New evidence in favor of proxy access?
Much like say on pay and majority voting proposals, CFA Institute expects proxy access would also motivate increased engagement between companies and their shareholders – if it ever gets a chance, that is.
In August 2010, when the SEC passed a proxy access rule (Rule 14a-11), US shareholders believed the opportunity to place their own director nominees on a company’s proxy ballot was imminent. But when the rule was struck down by the DC Circuit Court in July 2011, partly on the grounds that the SEC had not adequately assessed the economic effects of the proposed rule, the SEC did not appeal the decision and proxy access largely disappeared from the picture.
Now CFA Institute has released a report entitled ‘Proxy access in the United States: revisiting the proposed SEC rule’. It examines the costs and benefits of proxy access based on its limited use in markets such as Canada, the UK and Australia, and in a small number of US examples following the SEC’s amendment to Rule 14a-8 in September 2011. That rule enables eligible shareholders to submit for inclusion in a company’s proxy materials proposals that facilitate proxy access on a company-by-company basis. The report summarizes the findings of five academic event studies that provide a before-and-after comparison of stock prices with respect to regulation. CFA Institute finds that:
• Limited examples of proxy access and director nominations globally, coupled with the limited availability of corresponding market impact data, challenge whether a more detailed cost-benefit analysis is possible in the context of the court’s decision
• The results of event studies suggest proxy access has the potential to enhance board performance and raise overall US market capitalization by between $3.5 billion and $140.3 billion
• Assessing and measuring increased board accountability and effectiveness is challenging. None of the event studies indicate that proxy access reform will hinder board performance
• Proxy access is used infrequently around the world, even where low thresholds for ownership and duration of ownership exist. Evidence in these markets suggests proxy access has not disrupted the election process in jurisdictions that allow it
• There is limited evidence to suggest that special interest groups can use proxy access to hijack the election process or to pursue special interest agendas.
The court decision drew criticism from some investors, who argued that it’s impossible ‘to do a thorough cost-benefit analysis because you’re asking us to compare it to something that doesn’t exist,’ according to Matt Orsagh, director of capital markets policy at CFA Institute. The irony of the DC Circuit Court prohibiting proxy access is that ‘in the months leading up to that the markets had taken for granted that it was going to exist and so priced it in. Then when it’s taken away, the markets price it out and have to adjust, and that gives you an event study.’ Not an optimal way, Orsagh concedes, to conduct a cost-benefit analysis.
Proxy access isn’t a good format for special interest groups to gain entry onto boards as it restricts shareholder nominations to just 25 percent of the board’s seats in any one year and requires ownership of at least 3 percent of the company’s shares for at least three years. ‘Folks who want to have a quicker impact are still going to do their full slates and short slates,’ says Orsagh. ‘It’s most likely going to be a more long-term pension fund type investor’ who would use it.
CFA Institute hopes the report will help convince the SEC to revisit a proxy access rule. Orsagh asserts the risk of dissident directors being nominated for up to one quarter of board seats would induce boards to sit down and negotiate with shareowners to iron out any issues. ‘No director and no board wants to be embarrassed by not getting 50 percent of the vote, so they’re all motivated more to talk to shareowners, whatever the issue is,’ he says.
Proxy access was meant to be a device to help hold boards accountable, Orsagh adds: ‘It won’t be a magic bullet, but we think it’s a tool that will drive more engagement ultimately if it comes about.’