Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors

Abstract

The role of the Securities and Exchange Commission in the corporate governance process has shifted dramatically in recent years. The Commission has increasingly supplanted state law in determining substantive standards of corporate governance. The replacement of states with the Commission will have significant consequences. For one thing, the regulatory philosophy will change. For another, governance practices will become increasingly politicized and volatile. The volatility will be less apparent with respect to rulemaking and more apparent with respect to staff interpretations, particularly those under Rule 14a-8, the shareholder proposal rule. This is particularly clear in connection with changes to the interpretation of the “ordinary business” exclusion in Rule 14a-8. As a case study, the piece examines the phenomena in the context of proposals calling for shareholder approval of outside auditors. In 2005, the staff abandoned more than 50 years of consistent interpretation and found that proposals calling for shareholder ratification of auditors could be deleted from proxy statements under the “ordinary business” exclusion. The explanation for the shift is less likely changes in SOX that gave audit committees of some public companies the authority to select auditors and more likely a desire to reflect the views of the Commission.Volatility imposes costs. The article recommends a number of changes to Rule 14a-8 that are designed to reduce staff discretion and the risk of political shifts in practice.