The Mischaracterization of Shareholder Reform
The Chair of the SEC recently gave a speech indicating that she had asked the staff for some recommendations on the implementation of a universal proxy. The speech is here.
A universal proxy would simply require all sides in a contest to use the same proxy card. Under the existing system, each side uses its own card and generally includes only its nominees. Shareholders can, under state law, return only a single card. As a result, they must pick one of the two cards and, as a result, can only vote for those candidates. They cannot, therefore, vote for a mix of candidates from both slates.
The approach is inconsistent with the practice that occurs at the meeting itself. To the extent that the shareholder actually attends the meeting, he or she would receive a ballot that included all of the candidates and would be in a position to choose from both slates. As a result, the proxy rules, rather than the shareholder voting process, interferes with shareholder choice.
The proposal, therefore, would remove an unnecessary restriction on shareholder choice. It would remove a restriction inconsistent with the existing practice at shareholder meetings. Yet that is not how the WSJ characterized the change. In an article titled "SEC Chief Tilts Again to Activists" the WSJ opened by noting that "[a]ctivist investors may get more firepower in their battles against a company’s board candidates."
The characterization is misguided. First, the change does not clearly benefit one side or the other. There probably are plenty of shareholders who vote for insurgent candidates but would like to also vote for some of management's nominees but in the absence of a universal proxy cannot. Indeed, buried within the article was the observation that "[s]ome said the proposal isn’t expected to change many outcomes."
More importantly, however, shifts in the proxy rules designed to benefit all shareholders are probably always susceptible to a tendentious claim that they benefit activists. This is because anything that makes the proxy process cheaper, rational and more accessible will benefit all shareholders. Since activists are also shareholders, they likewise benefit.
The issue is not whether activists also benefit from a change in the proxy rules. The issue is whether shareholders as a group benefit. A universal proxy is a no brainer in that regard. It removes indefensible barriers to shareholder choice and, as such, benefit all shareholders.