Obama and the First Hundred Days: Institutional Investors Weigh In

With the new Chairman of the SEC decided, the next issue is the Agency's reform agenda.

A collection of 60 or so institutional investors have sent a letter to President Elect Obama addressing this matter.  The letter asked the president elect to take actions in the first 100 days designed to increase the voice of shareholders in risk disclosure, including not only credit risks associated with the mortgage crisis, but also environmental and social issues that have large financial implications.  According to the letter:

• We are writing to urge you to work to restore one element of investor disclosure within the first hundred days of your administration, specifically the right of investors to propose and vote upon resolutions asking a company to evaluate how specific risks may affect the company’s business. From the creation of the SEC in 1934, it has been recognized that investors stand in a unique position to monitor the companies in their portfolios, and to guard against certain risks to stock price, and to society, by encouraging responsible decision-making by management. We strongly encourage you to strengthen the ability of investors to play this important role, by both increasing the obligations of public companies to disclose data on their social and environmental performance, and by strengthening the role of shareholder resolutions in addressing these issues. In particular, we believe that restoring the ability of institutional investors to use the shareholder resolution process to probe companies on certain areas of investment risk is an important initial step. These include the kind of credit risks associated with the mortgage crisis, as well as an array of environmental and social issues which we believe may have large financial implications, e.g., climate change and product toxicity.

The letter specifically calls for a reversal of Staff Legal Bulletin No. 14C (June 28, 2005).  In that Bulletin, the staff indicated that companies could exclude proposals to the extent they called for some type of internal assessment of risks or liabilities faced by the company as a result of the practices.  They were, however, permitted to include the proposals if they were limited to calls to minimize or eliminate operates that could adversely affect the environment or the public's health.

It is no big surprise that investors are focusing on the strictures of Rule 14a-8.  It is not governed by the Delaware courts so investors have relatively clear and enforceable rights.  The provision will come under increasing pressure, particularly as shareholders seek greater access to the company's proxy statement for their nominees. 

As we pointed out on this Blog, the anti-access group was remarkably short sighted in opposing access.  The proposal put out by the Republican dominated Commission was almost useless, providing access to shareholder nominees only in those companies that first passed a bylaw requiring the practice.  With regime change, pressure will grow to provide large shareholders with direct access, eliminating the need for a special bylaw.  Look for reform of Rule 14a-8 to remain front and center under the new administration.

The letter is posted on the DU Corporate Governance web site.