The DC Circuit and Delaying the Inevitable

What are the long term implications of this decision?  Not  much.

In some respects, the DC Circuit's decision in Business Roundtable v. SEC is a grave disappointment.  The SEC has the authority to adopt an access rule, that was confirmed in Dodd-Frank. The rule was carefully crafted and vetted over a year long process.

The panel, however, didn't like the rule and imposed an almost impossible burden on the SEC.  It wasn't enough, for example, for the SEC to conclude that access could benefit boards and point to some studies making that point.  Instead, the Agency had to rely on the right studies.  The opinion criticized those used by the SEC but did not do the same with respect to those on the other side.  In other words, it is clear that the court agreed with one side but not the other.  One way or another that panel was going to strike down the rule.

That the DC Circuit would issue a political decision is no real surprise.  The circuit is full of judges who likely were too controversial for their home state senators to nominate.  Without senators in Congress, DC has no politicians who can object to the White House nominees.  As a result, the White House has a free hand and can more easily appoint controversial idealogues.  Moreover, the DC Circuit is often a stepping stone for the US Supreme Court.  Judges who want to be Justices can more easily attract the attention of the White House through their decisions. 

What the case shows is how far behind the courts are with respect to the evolution of the corporate governance process.  Two of the judges on the panel were appointed by President Reagan at the height of the law and economics movement.  That was the hey day of deregulation and the view that the market can resolve all issues.  The shallowness of that philosophy was brought home in the most recent recession.  But it is clear that this panel views interference in the management prerogative with disfavor and does not need much excuse to overturn it.

In one respect, the opinion did those favoring governance a favor.  Access is the most controversial rulemaking endeavor by the SEC in years, perhaps in the history of the Agency.  It represents the beginning of a paradigm shift in relations between directors and shareholders.  Access will force on management the obligation to consult with and talk to shareholders more often. 

Issuers are, however, unified in their opposition to the rule and the consequences of the rule.  With the Obama administration criticized as excessively anti-business, the DC Circuit has taken the issue off the table for the 2012 elections.  When the SEC returns with a new proposal, as it certainly will, the rule will likely go into effect after the elections.  The SEC will therefore have greater flexibility in determining the standards for access.  Thus some of the more onerous restrictions (the three year holding period for example) can more easily be jettisoned.  And, while the DC Circuit will get another crack at the rule, membership on the court is likely to shift in a more moderate direction.  

Access is an inevitability.  It is not because of ideology.  It arises out of the interests of shareholders.  As problems such as executive compensation remain intractable, shareholders will rely less on the "imperial CEO" model of governance and insist on greater participation.  While this can occur through incremental increases in authority (say on pay for example), the real solution is the right to nominate directors.  In fact, as the example of Britain has shown, it will be the threat of access that will cause boards to focus more often on the interests of shareholders rather than the actual use of the authority which, no matter what the DC Circuit thinks, is not likely to occur often.   

Given the importance of this authority and the more than half century of waiting by shareholders, a little more delay, in the greater scheme of things, won't really matter, particularly if the ultimate rule is more favorable to shareholders, which is likely to be the case.  Each time access has been shelved, the results have favored shareholders.  The initial efforts were for an access bylaw.  When that didn't happen, the SEC proposed a direct access right.  When that was delayed, Congress was prevailed upon to clarify the SEC's rulemaking authority in the area.  The same will likely occur here.  The ultimate rule will likely favor shareholders more than the current version.

The DC Circuit decision is, as we noted, a disappointment but it has not stopped access.  It has ony delayed the invevitable.