SEC Gives Shareholders Rights Activists a Win With New Proxy Rules
Over the years, shareholder activists, including hedge funds, pension funds and labor unions, have challenged the relatively untouched status of CEOs and executives, questioning their performance, pay and strategic and financial decisions. But the recent enactment of Dodd-Frank Wall Street Reform and Consumer Protection Act has provided the SEC with explicit authority to make rules addressing shareholder access to company proxy materials.
And according to the new "proxy access" rules, companies will be required to include the nominees of significant, long-term shareholders in their proxy materials, alongside the nominees of management. Shareholders or groups of shareholders will be eligible to have their nominees included if they have owned at least 3% of a company's shares continuously for at least the prior three years.
"A Matter of Fairness and Accountability"
Until now, shareholders rarely had any input into the slates of candidates put forward for board positions, but henceforth, the companies will have to include applicable shareholder nominees in the company proxy materials they send to all shareholders. This means that investors could eventually have greater influence over companies' strategic and financial direction. However, while investors will be able to aggregate their holdings to meet the 3% threshold, they won't be able to use the new rule to seek a change of control at a company or nominate more than 25% of a company's board of directors.
Generally, the new rules will become effective 60 days after their publication in the Federal Register, except for small public companies, where the new SEC rules will be deferred for three years.
"As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own," SEC Chairman Mary Schapiro said in a statement.
According to The Wall Street Journal, however, this rule change is fiercely opposed both by public companies and the Republican SEC commissioners: One of them, Kathleen Casey, even suggests it is illegal. Opponents of the rule say it will "create an unruly clash of competing interests that could bog down corporate decision making," as the Journal put it. And Casey argued the SEC fell short in its due diligence to show the benefits of proxy access outweigh the costs.
But with boards in general getting more aggressive about executives' performance, and more willing to bend to shareholders' wishes, it's clear the trend has already been moving toward more rights for shareholders.