Money Matters: Important proxy access measure struck down

By Brett D. Gardner

The Daily Record Newswire

Last August, the U.S. Securities and Exchange Commission approved a key proxy access proposal by a 3-2 vote. The proposal outlined procedures where shareholders could nominate candidates for director positions on corporate boards and have those nominees included in management's proxy materials.

The approval of the proxy access proposal was viewed as a key win for shareholders because holders who met the ownership and timetable thresholds could avoid a costly separate proxy solicitation by having their nominee(s) included on management's materials rather than their own, thereby avoiding unnecessary printing and mailing costs.

Leading up to the rule's approval, business groups argued the rule would ultimately serve as a distraction to a company's operations and would open the door for hedge funds and activists to manipulate companies and would also give significant power to labor unions. Before the rule even became implemented, these business groups, represented by the Business Roundtable and the U.S. Chamber of Commerce, sued to overturn the rule.

Less than one year after the rule's approval, business groups "won" and the U.S. Court of Appeals for the District of Columbia vacated the rule stating that the SEC did not adequately assess the economic effects of the rule.

Essentially, the entities that fought against the proposal forgot that shareholders are the owners of a corporation. Because of the strong resistance to the rule, management and company boards, for the most part validated the notion that they would like shareholders to have little to no ability to express concerns with a corporation's performance or a particular facet of a corporation's operations.

What's particularly concerning about the rule being struck down is that it reinforces that boards and companies can continue with the status quo of not listening to their shareholders by placing competing nominees on company proxy materials. The process of nominating directors is difficult enough and now, with the rule vacated, shareholders are back to square one and have to rely solely on boards and management to communicate with them to seek solutions rather than having a cost-effective solution to seek independent shareholder representation on a company's board.

In the midst of all of the debate about why the rule should be struck down, what seems to have been forgotten is that built within the structure of corporate governance is the concept of democracy. The votes that shareholders accumulate afford them certain rights as owners of a company, the most important of which is their voice; a voice that allows them to submit proposals before management and to vote on other matters brought before them as owners.

As an agent of the shareholders, the board is afforded the task of monitoring the activities of a company's officers and/or managers and the overall performance of a company. When company performance lags and the officers' and/or managers' fulfillment of their responsibilities becomes contentious, shareholders naturally begin to question such actions, as well as the responsibility of the board to effectively address the performance inefficiencies of the officers and managers they are entrusted to "monitor."

Proxy access is core shareholder right that would have made boards more responsive to shareholders and accountable for their oversight. How is this a bad thing for shareholders? Isn't it the shareholders, as owners, who are paying for the "right" if they were to have nominees placed on a company's board anyway?

The next time that you receive proxy materials from your company's management or a fellow shareholder seeking changes to your investment, remember that as a shareholder you have a democratic right and privilege that significantly affects the value of your investment. Don't unknowingly reject your fellow shareholder's suggested changes by supporting the contentions of an incumbent board or management.

The board's agenda may be in their own best interest, but is not always what is best for shareholders. Assess all sides and if you do not understand something contained in the materials you receive -- call, find out the answers and become active in your investment.

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Brett Gardner is a portfolio manager/analyst for Karpus Investment Management. He can be reached at (585) 586-4680.

Published: Tue, Sep 20, 2011

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