Posted August 29, 2010 12:14:44
Well, the long-anticipated event has finally occurred. There is no more guessing on the rules as the SEC has set forth new proxy access guidelines with a split vote and some interesting speeches on August 25th. I am pretty sure it will not go down as a “Day of Infamy” or even get some fancy handle like “Bloody Corporate Wednesday.” We’ve been waiting and talking about this so long that it is almost anti-climactic. The fact is, many institutional investors, corporate directors, activist hedge funds, and CEOs don’t know whether to celebrate or cry foul. Let’s take a logical look at two scenarios where both corporate directors and self-interested shareholder groups could either be happy or sad.
#1. The Happy Scenario:
Activist shareholders –This group is very happy to finally have some clout and the ability to nominate new directors without having to go into their own pocket to fund a proxy battle against a company’s slate of directors. Therefore, companies that are poorly governed and have equally dismal bottom-line performance are now on notice that while it will still be a challenge to meet the proxy access guidelines, shareholders have a tool to be better represented on the board. This tool isn’t perfect though, because while it may be easier to nominate a candidate, shareholders will still need to go out and round up the votes for that person to be elected. This could be no small task at times, especially when the company will pull out all the stops by hiring a proxy solicitor for their slate. But even so, activist shareholders, you are happily in the game.
Corporate boards and management – You are likely to be happy as well, because simply put: In the grand scheme of things, with these rather lofty thresholds, we may not see many shareholders or even groups able to garner the required 3% of stock and have held it for 3 years. But what really should make you excited is what didn’t end up in the Dodd-Frank Reform Act. No mandatory majority voting, no discretionary votes on areas other than the election of directors, and no nonbinding advisory votes on critical decisions except say on pay. So unless you have completely overpaid management or taken the company in a strategic direction that has resulted in a death spiral, you’re still in control of your company even if you do have to hire that proxy solicitor to make sure you get out the vote. You are likely also delighted that some smart folks out there feel that there are aspects of the rulemaking that still can be legally challenged.
#2. The Sad Scenario:
Corporate boards and management – Just the fact that the camel got its nose under the tent is a downer. If we now mandate proxy access and say on pay, what is next? Some may say that, in a way, we only have ourselves (or a few public companies) to blame. The fact is, this could get ugly. We’ve seen publicity that CalSTRS and Relational Investors are building a war chest of directors who could be viable shareholder nominees under these new rules. The bright light on boards has just gotten brighter.
Activist shareholders – Even though you are in the game, you have to feel a little sad about what might have been. Whoever struck the deal that resulted in keeping proxy access but walking away from the other potential shareholder election and oversight tools has left some key issues on the table. There has never been a better or more vulnerable time in the corporate world for shareholders to push for enhanced powers and, while they got a few, I honestly expected more influence to have swung your way. The final proxy access rules certainly narrowed the field of those who are in the game, and we’ll have to see if your investors prove to be good aggregators of those who are disgruntled, long-invested shareholders.
I recognize that there could be more scenarios where members of one party might be celebrating a victory and the other licking their wounds, but it was by stepping back and considering the perceptions of all the different interested parties that suggested to me that people’s views are all over the place, and that only time will tell how tell how Wednesday, August 25, 2010 will be will be remembered in the business school textbooks of the next decade.
My perception is that there is no question that the corporate world has given up some valuable ground that will never be returned. The real question is, will the Dodd-Frank Act’s corporate governance section and the added power to shareholders truly help in holding directors accountable and improve performance? Or have we just added more disclosure and distraction, which focuses directors on things other than some good old strategic planning. I actually have faith in the capital markets and the desire of board members to be successful boards. My glass is half full.