Corporate governance by the board, not the government
Proxy access allows shareholders or a group of shareholders, usually holding around 3 percent of the company’s shares, to directly nominate candidates for the board of directors. Traditionally, the board of directors nominates its own candidates for board vacancies. Groups representing public pension funds and labor unions have pushed for proxy access in order to open up corporate governance to their particular interests. Regulators at the Securities and Exchange Commission tried to make the rules mandatory five years ago, but a federal appellate court struck the rule down.
Starbucks’ new rule is similar to the bylaws changes made by some corporations in the last two years, as well as the rule the SEC sought to impose. Only shareholders—up to 20—who have held shares for at least three years and at least 3 percent of all shares, may nominate up to two candidates for the board.
According to the Institutional Shareholder Services Corporate Solutions, 39 percent of Standard & Poor’s 500 index companies provide a proxy-access right as of the end of August. Before 2015, few corporations provided for proxy access, but there is a recent trend toward wider adoption.
Other details of proxy-access bylaws could also be contentious. In July, the SEC’s Division of Corporate Finance allowed an H&R Block shareholder to modify the company’s proxy-access rules. This decision unexpectedly sided with two shareholders who sought to alter what types of shares are considered owned and whether proxy-access nominees could be renominated. Before the debate on the merits of proxy access has even been settled, activist shareholders are tinkering with the details of corporate governance, with the help of SEC regulators.
While some claim that long-term shareholders have a “fundamental” right to proxy access, the truth is that shareholders have never had such a right under the law. For small companies with a handful of well-informed investors, nominating candidates for the board may work. For large public companies with thousands of shareholders, most of whom are uninformed about the critical aspects of corporate operation, proxy access may be an inefficient solution for a problem that doesn’t exist.
There is good reason to doubt that mandatory proxy access would be good public policy. A recent study for the Mercatus Center by one of us (Bernard Sharfman) argues that board control of proxy access should be the default, based on the long history and rationality of corporate governance law. The study also demonstrates that empirical evidence thus far fails to show that government-imposed, mandatory proxy access will enhance the wealth of shareholders. Unless the evidence shows that mandatory proxy access will benefit all shareholders, the SEC should keep it off its agenda and allow corporations to govern themselves.
The evidence cited by mandatory proxy access proponents is not enough to support a government mandate. In fact, a study by the Chartered Financial Analyst Institute, written to encourage the SEC to put proxy access back on its agenda, contains methodological errors, such as incorrectly estimating the dollar value of mandatory proxy access. Additionally, there is evidence to suggest that mandatory proxy access may harm companies, particularly smaller companies.
The obscurities of the proxy-access debate may sound like another language to most investors, and that is precisely the point. Shareholders entrust the board of directors and corporate officers to handle the details of management. This arrangement typically works for shareholders. While shareholders of companies like Starbucks should be free to choose proxy-access bylaws, they should not be forced to do so by government regulators.
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