For decades, the question of investor access to company proxies has been a Pandora's box for the Securities and Exchange Commission, chock-full of competing interests and opinions from the investment community.
Last week, the regulators' five commissioners ripped the top off the box once again when they voted to present two competing rule proposals focused on the election of company directors to the public.
And the result could affect how so-called socially responsible and other activist funds do business.
"The message they have sent is confusing," said Tim Smith, chairman of the Social Investment Forum and senior vice president of Walden Asset Management in Boston. "They have left the door open for a wide range of options."
Commissioners voted 3-2 for each proposal to be put to the public for comment.
One proposal would open up the slate of director nominees to suggestions from shareholders who hold more than a 5% stake, and who have held that position for a year or more. The other adheres more closely to the current system, basically an "if-you-don't-have-anything-nice-to-say, say-nothing-at-all" rule, whereby shareholders are presented a slate by management, and have the option of voting yes or withholding their votes. Still, in this scenario, shareholders could, at their own expense, create their own proxy, a costly and infrequent endeavor.
Commissioners Roel Campos and Annette Nazareth both voted, albeit with reservations, for the first option, while Paul Atkins and Kathleen Casey voted for the second. Chairman Christopher Cox voted in favor of both.
While the proposals themselves offer opposite options, the discussion they spark may result in some mix of the two, radically shifting not only the election of directors, but the nature of all shareholder advisory resolutions. Advisory resolutions, which are non-binding, and generally propose policy changes, are the primary tool socially minded investors use to sway company practices.
Commissioner Atkins, for one, noted his concern that advisory resolutions detract from operating companies' primary businesses. Such proxies present "competing goals of collective action versus the tyranny of the minority," Atkins said. This minority uses their "nominal economic interest to hijack the agenda of all investors," he said. The process is costly for companies and burdensome for regulators' staff, he said, since companies that wish to keep shareholder resolutions off their agenda would often seek no-action letters from the SEC for protection.
In fact, 95% of all shareholder resolutions are advisory, according to Meg Voorhes, director of social issues services at Institutional Shareholder Services in Rockville, Md. From policies, such as the 1984 shareholder proposal pushing for non-discrimination based on sexual orientation at IBM, to environmental concerns, to shareholders urging American Electric to reduce its carbon emissions in the 1990s, Voorhes said, with time, such resolutions often have an impact not only in the boardroom of the target company, but on businesses at large.
Moreover, 70% of all shareholder resolutions are withdrawn after negotiations with management before they go to vote, showing their effectiveness and efficiency, Voorhes said during a Social Investment Forum-sponsored conference call before the SEC vote.
Campos lauded advisory resolutions as a tool for investors to influence management. Campos criticized the idea that rather than engage in the proxy process, shareholders unhappy with management should "use the Wall Street rule and simply walk away when they see something they don't like."
Furthermore, if institutional investors with large blocks of stock were to simply cash out when they disagreed with management, such swings could threaten market stability, Campos said.
Members of the Social Investment Forum also expressed concern about the possibility of allowing only those shareholders with a stake of 5% or more to access the proxy.
When it comes to multi-billion global companies such as ExxonMobil, for example, 5% is more than even the largest institutional investors control, said Lisa Woll, chief executive of the Social Investment Forum.
Even if the proposal allowing shareholders to nominate their own directors passes, the victory could be a hollow one, Smith said.
"They may be establishing a rule that opens up a door, but makes the threshold so high that the rule becomes unusable," said Smith, who predicted pressure from public comments to lower the threshold.
Another concern Smith cited is the speed with which Cox has vowed to establish a proxy-related rule.
The SEC examined rule changes in 2005, but efforts died in the face of stiff opposition from business groups, including the U.S. Chamber of Commerce. Before Cox's tenure, questions about revising the proxy process have haunted the Commission regularly.
The dangers of the vaguely worded current rule, which has been interpreted by the SEC to disallow shareholder access to the election slate, became clear in 2006 when the 2nd Circuit U.S. District Court ruled in favor of the American Federation of State, County and Municipal Employees, which sued insurance giant AIG for the right to nominate directors to its board. The decision overturned the years-long SEC practice of denying such petitions.
A vote for the "short" proposal, or the second option, would reaffirm the SEC's position of years past, although Campos and Atkins both questioned whether it would be any more legally binding than the present rule.
At last week's meeting, Cox vowed to end the cycle of uncertainty. "My intention is to have a clear, unambiguous rule in place before the next proxy season," he said. Proxies are published in the fall.
Those interested have 60 days to comment on the present proposals. Once the revised rule is published, there is another comment period, this time of 30 days, before the Commission vote, Smith said.
"Then it becomes the rule: no more hearings, no more comments," he said. "I think this is an issue that deserves a little more study," Smith said.
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