Democracy in America: Corporate Proxies, the SEC, and the Corporation
Commentary by Julie Fox Gorte, Senior Vice President, Sustainable Investing
In 2002, the government of Iraq deemed Saddam Hussein the winner in its national election, having won 100 percent of the vote. It wasn’t entirely clear how the ballots were counted, and apparently in some northern provinces there were no ballots at all, according to the CNN story. CNN also dryly noted, “Saddam was the only candidate in the election.”1 Elections in the former Soviet Union were famous for the same approach: 99 percent victories aren’t so difficult when there’s only one slate on the ballot.
Perhaps it is time to bring democracy to the corporate boardroom, where the typical election — like Saddam’s Iraq and the former Soviet “republics” — consists of a ballot of management’s handpicked candidates running unopposed for the privilege of representing shareholders. It’s hard to imagine much of anything in the United States, which so cherishes democracy, being less democratic, but there it is.
There are some who believe, however, that the guardians of shareholder interests are not yet sufficiently insulated from their constituents. On Wednesday, July 25, the Securities and Exchange Commission (SEC), voted to approve two very different draft proposals2 addressing shareowner access to the proxy ballot, both of which would significantly curtail the limited channels shareowners now have to affect corporate strategy, oversight and accountability. One proposal is relatively straightforward: it clarifies that shareholder proposals seeking to establish procedures for shareholder access to the company proxy for director elections are not permitted — or will be excluded by “no action” letters issued by the SEC — under the so-called “ordinary business” clause, or rule 14a-8. In short, no shareowner proposals on access to proxies would be permitted. The second is ostensibly the “democratic” proposal. It would ostensibly allow shareowners access to the proxy to create procedures for director elections, but only to shareholders that own 5 percent or more of the company’s stock. Five percent is a lofty threshold for any large company: at the moment, for instance, this would require a position worth over $24 billion in ExxonMobil, or over $9 billion in WalMart. Needless to say, very few of even the world’s largest institutional would own enough shares to have any meaningful say. The result is the same: shareowners will have no access to the proxy ballot and directors will be nominated by corporate management rather than by the shareowners they are supposedly elected to represent.
But the plot thickens. The second proposal also contains several open questions, and it appears quite possible that the limitations on shareowner rights could be significantly deeper than simply proposals regarding director elections. Indeed, the second proposal is beginning to look like what Congressional staffers call a Christmas tree: an informal designation for a bill decorated with many unrelated amendments providing special benefits to various interests. Specifically, this proposal may permit the creation of a much higher hurdle for shareholders to jump — such as a minimum percentage holding rule, or a bylaw prohibiting any nonbinding resolution being offered, or other hurdle — before allowing any shareholder access to the proxy whatsoever, not just those concerning proxy access for director elections, but anything.
The corporate proxy has been one of the primary vehicles shareowners can use to communicate with management, especially when management is unresponsive to less public appeals, on subjects ranging from majority voting to executive compensation, from non-discrimination against gay and lesbian employees to climate risk. In the current proxy season (2006/7) there have been over 350 proposals filed on environmental and social issues, and still more on corporate governance issues. If the proposed rules became law, such attempts to make corporate management more responsive to shareowner concerns would be a thing of the past.
Imagine: directors who are “elected” in an unopposed, Soviet-style election as long as they win a majority or (at about half the S&P 500 companies, and probably more than half of all smaller companies) a plurality of the “yes” votes, could amend the bylaws to prohibit any shareholder proposal from being included in the company’s annual proxy. If this happened at, say, ExxonMobil, which recently refused a group of representatives from large public pension funds access to a director who chairs the board’s public policy committee, then shareowners would have no effective access to directors at all. Their only recourse would be to withhold votes from management’s hand-picked board nominees —an extraordinarily blunt and ineffective instrument to use if all a shareowner wants to do is discuss certain issues bearing on a company’s long-term financial performance. And today, many issues that might be excluded as outside of “ordinary business” — from excessive executive compensation to climate risk — clearly bear on many companies’ long-term performance.
Accountability is critical for publicly traded corporations in a market economy, and improved corporate governance is clearly in the best interest of shareholders. Any loss of access to directors — limited as it is — would reduce the accountability of directors to the shareholders they are supposed to represent, and reduce the prospects for improved corporate governance at a time when a cascade of corporate scandals demonstrates what can happen when management insiders are left to their own devices. Interestingly, a search on the word “accountability” on the SEC’s website brings up a document entitled “Restoring Trust: Report to The Hon. Jed S. Rakoff, The United States District Court for the Southern District of New York on Corporate Governance for the Future of MCI.” In short, the report is a kind of post mortem on what went wrong at WorldCom. One of its more powerful passages reads as follows:
“The Governance Committee should establish a website that will offer shareholders a “town meeting” forum for discussion of issues of concern. One or more shareholders representing at least 1% of the voting power of the Company should be entitled to place resolutions on the website for consideration of all shareholders, irrespective of whether such resolutions would be deemed appropriate for the Company’s proxy statement (based on considerations of whether such resolutions involve matters of ordinary business or otherwise). The Governance Committee should establish criteria for the times of submission of such resolutions, and the time and manner of recording votes of shareholders regarding any such proposals. Any such proposal that receives a minimum vote to be set by the Governance Committee (such as 20%) should be placed by the Company on its next proxy statement. It should be the general policy of the Company to solicit the views of shareholders on issues of concern to them on an active basis.”
It has only been four short years since the publication of “Restoring Trust,” but many of those whose nest eggs were crushed by WorldCom’s debacle will never be made whole. There is never a good time to repeal accountability. We need it too much. Shareowner assets, including investments that Pax World makes on behalf of its shareholders, should never be treated lightly, and if that is to be the case, then the companies we invest in need accountable directors. Denying shareowner access to the proxy ballot is simply trampling on corporate accountability, pure and simple. It is important that all of us who care about corporate accountability, and governance, and social responsibility, oppose these proposed changes as forcefully as we can.
1CNN, “Saddam Gets Perfect Poll Result,” Wednesday, October 16, 2002.
2Securities and Exchange Commission, 17 CFR PART 240, “Shareholder Proposals Relating to the Election of Directors,”Proposed Rule, July 30, 2007, and 17 CFR Part 240, “Shareholder Proposals,” Proposed Rule, July 30, 2007.