What Theory and the Empirical Evidence Tell Us About Proxy Access

Abstract

Traditionally, the default rules of corporate and securities law have provided the Board with exclusive authority to decide whether shareholder proposals on proxy access are to be included in a public company’s proxy solicitation materials. However, the SEC has recently amended its rules to allow such proposals to be included whether or not a Board approves. This Article recommends that the SEC return to its traditional approach to proxy access and furthermore urges the SEC not to put mandatory proxy access back on its agenda absent consistent empirical evidence showing shareholder-initiated proxy access is value enhancing. These recommendations are efficiency based as the Board, the locus of authority with the expertise and access to information that is not accessible to shareholders, is in the best position to determine whether or not proxy access is wealth enhancing for shareholders, not the shareholders themselves. This Article makes three primary arguments. First, the SEC’s current regime of proxy access, by no longer allowing companies to exclude shareholder proposals on proxy access from their proxy solicitation materials, should not be understood as an enhancement to the “private ordering” of a company’s governance arrangements. Rather, this regime acts as a federal barrier to the more efficient approach of Board initiated proxy access. Second, the superiority of Board decision making in the context of proxy access creates a presumption that mandatory proxy access is an inefficient and unnecessary means of nominating and electing directors. Third, this presumption can be rebutted with empirical evidence that consistently shows, at a high level of statistical significance, that mandatory proxy access to be wealth enhancing for shareholders. This is required as the null hypothesis to be tested can be stated as follows: the “preservation of managerial discretion” in the nomination of directors is wealth enhancing for shareholders. However, the empirical evidence does not currently exist to reject the null hypothesis. As a result, it would not be unreasonable for the SEC to keep mandatory proxy access off its agenda.