Investor Access To The Director Nominating And Voting Machinery: A Certainty For 2010?

We came away from the Society’s annual conference almost 100% certain that there would be “proxy access” in time for the 2010 meeting season. SEC Commissioner Elisse Walter, who gave the closing address, spoke passionately on the subject – and made it crystal clear that her long-term friend and colleague, SEC Chairman Mary Schapiro, was equally committed to the idea… AND that they had the votes in hand to make it happen.

We are on record as being a fan of the idea – solely on the basis of fairness: How can we let proponents submit so many immaterial and sometimes downright silly things for a vote, and NOT let them put forward a proposal on what is currently being recognized as the most important thing of all for shareholders to vote on? But also, as we’ve been trying to point out – this is really something of a tempest in a teapot, IF, that is, the rules are written properly: Truly “serious investors” – who should be the only ones allowed to use the proxy machinery on the nickel of other shareholders – won’t be nominating directors willy-nilly. Truly “serious candidates” could never be found to run in non-serious contests. And, we’re almost 100% sure that if there IS a truly serious election contest, the dissidents will want to use their own proxy materials, and mount their own campaigns on their own…IF they seriously want to win, that is, and not just make noise.

On the other hand, we’ve also been warning for at least eight years now about the very serious dangers of “federalizing” corporate governance - and the all-important shareholder meeting process in particular where state laws and many important precedents are incredibly well-developed and have evolved steadily, and in a mostly positive way, in response to new developments and to well-reasoned ideas. The biggest dangers we see in the latest SEC draft that’s out for comment are the way-too-low thresholds for gaining access to the proxy machinery and the way-too-short holding period that has been proposed. Even the more “serious” activist and institutional investors seem to be realizing that these too-loose limits will allow a lot of non-serious troublemakers to potentially jump ahead of the serious folks…in a race to be the first to file, which is yet another bad criterion we say.

We plan to write our own comment letter - and readers, we’d urge you to file your own too – and a non-form-letter type, please. Meanwhile, we’d urge you to urge that the minimum threshold for share ownership be at least 5% - and ideally, we think, 10% - which, as we’ve noted above, seems to be a “reasonable threshold” for most activists in terms of calling a special meeting…which filing a competing slate is much akin to. We also think that requiring two years of prior ownership – plus a commitment to hold at least one more year following a proposal filing would go a long way to screening out proponents whose main agenda is to make noise…or make trouble…or make a quick buck, rather than to contribute to “good governance”.

P.S. Right now, we’d still lay 60:40 odds that this WILL get done in time for the 2010 season. While some folks are saying they’ll sue the SEC – and maybe they will – it seems pretty clear to us that the SEC does have the authority to set ground rules here. In fact, the current state of affairs – where shareholders can make proposals “except pertaining to an election” – is an exception of the SEC’s own making, to their own rules, which, accordingly, we think they can revoke on their own.