This coming Wednesday, Aug. 25, the Securities & Exchange Commission (SEC) will hold an open meeting regarding the controversial issue of setting proxy access rules for public companies. Shareholders should pay close attention.
Many of us now realize that misguided corporate managers and lazy or complicit boards have destroyed significant amounts of shareholder value in the past few years. Proxy access is a crucial tool to help shareholders fight back.
Taking the "act" out of activist
Proxy access lets shareholders nominate their own candidates to companies' boards of directors. Last-minute changes to proxy access policies that were considered in the financial reform bill (most ominously, an onerous 5% ownership threshold for proxy access) triggered alarm about the future of shareholder rights. Now, the issue's been left instead to the SEC's rulemaking.
According to The Wall Street Journal, the SEC is expected to pass a final proxy access rule (according to those oft-cited "people familiar with the matter"). However, investors can't pop the champagne cork yet. Rumor has it that the agency is considering an ownership threshold of 3%, which would block the vast majority of shareholders from proxy access.
The California Public Employees' Retirement System, better known as CalPERS, and 11 other public pension funds have urged the SEC to loosen its restrictions, pointing out that the 3% threshold is still pretty high when it comes to the biggest, most powerful companies. CalPERS said that the 20 largest public pension funds combined only own 2.88% of Goldman Sachs (NYSE: GS).
Such high thresholds could likely limit shareholder activism of any kind to large, powerful hedge funds and the individuals associated with them. Activist shareholders such as William Ackman, known for exerting pressure on companies like Target (NYSE: TGT), Borders (NYSE: BGP), and McDonald's (NYSE: MCD, and Carl Icahn, currently engaged in a wild skirmish with Lions Gate (NYSE: LGF), spring to mind.
In addition, CalPERS has pointed out to the SEC that requiring a holding period any longer than two years for proxy access would effectively defeat the whole purpose of allowing shareholders to try to put shareholder-friendly individuals on any boards in the first place.
Rumblings of change
This contentious issue has been on and off the SEC's agenda for quite some time. In 2009, the SEC proposed proxy access ownership thresholds to apply on a staggered basis: 1% for a large company, 3% for medium-sized company, and 5% for a small company, with a minimum timeframe of one year of holding the shares. That sounds reasonable, right?
Not to the business community, apparently. The U.S. Chamber of Commerce and the Business Roundtable joined the chorus of objectors, and they're probably far more pleased with the possibility of a 3% minimum. The business community's push for higher ownership thresholds shows just how terrified they are that shareholders might pushing back against outrageous treatment. Companies such as Occidental Petroleum (NYSE: OXY) and Dell (Nasdaq: DELL) have recently felt shareholders' wrath over excessive compensation and other contentious issues.
With more and more shareholders standing up to incompetent or irresponsible managers, it's no wonder that business interests would like to see shareholder rights nipped in the bud.
Taking a stand
In the wake of the Great Depression, the SEC was formed to help protect investors. Over the years, it has let us down too often, seemingly caving to big corporate interests rather than advocating for a fair marketplace and a level playing field for shareholders. Hopefully, the SEC is truly setting its sights back on its original mission, and giving investors the confidence necessary to invest for the long term.
A proxy access rule without crushing restrictions would be a good place to start. Dare we dream that the SEC could stand strong on the far more fair staggered ownership thresholds after all? Perhaps the individuals gearing up to vote against proxy access will remember the huge difference between favoring big business and supporting a truly free market.
Shareholders are part of that marketplace, and their ability to oppose corporate management if things go wrong is an important protection. Such a power could only be a threat to managers who are terrified of scrutiny and accountability.
Let's hope the SEC will take a strong stand for shareholder rights. The game has been rigged against us for too long.
Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on corporate governance.
