SEC's Long-Awaited Proxy Changes Make Much Sense Despite Protests

September 4th, 2009
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Contributed by: Eric Jackson, Ironfire Capital
After the meltdown of firms like Lehman Brothers, Citigroup (C), Bank of America (BAC), Fannie Mae (FNM), Freddie Mac (FRE) and General Motors, and the knock-on effect this has had on our entire economy, it's fair to ask the question: Where were the boards of directors when all of this was going on? How could they let such poor decisions happen under their watch?

The Securities and Exchange Commission agrees, and after more than 30 years of debating the possibility of doing so, has proposed new amendments that will let shareholders nominate up to 25% of a public company's board (to be voted on by all shareholders).

The director nominees will go on the same company ballot that management's own nominees do. Shareholders will view the bios of all the nominees and pick the candidates they believe will do the best job in representing their interests.

I've voiced my support for the amendments in a letter to the SEC a few weeks ago. In fact, the SEC has received almost 500 letters commenting on the proposed amendments. Predictably, those opposing the proposed changes that will diminish their control are fighting hard against them. Their arguments against allowing shareholders to nominate directors, and my rebuttals, follow:

No. 1. "The status quo system is working; don't punish all the good boards for a couple of bad boards."

These proxy access amendments won't require any additional work on the part of companies -- unless shareholders nominate alternate directors for election. In such a case, the incumbent board members will have to justify why they're better served to sit on the board than the shareholders' representatives. That's not such an onerous responsibility, in my opinion.

And remember that the U.K. and Australia have had such nominating mechanisms for shareholders for years and haven't seen a flood of proxy contests. The overwhelming majority of elections there are still uncontested. This rule doesn't punish all the good boards but will raise the quality of all the mediocre boards. A good board won't be impacted by these changes because they won't be a target for improvement.

No. 2. "We don't need some 'one-size-fits-all' regulation to restrict our choosing how to govern ourselves."

If the SEC mandated directors had to be men between the ages of 55 and 85, I would agree with this argument (many companies ironically choose that particular "one-size-fits-all" governance structure themselves). Yet, that's not what's going on here. This is a rule change allowing shareholders to freely select the best directors with the most relevant backgrounds to represent them.

This argument is like complaining that reporting your financial numbers on a quarterly basis is "one-size-fits-all," is too restrictive, and doesn't reflect the special uniqueness of some companies that should be free to choose to report their numbers once every three years.

No. 3. "Special interests will get a larger voice on boards than they deserve."

Companies worry that their boards are going to be filled with members of the AFL-CIO, PETA and Amnesty International. The reality is that these groups might end up nominating candidates for election to the board but they'll likely not pass a vote of all shareholders (unless they can make a compelling case).

If Carl Icahn couldn't get elected to the Yahoo! (YHOO) board last year after that board's botched handling of the Microsoft (MSFT) negotiations (which is why he cut a deal with the company to take three seats), what hope would Amnesty International have?

No. 3. "Conflict will be introduced to boards."

Some sleepy boards out there would do well with a little conflict to wake them up and get them to actually focus on key strategic issues facing them. However, again as the international data show, these changes promote better monitoring and vigilance -- not more conflict.

No. 4. "No federal law should step on the toes of state law."

I'm not a lawyer, but I don't understand the problem with a federal law being introduced that supersedes state law when it is judged to bring more benefits than costs. Extending this argument, the SEC, a national regulator, should not exist because it trumps state rights.

No. 5. "Companies know how to pick 'professional' directors who will respect fiduciary duty better than shareholders."

Besides smacking of condescension, this argument makes me laugh because proponents of this view are saying incumbent boards will pick director nominees with a better sense of fiduciary duty than shareholders -- even though the shareholders are the people to whom the directors are fiduciaries.

There were dozens of anti-proxy access letters to the SEC that looked remarkably similar. Interestingly, they all came from very small private businesses that seemingly have no dog in this fight and follow a similar format.

The letters come from companies like Hair Shapers of Bakersfield, Calif., Herren's Heating & Cooling of Rainsville, Ala., and Slycers Sandwich Shop of Jacksonville, Fla. In Tammy Bonkowski's letter, she talks about how her hair salon, Rumor Has It, in Taylor, Miss. will be hurt by proxy access because the rule change will cause "more unemployed people."

A Wall Street Journal article last week linked these many similar-sounding letters as organized through the very large and powerful U.S. Chamber of Commerce. If true, it's a sneaky and deceptive way to try to influence final voting by the SEC commissioners on these rule amendments.

The bottom line is that, when public corporations were created, the expressed purpose of the board of directors was to represent the interests of shareholders while overseeing and monitoring management.

Somewhere along the way, management found a way to appoint its own overseers and then get them to run unopposed in a sham election.

Shareholders don't want to micromanage management; they just want the right to vote on the best qualified pool of representatives to serve on the board. The SEC's proposed amendments for proxy access provide that.

Disclosure: At the time of publication, Jackson's fund was long Microsoft.
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Ironfire Capital
Related People: Eric Jackson; Jackson Leadership Systems, Inc
Related Entities: Ironfire Capital US Fund LP
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