The Conference Board Governance Center Blog


Proxy Access Could Hurt the Bottom Line

GUEST CONTRIBUTOR POST: Brian G. Cartwright is senior advisor to Latham & Watkins LLP and a fellow of the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University. Charles M. Nathan is a member of the corporate department in Latham & Watkins’ New York office, is co-chair of the firm’s Corporate Governance Task Force and is former global co-chair of the firm’s Mergers and Acquisitions Group. This post is exclusive to The Conference Board Governance Center.

By Brian G. Cartwright and Charles M. Nathan

The SEC’s adoption of proxy access on Aug. 25 is a watershed event of potentially historic significance, climaxing over four decades of activist effort aimed at the boardroom.dodd-frank act

The legendary community organizer Saul Alinsky invented what he dubbed the “proxy tactic” during his late-1960s-era agitations against Eastman Kodak in Rochester, N.Y. As Alinsky wrote in his famous 1971 guide Rules for Radicals, before then “[n]o one had ever organized a campaign to use proxies for social and political purposes.”  But as Alinsky thought about the idea, “[s]oon I was intoxicated by the possibilities.  You could begin to play the whole Wall Street board up and down.”  While Alinsky realized that “corporations will fight back by pointing out that the … demands of the stockholders will result in diminished dividends,” he believed enough stockholders would find their campaigns “more important than a cut in dividends.”  Alinsky was so excited by his new idea, that he trumpeted the proxy tactic as “one of the single most important breakthroughs in the revolutions of our times.”

Well, now we shall see whether Alinsky was right.  At a moment when our economy is tottering, millions are unemployed with little hope of relief, and American economic dominance is challenged by aggressive new competitors in Asia, a bare party-line majority of the SEC has embarked on a grand experiment in politicizing the leadership of our businesses.

Where once public company directors served on what were, in effect, self-perpetuating boards of trustees, now they find themselves newly transformed into a specialized form of politician coping with an annual election cycle.  Corporate governance activists are busily laying an additional foundation for the politicization of corporate boards by agitating for vastly increased shareholder ability to call special meetings between annual elections, at which directors could face removal votes if they have sufficiently displeased the governance activists. Directors who looked forward to continuing to add value at the end of their career using business skills honed over a lifetime now will find themselves, like Donald Trump’s reality show apprentices, subject to firing in public.

At least some directors more attuned to working on increasing market share than working on turning out the “political base” may head for the exits, and boardroom headhunters eagerly look forward to a boom in business.  Of course, most directors will continue to be re-elected most of the time – just like members of Congress, whose 90+ percent re-election rate fails to render their conduct any less political.

And what about the little guy—the individual investor? Unfortunately, the little guy could end up taking it on the chin—and not just because generally only the biggest  institutional stockholders will be in a position to use the new rules.

Why?  Because proxy access will work mostly in the shadows.  Those who control voting decisions by big institutional stockholders are consumed by a corporate governance agenda that is often divorced from value creation for shareholders and populist in substance and tone.  Moreover, many of these institutional investors are controlled by special interests—the labor unions and the politicians who run or appoint the managers of huge public employee pension plans.

The large institutional investors are insisting on face-to face meetings with directors so they can make their wishes known directly when “culturally acceptable” and, when not, by more subtle methods. They won’t  find it hard, for example, to  signal that “we’d prefer you build plants in the U.S. even if more expensive than overseas” or “we’d prefer you didn’t take that strike”  or  “we’d rather you invest in more expensive green energy.”

Directors who don’t want a proxy fight will quietly go along.  In most cases, no one would ever have to know:  the new SEC rules don’t require disclosure of such conflicts and contacts.

But enough conversations and decisions like that and entrepreneurship and profits will take an unseen hit.  Extrapolate that across the entire economy and, not only the individual investor, but American prosperity also could take an unseen hit, just when we’re most vulnerable.

About the Guest Blogger:

Brian Cartwright, Senior Advisor, Patomak Global Partners

Brian Cartwright, Senior Advisor, Patomak Global Partners

Brian Cartwright is a Senior Advisor with Patomak Global Partners. Prior to joining Patomak, Mr. Cartwright served as Senior Advisor and long-time partner to the law firm Latham & Watkins, where he was Global Chair of the Public Company Representation Practice Group and member of the Executive Committee. From 2006 to 2009, he served as General Counsel of the U.S. Securities and Exchange Commission. As SEC General Counsel, he was responsible for counseling the Commission on all matters brought before it, including all enforcement actions and all rulemakings.Mr. Cartwright also supervised all cases litigated by the SEC in the United States Courts of Appeals and advised on all adjudications appealed to the Commission. During his service at the SEC, Mr. Cartwright also served as a senior advisor to the Chairman and other Commissioners and helped shape the Commission’s major policy and regulatory initiatives.

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2 Responses to “Proxy Access Could Hurt the Bottom Line”

  1. The argument, aside from tinged with ‘guilt’ by association reasoning, is fundamentally flawed. Just because Alinsky or others developed a particular strategy, does not imply that proxy access by large institutional owners fit in the same boat. The ‘little guy’, always and almost everywhere excluded from serious influence to say nothing of power from influencing corporate boards and corporate behavior, are a declining species in the U.S. (and globally). The little guy (and gal) own less than 30% of equity of the top 1000 corporations (often far less). Large institutional owners of various types (mutual funds, pension funds, etc) by and large represent the ‘little guy’ (or should) as they managed defined benefit or defined contribution retirement plans. To ignore this historically new circumstance, where large institutional investors ‘own’ the vast majority of corporate equity (and other asset classes) yet have little access to the proxy mechanism (short of ‘just say no’ campaign), is close to absurd.

  2. “The little guy could end up taking it on the chin” since “proxy access will work mostly in the shadows.”

    The deliberations of public pension boards are mostly conducted in public meetings. Certainly, policies concerning qualifications will be widely discussed. Most meeting notes of such public boards are available under public records act statutes.

    Directors nominated through proxy access will be considered under a far more open process to the “little guy” and others than those nominated by corporate boards.

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