Early last month a federal appeals court issued a ruling on a shareholder proxy access case that has the potential to dramatically transform the way corporate boards operate. The case involved an attempt by the American Federation of State, County and Municipal Employees (AFSCME) , one of the nation’s largest unions, to have shareholder-nominated candidates for corporate boards be included in the proxy statement that management sends to shareholders.
The Second Circuit Court of Appeals in New York concluded that publicly traded companies cannot exclude shareholder proposals designed to allow shareholders to place shareholder-nominated directors on management’s proxy statements. Within thirty-six hours of the court’s decision, Securities and Exchange Commission chair Christopher Cox announced that the SEC would conduct an open meeting on the matter on October 18. According to Stuart Grant, managing partner of Grant and Eisenhofer, legal counsel to AFSCME, “Chairman Cox did not call this meeting to say, ‘Good job Circuit Court, we are with you.'” Shareholder activists fear that the SEC will attempt to rescind the advancement of shareholder rights.
There are more than 80 million Americans who currently hold shares in American corporations. The vast majority of them pay little attention to the arcane rules that govern elections to the boards of directors of the companies that they ostensibly own. Most stock owners either ignore the proxy statement they receive in the mail or dutifully vote management’s slate. But the outcome of this case has tremendous significance for the corporate governance movement.
Under existing rules, it is extremely difficult for shareholders to run their own candidates for boards of directors of large companies. Currently, company management is allowed to send out proxy statements– the means by which shareholders vote–that include only their hand- picked candidates. It is prohibitively expensive for a shareholder, or a group of shareholders, to put forward a candidate for director. Candidates not included on management’s proxy list have to spend their own money for mailings to shareholders and legal filings with the SEC. Effectively reaching tens of thousands of shareholders can cost hundreds of thousands of dollars if a candidate is not included on management’s list. Real corporate democracy is rarely practiced.
Management control of board elections has been a closely guarded prerogative for several reasons. There is fear that with easier access to corporate boards, small groups with narrow interests could skew companies away from increasing shareholder value toward tangential “social” issues. And some financial experts argue that in the long term, hedge fund managers–investors who purchase large amounts of stocks often with the intention of taking over the board–are a market- driven way to discipline inefficient and under-performing companies. But as economist John Maynard Keynes quipped, “In the long run, we are all dead.” By the time corporate raiders and hedge fund entrepreneurs get around to transforming dysfunctional companies, tremendous shareholder value has been lost.