We are examining the decision by the Commission to deny shareholders access to the company's proxy statement for their nominees. As part of the process, we are examining the history of access. Much of what is written can be examined in greater detail in my paper, The SEC, Corporate Governance, and Shareholder Access to the Board Room.

The aborted effort in 1942 to provide shareholders with access to the proxy statement for their nominees put an end to the efforts until the 1980s. Two things changed during the longer interlude. First, by the late 1980s, shareholder activism had risen to the fore. Shareholders wanted greater influence in the board room, with Rule 14a-8 ceasing to be the exclusive purview of the gadflies.

Second, the Commission began to realize that the efficacy of the disclosure process required some attention to the substantive behavior inside the board room. In assigning to the Commission responsibility for disclosure, Congress interjected the agency into the corporate governance process. With the traditional problems of self perpetuation and excessive compensation documented in the legislative history, Congress assumed that the disinfectant of sunlight coupled with extant shareholder authority would solve the worst abuses.

The authority was not paired with the right to regulate substantive behavior within the company. Typically treated as a matter of fiduciary obligations, it was left to the states. Over time, however, it became clear that the efficacy of the disclosure system depended upon the substantive obligations of the responsible officers and directors, something that emerged with a vengeance during the corporate bribery scandal of the 1970s. Uncovered as a byproduct of the Watergate scandals, the widespread nature of the problem demonstrated weaknesses in the process of formulating disclosure. Although the scandal resulted in amendments to the Exchange Act, none seriously addressed the issue of accountability.

The Commission tried to encourage the use of independent directors in part by exhortation. See Exchange Act Release No. 14970 (July 18, 1978) (“In this regard, the Commission believes that it is desirable that these three standing committees, which have responsibilities in areas where disinterested oversight is most needed, normally be composed entirely of persons independent of management.”). Alternatively, it sought to pressure the stock exchanges into requiring independent director requirements through the mechanism of listing standards, an approach weakened by the DC Circuit's decision in Business Roundtable v. SEC, 905 F.2d 406 (D.C. Cir. 1990).

Increased shareholder activism, the search for accountability, and the growing importance of independent directors, meant that attention would eventually return to the election process, including the limitation in Rule 14a-8 on shareholder nominations. At the same time, however, resistance from corporate America would remain stiff. Shareholder access raised the threat of directors not vetted by management, an anathema. More specifically, companies were concerned with “special interest” directors.  

The Commission, therefore, found itself in the middle of the two warring camps. The leanings of the staff and the interests of institutional investors sometimes resulted in access returning to the forefront.  The dynamics would cause access to resurface but would leave the Commission paralyzed from decisive action.  Tomorrow, we shall look at access revisited.