Business Roundtable v. SEC: The Shareholders Respond

The Council of Institutional Investors, TIAA-CREF and 14 other funds (including such notables as Calpers and NYCERF) filed an amicus brief supporting access and Rule 14a-11.  How big of a group is this?  As the brief notes: "Amici and their members cumulatively manage assets exceeding $3 trillion and make annual benefit payments totaling billions of dollars."

More important than the amount, this is an impressive group of shareholders that have as their goal the need to enhance the long term values of their shareholders.  They take central issue with any attempt by Petitioners to speak on behalf of shareholders.   

• The challenge here comes not from shareholders who would be injured by inappropriate regulation, but from the corporate agents the Rule would make more accountable.  Petitioner    BRT is “an   association of chief  executive officers of leading   U.S.   companies.” Business   Roundtable, About Us, http://businessroundtable.org/about-us/ (emphasis added). Its claim that the Rule will injure  share- holder interests thus warrants skepticism.

Likewise, the brief takes issue with the argument that "private ordering" somehow benefits shareholders. 

• The SEC properly rejected petitioners’ so-called “private-ordering” approach   under   which   each corporation would independently decide whether to allow proxy access.  The notion that one  generation of shareholders could   disenfranchise   the   next   is   contrary   to   the  purpose of shareholder meetings.  That company-by-company approach would impose staggering costs.  Moreover, effective private ordering is not possible because many companies impose impediments such as supermajority requirements, restrictions on shareholders’ ability to amend or propose bylaws, and board repeal of shareholder-adopted bylaws. 

The brief also disagrees with the argument that shareholders have alternatives and particularly take issue with use of majority vote provisions as evidence that private ordering will be effective. 

• The SEC also properly concluded that  shareholder amendments to the corporation’s      governing documents, and  shareholder “vote no” campaigns, are equally insufficient.   “[M]any companies have supermajority voting requirements to   amend   the   bylaws,   thereby ‘making  shareholder-proposed bylaw   amendments nearly impossible to implement.’” 75 Fed. Reg.  at 56,675 n.1063; id. at 56,673. And “[t]here is no reason why shareholders who have the affirmative right to elect directors   should   be   limited   to   the   negative   option   of   opposing   board candidates through majority voting or ‘just say no’ campaigns.” CRI 295 at 3.  As petitioners acknowledged, “‘vote no’ campaigns do not have a legally binding effect where the targeted company uses a plurality voting regime in an uncontested election.” CRI     320   at  13. Many companies with  “majority” voting, moreover, simply “refus[e] to accept the resignations   of   directors   who   failed   to   receive   a   majority vote.” 75 Fed. Reg. at 56,775.  Nowhere in their argument do petitioners offer any challenge to the SEC’s finding that existing tools are inadequate.

An interesting aspect of the brief is the use of data from other countries where access is already in place.  The authority has rarely been used because the mere presence of the authority causes management to become more responsive.

• shareholders in those countries exercise their proxy-access rights “judiciously,” CRI 231 at 7; CRI 249 at 3 (“actual use” is “rare”), because proxy access increases management responsiveness and   thereby   decreases the need for shareholders to invoke their rights, CRI 57 at 2.  In Australia, for example, proxy access “has led to better functioning board nominating committees, who take into account   not   only   the   skills   and   experience   of   potential candidates,   but   their likely    acceptability to  shareholders.”  CRI    219   at  1.  The    United Kingdom’s experience   is   similar.    See,   e.g.,   CRI   227   at   3-4;   CRI   249   at   3; CRI 117 at 2.  Where   shareholder   candidates   were   appointed   to   underperforming   companies   in that country—“which has had proxy access for over 100 years”—the appointment was generally “followed by a  significant improvement in financial returns.” CRI 626 at 3.

In the end, this is likely what scares corporate America.  Access is a limited right.  Management still has the corporate treasury to use to defeat any candidates put forth by shareholders.  Whatever the number of access challenges, shareholders will usually lose. 

Nonetheless, however weak the right to access, it provides a mechanism for shareholders to take direct action against non-responsive boards.  To avoid access challenges will require increased responsiveness and communication with shareholders.  It is likely that a number of the companies opposing access would prefer not to have to do this.

The brief is part of a growing trend and a good one.  Institutional investors are collectively weighing in on issues such as access.  As discussed in The SEC, Corporate Governance, and Shareholder Access to the Board Room, this has not always been the case.  This brief points out that when interested in the needs and views of shareholders, courts should listen to shareholders, not other groups. 

Primary materials, including all of the briefs, are posted on the DU Corporate Governance web site.