The Meaningful Return of Shareholder Access (Part 1)
Directors are not chosen by shareholders. In the case of most public companies, shareholders can only vote for a single slate of directors in something that resembles an old style Soviet election. The decision as to who gets to serve on the board, therefore, is made not when shareholders vote but when the slate submitted to shareholders is selected. The slate is invariably determined by the board, with input (explicit or implicit) from the CEO. (For a discussion of this influence, see The Demythification of the Board of Directors). The result is a system whereby directors seeking to remain on the board have greater incentive to side with management than with shareholders.
Assorted reforms designed to ensure greater board independence and orientation towards shareholders have been tried. The definition of director independence at the stock exchanges (but not Delaware law) has been tightened. Listed companies must have a nominating committee that consists only of independent directors. Nonetheless, these approaches have largely failed. Id. The definition of director independence does not ensure independence in fact. Nominating committees may consist of independent directors but they can still consult with management and accept their nominees.
The one reform that did have the potential to work, however, was shareholder access. (for a history of the SEC's efforts in this area, see The SEC, Corporate Governance, and Shareholder Access to the Board Room) as a rule by the SEC, shareholder access allowed large shareholders (or groups of shareholders) to submit a minority of directors for inclusion in the company's proxy statement. Shareholder access made it more cost effective to run nominees not selected by incumbent management. Access also had the potential to more closely focus directors on the interests of shareholders in order to avoid the submission of competing nominees.
The SEC's shareholder access rule was struck down by the DC Circuit on administrative grounds. (for a discussion of the case and the weak reasoning, see Shareholder Access and Uneconomic Economic Analysis: Business Roundtable v. SEC). The opinion was poorly reasoned and had the appearance of a result oriented decision. Nonetheless, the decision eliminated the SEC's categorical rule on the subject.
Since then, shareholder access has been a matter of private ordering, with shareholders submitting a modest number of proposals at specific companies calling for access. A number received majority support. Nonetheless, its safe to say that for the most part, shareholder access was not at the forefront of investor concerns, probably more a result of exhaustion than disinterest.
As we will discuss in the next post, that is about to change.