A Saturday Editorial: Shareholder Access, Open Markets, and Economic Logic

There is considerable irony among those who oppose access to the company's proxy statement for shareholder nominees to the board.  These bylaws are permitted under state law.  They are rendered all but impossible to make not because of state law restrictions but because of the costs associated with the federal proxy rules.  If they can't be included in the company's proxy statement, shareholders must draft their own proxy statement and distribute it to shareholders.  In the case of companies like Exxon-Mobile, the existence of 600,000 shareholders makes distribution prohibitively expensive. 

Many who oppose access purport to favor state law regulation of corporations.  Yet non-access effectively preempts state law.  Many who oppose access purport to favor a nexus of contracts approach to corporations, one that eschews categorical rules and permits shareholders and directors to engage in private ordering.  Larry Ribstein comes to mind here.  Yet non-access is designed to cut off an avenue of interaction between shareholders and directors, replacing it with what is essentially a categorical rule prohibiting shareholder nominations. 

Many who oppose access purport to favor deference to the market (Lynn Stout comes to mind here).  Yet non-access would prevent any market from operating.  To succeed with an access proposal and subsequently to elect candidates to the board, shareholders must convince other owners of the merits of their candidates.  Opponents of non-access would cut off this process, leaving in its place an effective ban on shareholder nominations.  Or as Commissioner Nazareth noted in a recent talk:

• An access proposal such as the one we published in July rests on another perfectly logical economic tenet. In a free market system, a majority of the shareholders will generally behave in their economic self-interest. When it comes to share ownership, their goals are profitability and integrity of the enterprise. In the vast majority of instances these incentives will be consistent with those of the company's management. Responsible management need not fear its shareholders. Unfortunately, there are notable instances, however, in which management acts in its own economic self interest, or chooses to ignore the express will of the shareholders and is unresponsive to them. In such instances, shareholders should have the ability to effect changes through the proxy process. Currently, (other than, to a limited degree, through certain majority vote initiatives) shareholders have virtually no chance to do so through access to the company ballot. Our proxy rules do not facilitate it, and shareholders are forced to solicit proxies on their own ballot, which is more costly and much less effective.

In other words, opponents to access want to interfere with the market, override state law, and impose a categorical prohibition.  Most business interests are more straightforward about their opposition.  They don't want shareholder representatives in the board room (usually calling them special interest directors) because they will disrupt the way things are done.  On this score, such opponents are right.  With shareholder nominees inside the board room, many decisions, particularly those involving executive compensation and self dealing, will likely be scrutinized more closely.  It will not be business as usual.