The effort at private ordering instigated by the NYC Comptroller through the Board Accountability Project ought not to have been necessary.
In 2010, the Commission adopted a rule requiring public companies to offer access to their proxy statement to 3% shareholders who held the shares for at least three-years. See Exchange Act Release No. 62764 (Aug. 25, 2010). Had that rule been left in place boards would probably already be more diverse, compensation would be less extreme, and climate change would have a higher profile in the governance process.
Nonetheless, the rule was not allowed to go into effect, having been struck down by the DC Circuit on process grounds. The court relied on a questionable interpretation of the arbitrary and capricious standard. In contrast to what is required in these sorts of cases, the court gave almost no deference to agency interpretation and adopted a view of cost-benefit analysis that exceeded the bounds of all prior interpretations. See Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC.
The weakness in the analysis used by the opinion was made abundantly clear by the recent study produced by the CFA Institute on shareholder access. See Proxy Access in the United States: Revisiting the Proposed SEC Rule. According to the Study:
- Limited examples of proxy access and director nominations globally, coupled with the limited availability of corresponding market impact data, challenge whether a more detailed cost–benefit analysis was possible in the context of the court’s decision.
- The results of event studies suggest that proxy access has the potential to enhance board performance and raise overall U.S. market capitalization by between $3.5 billion and $140.3 billion.
- Assessing and measuring increased board accountability and effectiveness is challenging. None of the event studies indicate that proxy access reform will hinder board performance.
In short, there is little evidence that access was harmful and significant evidence that it benefited shareholders. Likewise, the Study suggested that there was little to be gained by an even more extensive cost-benefit analysis.
The CFA Study likewise expands the analysis by taking the discussion out of the realm of theory and into realm of actual practice. The Study noted that shareholder access is already a fixture in countries such as the UK, Australia, and Canada. The actual experience of these countries is available to shed light on the role access plays in the governance process. The data shows modest use; according to the CFA Study:
- We found that over the past three years, proxy access has been used only once in Canada to nominate directors to a board (where it was used successfully). In Australia, proxy access was used 11 times in the past three years, only once successfully. In the United Kingdom, proxy access was used 16 times over the past three years; it was successful on 8 occasions and was defeated 6 times, and nominees’ names were withdrawn on 2 occasions. These data suggest that proxy access is a rarely used shareowner right that is typically used only when other outlets for shareowner concerns about a company or its board—such as engagement between shareholders and companies—have been exhausted or have otherwise proved unfruitful.
Add to this data the fact that a number of companies in the United States now have access provisions in place and none have apparently been used.
All of this suggests that access will not be particularly disruptive and will benefit companies by better focusing directors on the interests of shareholders. Given these conclusions, perhaps the time has come for an end to private ordering and a reexamination of the need for rulemaking to make access a more categorical part of the governance landscape.