules?  If we trust shareholders to choose among competing slates of nominees, why not trust them to choose the best proxy access regime?

The SEC's response is that access is a right, and we shouldn't let a majority of shareholders vote to deny rights to all shareholders.  That's not very persuasive.  If this is an individual shareholder right, why limit it as strictly as the 3%/3 year rules do?  The vast majority of shareholders are effectively denied this supposed right under the SEC's rule.  The answer is that the rule balances competing considerations to arrive at a result that is likely to lead to the most efficient governance system.  But that's not about rights at all, it's about effective governance.  And the SEC may be wrong about that balance in general or for specific companies.  If a company's shareholders think the SEC has got the balance wrong, they should be able to correct it.

Is this a step forward overall?  I hope so, but I'm not sure.  I suspect this is not the last word from the SEC on this subject.  There's a lot right here, and what is wrong is pretty easy to fix.  I hope that a future Commission will choose to fix it.