Proxy Access Research Articles

Measurement Issues in the Proxy Access Debate

Recent empirical data indicate that the Commission’s proxy access proposals reduce shareholder wealth and are inimical to the best interests of the shareholder community at large. Cross-sectional variation in stock price response data further suggest that the Commission should reject a ‘one-size-fits-all’ approach, and that an opt-in rule is less likely to destroy shareholder wealth than an opt-out rule. None of the studies cited by the Commission in its request for further comment support a competing conclusion. The studies cited by the Commission instead suggest a rational basis for the market’s concern that the proxy access process can be captured by a small number of institutions with idiosyncratic objectives that conflict with the best interests of the larger shareholder community.

Setting Optimal Rules for Shareholder Proxy Access

Recent developments in Delaware concerning shareholder bylaws and the SEC proposal concerning shareholder proxy access have moved the U.S. closer to a set of optimal rules for shareholder proxy access in nominating director candidates, but not all the way there. These rules must address both the default rule which applies in the absence of agreement within a corporation to the contrary, and the altering rule which specifies who within a corporation may choose to opt out of the default provisions. Applying principles of accountability and freedom of contract, the optimal default rule would allow for certain shareholders to use the corporate proxy to nominate director candidates. The optimal altering rule would make it easy for shareholders to propose bylaws under the Rule 14a-8 process which opt out of the default provisions. Although it would be desirable were states to set these rules on their own, a degree of managerialism at the state level combines with the history of extensive SEC regulation of the proxy process to give the SEC an important role in helping set the rules. As matters currently stand, Delaware is appropriately flexible but has the wrong default rule, while the SEC’s proposal has the right default rule but too little flexibility.

Testimony of John C. Coates IV Before the U.S. Senate Subcommittee on Securities, Insurance and Investment on Proposed Corporate Governance Reforms

The financial crisis has generated a renewed interest in financial regulation as well as corporate governance more generally, among both academics and lawmakers. A large number of bills have been introduced in the Congress to address one or more aspects of corporate governance, including most prominently the Shareholder Bill of Rights Act of 2009 (S. 1074), introduced by New York’s Senator Charles Schumer. The following testimony of Prof. Coates takes up three broad themes: (1) the need for corporate governance of financial institutions to differ from that of other companies, (2) the general weakness of academic and scientific evidence on corporate governance topics, and (3) the general need for carefully considered moderate reforms that can be revised as evidence develops over time. The testimony reviews the state of the evidence on specific, current policy proposals, including “say on pay,” splitting the chair and CEO roles, staggered boards, and proxy access.

Blockholders on Boards and CEO Compensation, Turnover and Firm Valuation

Independent directors who are blockholders (IDB) can generate arms-length bargaining in setting CEO contracts, but can also extract private benefits. Using a panel of about 11,500 firm-years and a unique, hand-collected dataset on IDB-identity, we find that IDBs are more prevalent in firms where blocks or board seats are easier to acquire and in firms with greater need for IDB presence. After controlling for other factors and accounting for endogeneity, CEOs of firms with IDBs have lower pay, lower flow and stock of equity incentives, and higher turnover-performance sensitivities. And firms with IDBs have higher valuations. These effects are large, robust and supported by analyses of switches to and from IDB presence. Our results suggest that IDB presence promotes better contracting, monitoring, and valuation. Our findings imply that by making it easier for blockholders to obtain a board seat, proxy access rules sought by the SEC can benefit shareholders.

Internal Contradictions in the SEC's Proposed Proxy Access Rules

The Securities and Exchange Commission has proposed proxy rules mandating shareholder access under conditions that can be modified by a shareholder majority to make proxy access easier, but not more difficult. The Proposing Release, however, contradicts the Proposed Rules in two distinct respects that render the Proposed Rules arbitrary and capricious in violation of the Administrative Procedure Act. The first contradiction relates to core principles of shareholder self determination. A fundamental premise of every proxy access proposal is that the majority of shareholders are sufficiently intelligent and responsible to nominate and elect directors. But the Proposed Rules prohibit the identical shareholder majority from establishing a proxy access regime, or from amending the Proposed Rules to establish more stringent access standards. The Commission offers no rationale as to why an identical majority of shareholders is so selectively intelligent and responsible that it can be relied upon to elect directors nominated pursuant to the Commission’s imposed access standards, but cannot be relied upon to set its own access standards.The second contradiction relates to the Commission’s assertion that the Proposed Rules replicate the physical shareholder meeting as governed by state law. Nothing in state law sets a minimum proxy access standard, defines the contours of any access proposal to be considered by shareholders, or prohibits a majority of shareholders from amending an access standard to make it more stringent while allowing the same majority to relax the standard. The Proposed Rules thus fail to achieve the Commission’s stated objective, and instead erect barriers to shareholder action that exist nowhere in state law.Both contradictions are potentially cured by a fully-enabling approach in which proxy rules are modified to allow shareholders to propose, and a majority of shareholders to adopt, access rules that are appropriately suited to the individual circumstances of individual corporations. Only this fully-enabling approach is consistent with core principles of shareholder self-determination, and with the operation of state law governing by-law amendments.

US “say‐on‐pay” legislation

PurposeThe purpose of this paper is to discuss the issues surrounding “say‐on‐pay” legislation in the USA; evaluate the corporate governance alternatives to “say‐on‐pay” legislation; recommend a policy encouraging enhanced executive accountability; and suggest research questions pertaining to “say‐on‐pay” proposals and executive compensation for scholars to pursue.Design/methodology/approachThe paper takes an exploratory approach to discussing and analyzing the issues surrounding “say‐on‐pay” legislation in the USA and offering an alternative corporate governance approach to enhancing executive performance.FindingsThe paper finds that whether an annual non‐binding “say‐on‐pay” policy is instituted or not within a company is not the crux of the executive compensation issue. What is important is whether concerned shareholders have the ability to have proxy access and successfully pass such a resolution, thereby exercising shareholder pressure on the board of directors to implement a corporate policy of equating appropriate executive compensation with managerial performance. Moreover, this improvement in board‐shareowner engagement, along with expanded disclosure of executive compensation packages, will assist in obviating the need for the exercise of a draconian shareholder resolution to remove directors.Originality/valueThis paper offers an in‐depth review of the “say‐on‐pay” legislative and corporate governance controversy; places the issue in the context of effective corporate governance; recommends a reasoned approach to executive compensation accountability; and offers a list of research questions for corporate governance and human resource management scholars to pursue.

Adolescent Access to Online Health Services: Perils and Promise

Purpose Many health care institutions provide online health services to adult patients and proxy access to parents of young children. Many of the benefits and barriers to providing such services to adolescent patients remain unclear. Methods The present work is based on a literature review and expert opinion synthesis. Results Potential benefits of providing online health services to adolescents include improved health care access, health literacy, and ongoing care. Potential barriers include information complexity, confidentiality concerns, legal issues, and management priorities. Conclusions Although barriers exist to implementing adolescent access to online health services, the potential benefits are significant. Overcoming these barriers will involve invoking legal and policy strategies and refocusing priorities on adolescent health.

Proxy Access and the Internet Age: Using Electronic Shareholder Forums to Improve Corporate Governance

On November 28, 2007, the SEC voted to amend federal proxy rules in two ways. The first amendment clarified the SEC’s stance that corporations may exclude shareholder proposals for nominees to the company’s board of directors from the company’s proxy materials. The second amendment was designed to encourage the use of electronic communications between companies and investors. These SEC actions constituted a partial response to a longstanding debate concerning the role of shareholders in corporate governance. This Note argues that innovative uses of web-based technology could resolve many contentions issues concerning shareholder participation in corporate elections and ultimately improve the quality of corporate board elections from the perspective of corporate boards and shareholders. Despite their early state of development, electronic shareholder forums present corporations with the clear opportunity for low-cost, beneficial interaction with shareholders. With a proper investment of time and due consideration, electronic communications with shareholders stand to improve corporate performance without dramatically altering structures of corporate governance.

The Wizard of Oz, the United States Constitution, and Corporate Governance

Article II Section 2 of the United States Constitution requires that a majority of the Senate confirm Presidential nominees. It forces the President to negotiate with the Senate in order to obtain the necessary Senatorial approvals. A similar advice and consent mechanism can be replicated in corporate America. Shareholders can be cast in the role of the Senate. The incumbent board can be cast in the role of the Executive. The board can be required to obtain approval of a majority of the shareholder base before a director is allowed to serve. Indeed, there are at least eight substantial reasons to prefer such a system of advice and consent to the variety of proxy access proposals currently advocated by many shareholder rights organizations. Significantly, at least 63 percent of the S&P 500 have already adopted bylaws or board guidelines that either implement or come reasonably close to implementing just such a regime. The SEC can, if it desires, and consistent with the D.C. Circuit's decision in Business Roundtable v. SEC, adopt regulations that impose additional disclosure requirements and filing liabilities on corporations that fail to implement effective advice and consent regimes. These regulations would provide an incentive for all publicly traded corporations to adopt irrevocable advice and consent mechanisms that conform to minimal SEC requirements. These regulations could also serve as an effective substitute for the two controversial proxy access proposals that the Commission now recognizes as ineffective solutions to the battle over proxy access.

A 'Research' Database on Infrastructure Economic Performance

The authors present an infrastructure database that was assembled from multiple sources. Its main purposes are: (1) to provide a snapshot of the sector as of the end of 2004; and (2) to facilitate quantitative analytical research on infrastructure. The paper includes definitions, source information, and the most recent data available for 37 performance indicators that proxy access, affordability, and quality of service. Additionally, the database includes a snapshot of 15 reform indicators across infrastructure sectors.

Shareholder Bylaws, Shareholder Nominations, and Poison Pills

Shareholder bylaws that limit or direct board action raise tough and fascinating questions of both statutory interpretation under state law and an important policy matter. In particular, over the last decade shareholders have sought to use bylaws to limit poison pills and to grant shareholders access to the corporate proxy materials to nominate directors. This paper argues that an expansive, although not unlimited, shareholder power to enact bylaws is both a plausible interpretation of Delaware's statutory scheme and desirable as a policy matter. Shareholder bylaws that set general rules of corporate governance and procedure should be valid unless more specific statutory provisions remove a specific matter from the bylaw power. Applied to poison pill and proxy access bylaws, both are valid under the general analysis, although poison pill bylaws may not be valid due to a more specific provision of Delaware law. The SEC should require boards to include bylaw proposals unless the particular proposal is clearly invalid under relevant state law.

Shareholder Bylaws, Shareholder Nominations, and Poison Pills

Shareholder bylaws limiting or directing board action raise a tough and fascinating question of statutory interpretation under state law as well as an important policy question. In particular, over the last decade shareholders have sought to use bylaws to limit poison pills and to grant shareholders access to the corporate proxy materials to nominate directors. This paper argues that an expansive, although not unlimited, shareholder power to enact bylaws is both a plausible interpretation of Delaware's statutory scheme and desirable as a policy matter. Shareholder bylaws that set general rules of corporate governance and procedure should be valid unless more specific statutory provisions remove a specific matter from the bylaw power. Applied to poison pill and proxy access bylaws, both are valid under the general analysis, although poison pill bylaws may not be valid due to a more specific provision of Delaware law. The SEC should require boards to include bylaw proposals unless the particular proposal is clearly invalid under relevant state law. Board bylaws and certificate provisions could limit shareholder bylaws in some corporations, but it is likely that in many corporations boards will not be willing or able to enact such limits.

A Trip Through the Maze of 'Corporate Democracy': Shareholder Voice and Management Composition

This paper describes and analyzes the role of shareholders in determining the composition of corporate management. Prepared for a symposium on race and corporate law, the paper explores shareholder voice using the example of shareholder activists seeking to increase the racial diversity of boards and officers. Board composition must balance the collegiality and trust that accompanies homogeneity with the creative spark offered by heterogeneity. The paper examines the use of shareholder proposals, voting in board elections, and litigation as methods of diversifying management. The paper pays particular attention to the recent flurry of post-Enron corporate governance reforms, such as the Sarbanes-Oxley Act and proposed changes in SEC proxy rules and NYSE listing requirements. A recurring theme of post-Enron reform is director independence, which may require substantial turnover on boards in coming years. Although shareholders nominally elect directors, in fact they have very limited ability to determine board composition directly through the exercise of voting power. While shareholders can theoretically nominate alternative candidates, this option is severely limited by the daunting logistics and costs of running a proxy campaign. The SEC's recent proposal to give shareholder-nominated board candidates access to the corporate proxy is meant to address this problem. Proxy access under the proposed rule change is subject to significant limitations, however, and thus will affect board composition in only the most extreme circumstances. The paper concludes that the current wave of corporate governance reform has produced only marginal increases in shareholders' opportunity to influence the composition of corporate management.