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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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December 10, 2007 12:01 AM ET
Many shareholder advocates believe that the decision late last month by the Securities and Exchange Commission to prevent investors from nominating their own board candidates effectively squashed their best chance for firing inept directors. Former SEC commissioner Joseph Grundfest, however, argues that shareholders at many companies—more than two-thirds of the S&P 500, at last count—already have the ability to toss incompetent directors off of boards through majority voting policies. And the SEC’s next best move, he says, would be to forget about proxy access and adopt regulations that punish companies that fail to implement majority voting. In a working paper published last month, Mr. Grundfest, currently a professor at Stanford Law School, says majority voting is “simpler, less arbitrary, less likely to lead to litigation, more likely to promote consensus rather than confrontation” and cheaper to implement than allowing shareholders access to company proxies to nominate directors. For starters, Mr. Grundfest says, majority shareholder vote requirements—in which directors must receive more yea than nay votes to keep their seats—replicate the “advice and consent mechanism” of the U.S. Constitution. Much as the President must consider whether a nominee will be approved by the Senate, so too must a board concern itself with whether or not shareholders will support its nominees. “If the advice and consent process is good enough for the United States Constitution, doesn’t it at least deserve a fair shot in the corporate governance process?” Mr. Grundfest asks in his paper. Indeed, Mr. Grundfest claims majority voting is even more powerful than the Constitution, because the majority of directors are up for election every year, allowing shareholders to “throw the bums out” in any given year if they’re unhappy with their results. The Senate, however, must turn to costly (and rare) impeachment proceedings to correct a mistake. Mr. Grundfest told Financial Week he was “purposely vague” in his paper about how the SEC could speed up the implementation of majority voting by U.S. public companies, since there are several approaches that could be taken. For example, he said, the agency could simply require that any corporation that fails to have a majority vote policy explain why it refuses to adopt such a policy, much as the Sarbanes-Oxley Act requires a company to explain why it does not have a financial accounting expert on its board if it has none. “At the other extreme,” he added, “the commission could impose additional disclosure requirements and filing obligations on companies that refuse to adopt advice and consent mechanisms.” His intermediate approach: Regulators could provide for permissible shareholder access proposals to be considered only at companies that fail to adopt adequate majority voting procedures. Warren Batts, professor at the University of Chicago Graduate School of Business and a director at Methode Electronics and the London Stock Exchange-listed Chicago Climate Exchange, said majority voting would eliminate the need for proxy access only if the votes were binding and not advisory. “It ought to be like a political election: Either you get the votes and stay on the board or you don’t and you leave,” he said. (Majority voting policies at many companies allow the board to choose to accept or refuse a director’s resignation if he or she receives less than a majority of votes.) The only flaw, Mr. Batts pointed out, was the possibility of an entire slate of directors failing to be elected. “Who creates the new board?” he said. “You certainly don’t want management creating it.” Tom Lehner, director of public policy for the Business Roundtable, said his organization supports Mr. Grundfest’s views, and it used the academic’s paper in a hearing on proxy access before the Senate Banking Committee in mid-November. “One of the reasons so many companies have rushed to adopt majority voting is because they realize it’s a much better mechanism for holding directors accountable,” Mr. Lehner said. Furthermore, Mr. Lehner doubted that such majority voting policies need be binding to work. “Any company would be out of its mind if it had a majority vote against a director and then seated him,” he said. The SEC, which voted late last month to limit proxy access (See “SEC Nixes Proxy Access, with Revisit Seen in ‘08”, FW, Dec. 3.) is expected to take up the proxy access issue again next year. SEC spokesman John Nester declined to comment on Mr. Grundfest’s paper. FW
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