Critiquing the CFA Institute’s report on proxy access

Is proxy access – that is, the ability of certain privileged shareholders to have their own slate of director nominees included in the proxy-solicitation materials public companies must distribute ahead of their annual meetings – a good thing or a bad thing for corporate governance?

Finding the right answer to that question could be critical, as roughly 200 companies currently are expected to face shareholder-submitted proxy-access proposals in 2016. These include 36 from the New York City Comptroller’s Office and 40 submitted by the California State Teachers’ Retirement System (CalSTRS).

As the proposals continue to play out, a study from the CFA Institute that purports to calculate the market value of mandatory proxy access, “Proxy Access in the United States: Revisiting the Proposed SEC Rule,” has been elevated to center stage.

The CFA report assesses the benefits to fall somewhere in the very broad positive range of $3.5 to $140.3 billion. Strikingly, this range implies that proxy access can only be a good thing for shareholders. As shall be discussed, this is a very misleading impression, when one considers the entire universe of event studies the CFA report’s authors had available for their analysis.

The CFA report derived its range of values not by collecting any new data, but by drawing on the empirical results of four published event studies and subsequently converting each to a dollar figure. The four results the CFA report used were: $140.3 billion, based on a study by Jonathan B. Cohn, et al.; $64.9 billion, based on a study by Joanna Tochman Campbell, et al.; $14.6 billion, based on a study by Bo Becker, et al.; and $3.5 billion, based on a study by Torsten Jochem.

Proponents are using the CFA report to support their claims that proxy access will create value for shareholders. For example, as part of its proxy-access initiative, the New York City Comptroller’s Office incorporated a short summary of the CFA report’s results as supporting evidence for the nonbinding shareholder proposals it’s submitted to targeted companies. Noted shareholder activist James McRitchie also has used it as supporting evidence for his proxy-access proposals, including one he submitted at the 2016 annual meeting of Apple Inc. In addition, the Canadian Coalition for Good Governance has used it as support for its endorsement of mandatory proxy access in Canada.

Unfortunately, while this report is widely cited, its findings really haven’t been vetted. A closer look reveals shortcomings that should disqualify the CFA report from being used as support for mandatory proxy access; for shareholder proposals on proxy access; for board discussions about whether a proxy-access bylaw should be implemented; and, perhaps most importantly, for board discussions about whether a proxy-access bylaw needs to be rescinded.

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