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Financial Times: Investors issue challenge to SEC over access to proxy

By Jeremy Grant and Kate Burgess: Published: October 30 2006 02:00 | Last updated: October 30 2006 02:00

In the world of US corporate governance, a gigantic tug-of-war has played out for decades between company boards and shareholders in the companies they run.

At issue is the ability of shareholders to get access to the proxy, which would give them a say in who is elected to company boards. Frustration has been mounting among large institutional shareholder groups over a Securities and Exchange rule – known as 14a-8 – blocking their access.

While state law governs what shareholders are allowed to vote on, federal law – and thus the SEC – governs the crucial communication and disclosure process in proxies.

Now, a group of largely non-US investors is challenging the SEC to switch its stance on 14a-8 and to allow shareholders access to the proxy when it comes to board elections.

Sixteen public and corporate pension fund managers – from energy group Shell, the Ontario Teachers’ Pension Plan and the UK’s Association of British Insurers – have written to Christopher Cox, SEC chairman, urging him to grant such access.

“It cannot be emphasised enough how difficult it is for investors based outside the US to come to grips with the fact that shareholders of US companies lack basic rights which they take for granted in developed markets,” said the signatories, who between them manage $3,400bn in assets, much of it in the US.

The intervention is striking. It shows that the debate over shareholder democracy is shifting beyond an argument between US corporate boardrooms and US shareholder activists, to one involving non-US shareholders as foreign ownership of US companies rises.

Foreign investment groups are also concerned that US regulations and standards on corporate governance will leech into other jurisdictions.

Keith Johnson, a corporate governance specialist at Milwaukee law firm Reinhart Boerner Van Duren, says: “Global institutional investors have come to realise that what happens in the US corporate governance system has a spillover effect to companies elsewhere.”

The fact that shareholders in the UK have the power to nominate and vote directors off boards encourages directors to communicate more with their shareholders.

It is a power rarely used “but it makes directors in the UK more sensitive”, says one signatory. Nor has this power destabilised companies, as some in the US fear, he adds. On the contrary, more dialogue with shareholders has helped defuse situations.

US shareholder advocates have for years pushed to put forward resolutions and board candidates. This was possible until the mid-1990s, when the SEC, under pressure from the business lobby, changed its mind amid rising institutional investor activism.

The failure of William Donaldson, Mr Cox’s predecessor, in 2003 to re-open the proxy to shareholders for elections was seen as a victory for the business lobby. The US Chamber of Commerce and Business Roundtable argued that opening the proxy would allow the process to be “hijacked” by special interests.

But Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, says: “Even if you have a single-issue person on the proxy, to win they still have to garner a majority of the vote. You are going to have to put on a candidate who has broad appeal.” Equally, Mr Elson does not think that allowing shareholder access is enough given the costs involved in campaigning for board elections.

Indeed, the 16 signatories to the SEC letter blame high costs for creating an environment where the “primary corrective mechanism in the US has become the market for corporate control in which predatory bidders have an advantage over long-term shareholders”.

Mr Elson says: “[Proxy access is] a half solution. I’d like to see a shareholder-approved scheme to re-imburse candidates for directors who are successful. That will ensure more vibrant elections and that only legitimate candidates receive funding.”

So will the SEC re-open proxy access? Mr Cox and his fellow commissioners are due to address the issue on December 13.

John Coffee, professor of securities law at Columbia Law School, says that with a Republican majority among the five commissioners, change is unlikely soon.

“For chairman Cox to support this would be a little bit like Saul falling off his horse on the road to Damascus. I don’t want to say anything is impossible if there was strong enough pressure, but right now I don’t see this as something that the Republican majority is open to.”

Copyright The Financial Times Limited 2006 and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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